Pacific Railroad v. Hushes

Leonard, Judge,

delivered the opinion of the court.

After the company was incorporated, Mr. Hughes subscribed for the stock, for the calls upon which this suit is instituted. The remedy, by personal action, is given by the 6th section of the charter, which authorizes the company to make calls for the payment of the capital stock as they may deem proper ; “ and if any stockholder shall fail to pay any such requisition within ten days after the time appointed, to recover the same with interest ; and if not collected, the company may declare the stock forfeited and sell the same.” Subsequently, the amendatory act jof 1st March, 1851, and the two amendatory acts of 25th December, 1852, were passed and accepted by the company ; but the defendant, not having assented to them, insists that the effect of them is, ipso facto, as a matter of law, to discharge him from his obligation to pay the subsequent calls upon his stock, and this is the question we are now called upon to settle.

When an unincorporated joint stock company is formed, the rights of the partners, not only as between themselves individually, but also between each member and the whole body of the *298 subscribers, are usually settled by the articles of association or a deed of settlement. These articles, constituting the association, and regulating not only the powers of the majority, but also the rights of each stockholder, are the constitution of the society, and of course can not be changed without the consent of every member ; and therefore, if the company attempt to appropriate the funds to a purpose not authorized by the articles, or assume powers not conferred by the constitution of the company, the law will protect the minority by an injunction or a decree for a dissolution of the company, and an account and distribution of its effects, as the character of the act complained of may require.

And it may be that the same law ought to prevail when a mere private company, charged with no public duties, and acting alone with a view to the interests of its members, acts under a charter of incorporation, upon the principle that the charter then stands as the constitution of the society in lieu of articles of asssociation, and regulates the rights and duties both of the company and the stockholders, pursuant to their mutual agreement. Accordingly, there are cases in the books of proceedings against incorporated joint stock companies, by individual members, to'restrain the company from misapplying the corporate funds ; and this relief may be extended even to a dissolution of the society, and an account and distribution of its effects, if the case require it, upon the same principles that similar relief is administered in ordinary partnerships.

But it must be observed that there is an admitted distinction between a company acting under mere articles of association and one acting under a charter of incorporation, in reference to the control of the majority over the constitution of the-company. In the one case the articles are inviolable in every particular, no matter how minute, unless a power to alter is expressly given to the company ; in the other, as the Jaw authorizes the government to change the charter, with the assent of the majority, it may be said that there is an implied assent on the part of each stockholder to all such changes. It is insisted, how *299 ever, that this implied assent does not extend to such fundamental changes as make the amended charter an entirely different enterprise ; changing, for instance, a charter for a canal into one for a railroad or a charter for a road; to accommodate one line of travel, into one for a road for the accommodation of an entirely different line; nor to changes that materially alter the constitution of the society, or greatly enlarge its powers.

In England, however, where private property is, perhaps, as well protected as in our own country, no such limitation appears to be recognized in reference to this implied assent of all the stockholders to future changes in the constitution of the company, made by the government, with the consent of a majority of its members. Accordingly, Lord Brougham, in Ware v. Grand Junct. Wat. Co., (2 Russ. & Mylne, 470,) refused to restrain a railroad company from applying to parliament for an enlargement of its powers and for fundamental changes in its constitution, upon the ground that it was the right of the company to procure these changes, if they desired them; and that all who became stockholders, did so with their eyes open to this power of the majority over the constitution of the society. We remark here, too, that a distinction seems to exist in the English courts between mere private corporations, acting exclusively for the benefit of their members, as banking and other similar companies, and railroad companies, that must be considered as acting partly with a view to the public interest, in consideration of which they obtain from the government the right of taking compulsorily the land of private individuals for the use of the road. (Ffooks v. The Lond. & S. W. Railroad Co., 19 Eng. Law & Eq. Rep. 11.)

But, however all this may be, and recognizing for the purposes of the present case the right of each stockholder to resist fundamental changes in the charter to his injury and against his consent, it seems to us that the American cases that have allowed this matter to be set up at law, as a defence to a suit for calls upon stock taken, have not been very well considered, are without any precedent in the English courts, are *300 not warranted upon just legal principles, and can not be carried out in practice without infinite mischief, not only to the public interests involved in all great works of this character, but also to the private rights of the other members of the company. If the dissenting member is released at law by the mere effect of these fundamental changes, it is because they have of themselves broken up, without any judicial sentence to that effect, the original association, on account of the inability or unfitness of the corporation, as now constituted, to execute the original purposes of the association. It is very evident, however, that whenever this question is to be discussed and settled, there are other parties interested in it besides the complaining stockholders and the corporate body. The members of this company have agreed with one another to construct a railroad out of a joint fund, to which each has contributed in proportion to the share he is to have in the work when completed ; and it is not and ought not to be in the power of any one or more of the partners, at pleasure, to break up this undertaking by withdrawing the fund already advanced ; or, which is the same thing, by withholding what he has agreed to contribute; nor ought the courts of justice, by their judgments, to produce this result, unless in a case proper for such relief, and in which all the interests to be affected are represented before the court. Whether, however, the alleged changes in the constitution of this company, procured, or at least assented to by a majority of the company, are of such a character as to warrant the interference of the courts at the instance of a dissenting stockholder, by injunction against a probable misapplication of the funds, or by a decree for a dissolution of the original association, on account of the unfitness or inability of the corporation, as now constituted under the amended charter, to execute the original purpose of the partners, need not be now determined. In the view we take of the case, it is enough — yielding to this stockholder all the rights that he would have in a private joint stock company, acting under voluntary articles of association— without any power in the company to change the objects of as *301 sociation, or alter, in the least, the constitution of the society— that his remedy for a wrong of the character of the present one, is a suit in equity, in which all the parties in the matter to be litigated may be heard, and complete justice done to all upon the final determination of the case. And to this view of the subject we incline, notwithstanding some of the American cases to which we have been referred hold quite a different doctrine, and allow fundamental changes in a charter to be used by a stockholder as a defence at law against subsequent calls upon stock previously subscribed, but with considerable difference of opinion as to the character and extent of the changes necessary to produce this result.

In reference to this defence at law, we remark, that the only cases we have found in which the relief was actually granted upon the ground suggested, are, The Union Lock & Canal Co. v. Towne, 1 N. H. 44; Hartford & N. H. Railroad v. Croswell, 5 Hill, 385 ; and Winter v. The Musco. R. Co., 11 Geor. 451 ; although, in the cases of Indiana & Ebensburg Turnp. Co. v. Phillips, 2 Penn. Rep. 184; Penn. & Ohio Can. Co. v. Webb, 9 Ohio, 139; Barrett v. Sangamon & Alton Railroad, 13 Illinois, 505, and Green. & Col. R. Co. v. Coleman, 5 Rich. 140 , the general doctrine is recognized upon the authority of previous cases in Massachusetts, New Hampshire and New York, but not applied on account of the character of the charges made.

In the New Hampshire and New York cases, the stockholders were discharged at. law from the calls upon their stock, because the legislature had subsequently increased the power of the company, in one case, authorizing it to purchase a hundred instead of six acres of land; and in the other, allowing it to run a line of steamboats from the termination of their road ; and in Georgia, the original termination of the road was changed to a new point, fifty miles short of it, and in a different direction. These are, it is believed, the first cases in which this doctrine was put in practice, and the authorities referred-to for it are two cases from Massachusetts, Mid. Turnp. *302 Co. v. Locke, 8 Mass. 268 , and Med. Turnp. Co. v. Swan, 10 Mass. 384 ; a case from New York, Livingston v. Lynch, 4 John. Ch. Rep. 573, and the case from Pennsylvania, of Ind. and Eben. Turnp. Co. v. Phillips, 2 Penn. 184 .

A careful examination of the Massachusetts cases, to which all the others refer, will show, it is believed, that they contain no such doctrine as that applied in the cases that cite them as authority. The only question in them was, whether the company could recover upon an express collateral promise of the stockholder to pay calls ; and while it was holden that it could not, because, under the circumstances attending the promise, it could not be considered as made to the company, it was at the same time admitted that the party was a member of the company as then constituted, and liable as such to all the remedies provided by the charter in respect to calls upon stock subscribers.

The case from Johnson’s Ch. Reps, was a suit in equity, and the decree of the chancellor establishes that in a private joint stock company the majority can not change the constitution of the society as established by its members, without the consent of every one ; and how the case of the Ind. and Ebensb. Turnp. Co. v. Phillips is now considered in Pennsylvania, is shown by the subsequent cases, already referred to, of Irwin v. Turnp. Co., and Gray v. The Monongahela Nav. Co.

The English cases referred to in the briefs, we think, afford no countenance to the doctrine here insisted upon. We remark, however, that there is a manifest distinction between the Georgia case and the cases from New Hampshire and New York. In the former, assuming that there had been a substantial legislative change in the termination of the road, so that it was quite a different enterprise from that originally contemplated, the plaintiff’s right to recover further calls might be repelled upon the ground that, as the company had no power, as now constituted, under the amended charter, to build the road originally designed, it ought not to be allowed, even at law, to collect funds that it could not lawfully use; but, in the other case, the *303 objection is not that tbe funds, if used at all, must be misapplied, but that, as the company is now authorized to do other things, it may misapply them, -or, at least, that it is now so changed in its constitution, that it is an unfit agency to be trusted with the application of the funds originally contributed, and should, therefore, be deprived of all control over them.

We are disposed to think that, in both classes of cases, the better and safer remedy for all persons interested would be a direct proceeding in equity, in which all the necessary parties could be brought before the court; but, without determining this now, we are satisfied' that when the changes are of the character last indicated, consisting only of an increase of corporate powers, or of a different organization of the corporate body, leaving it, with lawful power, to execute what may be considered as substantially the original work, the party can not be relieved at law in a suit for calls upon his stock.

We proceed, therefore, to an examination of the changes here complained of. They are, in the termination of the road, and in the additional powers conferred upon the company, not only to build branches, but also to issue nerv stock, and thereby lessen the relative power of the stockholders.

The original charter was for a “road from the city of St. Louis to the city of Jefferson, thence to some point in the western line of Van Burén (now Cass) county, in this state, with a view to its continuation westward to the Pacific ocean.” The amendment of March 1st, 1851, was from the same beginning, “ on any route the company may deem most advantageous to any point in the western line of this state, which the said company may select;” and the act of 25th December, 1852, provided that the road, beginning at the same beginning, should run “ westwardly by way of Jefferson city, and thence along the best and most practicable inland route through the county of Johnson, terminating at any point in Jackson county which may be designated by the company.”

In Irwin v. The Turnp. Co., (2 Penn. & Watt’s Rep. 470,) it was held that a change in the intermediate points of a road *304 would not release the stockholders from the calls ; and in the Penn. and Ohio Can. Co. v. Webb, (9 Ohio, 139,) it was remarked by the court, even in reference to changes in the terminative points : “ It is not every minute change which will absolve a subscriber from his engagements. In works of this kind, some power of regulation is retained by the legislature— some discretion is confided to agents who execute the details.' When the subscription is general, uncombined with conditions, perhaps the'stockholder has no reason to complain of any line of transit which starts from the same point of business, accommodates the same line of travel, and substantially subserves the same general interests.” The only objection, however, that could be taken here, in reference to the legislative change in the position of the road, is to that made by the act of 1st March, 1851 ; but it was decided here, in the Pacific Railroad v. Renshaw, ( 18 Mo. 210 ,) that that change did not release the stock subscribers, and there is no pretence for insisting that the subsequent change in the location of the road, made by the act of 25th December, 1852, had that effect. That act only designated one of the many routes that it was competent for the company to select under the act of March, 1851, and by accepting the amendment of 1852, and thereby selecting the route there indicated, the company only exercised the power of selection they had under the act of March, 1851.

In reference to the other amendments, it is seen that they do not put it out of the power of the company to apply the fund to the purpose for which it was subscribed, and therefore these changes, under the view we have taken of the law, constitute no defence in this action.

If the company are about to misapply the funds to the injury of any stockholder, his redress is by a direct proceeding to restrain such misapplication; and if the company can not now be safely trusted with the funds, on account of the changes in its constitution, or if it has conducted or is now so conducting the affairs of the stockholders as to show that a continuation of the association can not result in effecting its original purpose, *305 and the stockholders, in a public corporation of this character, are entitled to the same relief to which they are entitled against a private joint stock company, (about which we refrain from expressing any opinion,) the remedy is a direct proceeding to which all the associates are made parties, either individually or by representation, and where proper relief can be administered to the complaining party, according to the exigency of the case, and consistently with the rights of others.

The result is, Judge Ryland concurring,

that the judgment must be affirmed.

Scott, Judge.

The question involved in this case seems to be well settled in the American courts. That a material alteration in the charter of a corporation, which is its fundamental law, will discharge a stockholder from future liability for calls on his subscription, previously made, when the alteration is effected without his consent, stands on principles of law long recognized, and founded in justice. I do not find that there is any contrariety of opinion on the subject. Courts have differed as to the extent of the change in a charter which will produce this consequence, but all of them unite in sanctioning the general rule. Although a stockholder is a member of the corporate body, yet there is an individual contract between him and that body which is defined by the terms of the charter existing at the time of his subscription. He agrees to pay his money for a specified purpose, and for that alone, and on no principle of law or justice can the corporation, without his consent, change the purpose to which he agrees it shall be applied and yet compel its payment. A payment coerced under such circumstances, would be arbitrary and tyrannical and abhorrent to all our notions of the sanctity of contracts. It is no answer that the stockholder was aware that a majority of the corporation could apply for and obtain from the legislature á change of its powers and objects. The legislature may change the charter, but it has no power to vary the contract of the stockholder against his consent. If a corporation will, against *306 the wishes of its stockholders, obtain a material change of its fundamental law, it must be content to lose the subscriptions which had been previously made. It is for the interest of corporations that such should be the law. What prudent man would invest his money in an enterprise which he has well considered and deemed profitable, if, at any moment after-wards, a majority of those with whom he is associated may change the character of the enterprise and compel him to pay his money in an adventure which his judgment condemns and which he sees would end in ruin ?

As this is a matter of some moment at this time, it may be as well to refer to some of the cases which have been decided in relation to it. As far as I have examined, they are of one tenor. In the case of the Middlesex Turnpike Cor. v. Locke, ( 8 Mass. 268 ,) it was determined that where the directors of a turnpike corporation, with the assent of the corporation, procured an act of the legislature, altering the course of the turnpike road, one who, before such alteration, had subscribed for a share and had expressly promised to pay all assessments, was held not to be answerable in an action for the assessments. The court said the plaintiffs rely on an express contract, and they are bound to prove it, as they allege it. Here the proof is of an agreement to pay assessments for making a turnpike in a certain specified direction, and of the making a turnpike in a different direction. The defendant may truly say, non hxc in fender a veni. He was not bound by the application of the directors to the legislature for the alteration of the course of the road, nor by the consent of the corporation thereto. Much fraud might be put in practice under a contrary decision. The same doctrine is maintained by the same court in the subsequent case of the Middlesex Turnpike Corporation v. Swan, ( 11 Mass. 393 .) In the case of the Hartford & New Haven Railroad Co. v. Croswell, ( 5 Hill, 383 ,) the Supreme Court of New York held that, if a corporation procure an alteration to be made in its charter, by which a new and different business is superadded to that originally contemplated, such of the *307 stockholders as do not assent to the alteration will be absolved from liability on their subscriptions to the capital stock, especially if the alteration be one plainly prejudicial to their interests. In this case, the court remarked: “ It is most obvious, if incorporated companies can succeed in establishing this sort of absolute control over the original contract, entered into with them by the several corporators, there is no limit to which it may not be carried, short of that which defines the boundary of legislative authority. The proposition is too monstrous to be entertained for a moment. Corporations possess no such power. The original charter is the fundamental law of the association, the constitution which prescribes limits to the directors, officers and agents of the company not only, but to the action of the corporate body itself, and no radical change or alteration can be made or allowed by which new and additional objects are to be accomplished, or responsibilities incurred by the company so as to bind the individuals composing it, without their assent.” In New Hampshire, in the case of the Proprietors of the Union Locks & Canals v. Towne, (1 New Hamp. 44,) it was determined where an individual had contracted to take a share in a corporation created for the purpose of making a river navigable, and empowered to hold real estate not exceeding six acres, and to collect a toll forty years, not exceeding twelve per cent, per annum on the amount of money expended, and afterwards, the legislature, upon the petition of the corporation, but without the assent of the individual, authorized them to hold real estate to the amount of one hundred acres, and to collect a toll unlimited as to its amount and duration, that the individual was discharged from his contract and not liable for any subsequent assessment on the share. The court observed, the opinion being delivered by Judge Woodbury, that, to make a valid change in this private contract, as in any other, the assent of both parties is indispensable. The corporation, on one part, can assent by a vote of the majority ; the individual on the other part, by his own personal act. However the corporation then may be bound by the as *308 sent to the additional acts, this defendant, in his individual capacity, having never consented to either of them, is under no obligation to the plaintiffs except what he incurred by becoming a member under the first act. Consequently, the assessments sued for, if raised to advance objects essentially different from those originally contemplated, are not made in conformity to the defendant’s special contract with the corporation ; and this action, sustainable on that contract alone, cannot be supported.” In Georgia, in the ease of Winter v. The Muscogee Railway Co. ( 11 Ga. 450 ,) it was decided that, “ where a charter was granted to build a railroad between certain points, and the defendant subscribed for shares of sto'ck, and afterwards the charter was amended by changing one of the termini of the road, running it in a direction different from that contemplated by the original, charter, the defendant was released from the payment of his subscription, as he had not consented to the alteration.” The court said “ that corporations can exercise no power over the corporators beyond those conferred by the charter to which they have subscribed, except on the condition of their agreement and consent. That, although alterations may be made in the charter of an incorporated company, in furtherance of the designs and objects of the company, yet in all such cases due regard must always be had to the inviolability of private contracts. The original contract of the parties can not be materially or essentially altered by an amended charter, so as to bind subscribers thereto without their assent.” The doctrine maintained in this opinion is recognized in Illinois, in the case of Barret v. The Alton & Sangamon Railroad Co., (13 Ills., 508.) On this question similar views are expressed by the court of Ohio, in the case of The Penn. & Ohio Can. Co. v. Webb, (9 Ohio, 136) ; also by the court in Vermont, in the case of Stephens v. Rutland & Burlington Railroad Co., reported in Wharton’s Law Register for January, 1853. The court in Pennsylvania, in the case of the Turn. Co. v. Phillips, (2 Penn. & Watts, 194,) maintain the same doctrine; nor do I conceive that there is any thing inconsistent *309 with the principle therein declared in the subsequent case, in the same book, of Irwin v. The Turnpike Co., 470.

I do not understand that the law in England, in relation to this question, is different from that maintained in the courts o£ the United States. This may be inferred from the cases of the Midland Great West. Railway Co. v. Gordon, (16 Meeson & Wellsby, 803,) and Davis v. Hawkins, (3 M. & Sel. 488.) I do not consider that the case of Ware v. The Grand Junction Water Works Co., (2 Rus. & Mylne, 470,) contains any thing at variance with the principle above stated. That was no action on a contract. The law applicable to contracts had nothing to do with it. That was an application by the stockholders to a court of Chancery to restrain the corporation from applying to parliament for an enlargement of its powers. Corporations may undoubtedly apply to the legislature for an extension of their powers, but they must take the consequence of such extension when it materially and essentially varies the purposes and objects of the original charter. What redress is it to a party if he is compelled to pay his-money in the first instance, and then to apply to a court for an injunction to restrain its improper application ? If collected, it can not be applied to the original purposes of the corporation, for they are materially changed ; and so if the company is restrained, it must lie idle in its hands, and if so, it should not be received, as in equity and justice it ought to be returned to the stockholder, as it can not be used for the purpose for which it was agreed to be paid.

In my opinion, the change in the charter was of such a character as justified the subscriber in withholding the payment of his calls, and therefore the judgment should be reversed.