Allen v. Ajax Mining Co.

Mining Corporations — Sale of Property — Authority Given, by Statute — Impairing Obligation of Contract — Constitutionality of Statute. In a suit by a minority stockholder o£ a mining corporation to restrain the sale of the corporate property, held, as to a mining corporation organized between 1889 and 1898, the authority conferred on such corporation to sell its property by Laws of 1899, page 113 (commonly known as “House Bill 132”) was not violative of the Federal Constitution (Art. I, Sec.tion 10) and the Constitution of the State of Montana (Art. Ill, Section 11), as impairing the obligation of contracts.

Appeal from District Court, Lewis and Clarke County; J. M. Clements, Judge. Suit by Otis R. Allen against the Aj ax Mining Company and others. Erolm a judgment in favor of plaintiff, defendants appeal. It is evident that the lower court in granting the injunction complained of herein had in mind and followed the decision of this court in Forrester v. Boston cG Montana, Gonsol. Min. Go., 21 Mont. 544, and it must he conceded that if said decision states the law as it now exists in this state, the action of the lower court under the facts presented in respondent’s complaint was correct. Necessarily in order to reach its decision the lower court must have disregarded and held invalid the Act of the Sixth Legislative Assembly, adopted February 28, 1899, commonly known as “House'Bill 132.” We shall contend that said Act is a valid exercise of the legislative power and that therefore the action of the lower court in granting the injunction in question was erroneous. No act of the legislative assembly ought to be held invalid unless it plainly appears, beyond a reasonable doubt, that the act contravenes some provision either of the Federal or of the State Constitution; and that if any doubt exists as to an alleged repugnancy between the Constitution and the statute, such doubt must be resolved in favor of the validity of the statute. Further, that “Constitutions of a state are distinguished from the Constitution of the United States in this: ‘The government of the United States is one of enumerated powers; the National Constitution being the instrument which specifies them, and in which authority should be found for the exercise of any power which the national government assumes to possess. In this respect it differs from, the constitutions of the different states, which are not grants of powers to the states, but which apportion and impose restrictions upon the powers which the states inherently possess.’ (Cooley on Const. Lim. p. 10.) Therefore a state legislature is not acting under enumerated or granted powers, but rather under inherent powers, restricted only by the provisions of their sovereign constitution.” (State v. French, 17 Mont. 54-56.) And further, that in the construction of constitutions all provisions in pari materia are to be construed together so as to arrive at the meaning and intent of any particular provision. The case of Forrester v. B. £■ ill. Go., 21 Mont. 544, was decided November 28, 189S, the Act of the legislature referred to was adopted February 28, 1899, and was undoubtedly passed to obviate the restraint imposed by the common law upon the alienation of property belonging to solvent, prosperous and going mining corporations. For the purpose of this argument it may be conceded that the relations surrounding corporations and stockholders are contractual in their nature, and that such relations are three-fold. (1) That between the state and the corporation. (2) That between the corporation and its stockholders. (3) That between the stockholders inter sese. The constitutional provisions which it is said the statute in question contravenes axe Section 10 of Article I of the Federal Constitution which prohibits 'the several states from passing any law impairing the obligation of contracts, and the like provision found in Section 11 of Article III of the Montana Constitution. In connection with this last provision consideration must be given to Section 2 of Article XV, which provides: “That no charter of incorporation shall be granted, extended, changed or amended by special law * * * but the legislative assembly shall provide by general law for the organization of corporations hereafter to be created; Provided that any such laws shall be subject to future repeal or alterations by the legislative assembly,” and Section 3 of Article XV, which reads: “The legislative assembly shall have the power to alter, revoke or annul any charter of incorporation existing at the time of the adoption of this Constitution, or which may be hereafter incorporated, whenever in its opinion it may be injurious to the citizens of the state.” As far back as the Dartmouth College Case, 4 Wheat. 518, it was held by the Supreme Court of the United States that the charter of a corporation is a contract within the Imeaning of the said clause of the Federal Constitution and consequen tly protected from impairment by a state legislature. It was suggested in the concurring opinion of Mr. Justice Story'in that case that it would be competent for the legislature to reserve the power to■ repeal or alter the grant of franchises embodied in the charter of a corporation. (Thompson’s Commentaries on the Law of Corporations, Vol. 4, Section 5408.) It is well known that the several states were quick to avail themselves of this view, of Judge Story, and we find also that the legislative assembly of the territory and state of Montana has from an early day reserved the power to alter, amend or repeal any of the laws of the territory or state relating to corporations. This reservation is found in Section 21, p'. 410, Acts 1871-2, which was in turn re-enacted in.the revision of 1879, Pev. Stat. 1879, p. 454, Sec. 264, in the compilation of 1887, Comp. Stat. 1887, p. 730, Sec. 466, and in the Civil Code of 1895, Section 394 and Section 550. The question then arises1 whether the statute in question is within the reserved power. (Thompson’s Work on Corporations, Yol. 1, Section 90.) The cases construing this reserved power are practically innumerable and it is a difficult if not impossible task to reconcile them. This confusion would probably not have arisen if the underlying principle had been kept in mind, that the reservation is as much a part of the contract as the grant itself, in other words, that the grant, the authorization for corporation existence, and the relations flowing’ therefrom, as between the state gnd the corporar tion, the corporation and its stockholders, and between the stockholders, have all been taken and assumed with the understanding that they might be altered or repealed whenever the state saw fit to do so. As expressed by the Supreme Court of California in Market St. By.- Co. v. Heilman, 109 Cal. 571, s. c. 42 Pac. 229 : “When an individual becomes a stockholder in a, corporation it is with the implied assent on his part to the right of the legislature to alter and amend the law within the scope of the constitutional provision and is as binding upon him as a contract to like effect of his own making would be.” So far as we are aware the question is res integra in Montana, but “in the absence of a controlling precedent of our own, it is a salutary general rule to follow the decision of the Supremo Court of the United States.” (Ruby Chief M. & M. Co. v. Prentice, 52. Pac. 210.) In support of our contention that the law in question is valid and clearly supported by the weight of authority we shall cite only a few cases such as, in our opinion, are the most analogous to the facts of the case at bar, and so far as possible, only those of the most recent date. (Northern Central R. Co. v. State of Maryland (1902), 187 U. S;. 258, 267; Looker v. Maynard (1900), 179 U. S'. 46; Gregg v. Granby (1901) , 164 Mo. 616-; C. H. Vernier Co. v. U. S. Steel Corp. (1902) , 116 P'ed. 1013; Williams v. Hall (1900), 5“5 S. W. 706; Thompson on Corporations, Sec. 3034; 2 Cook on Corporations, S'ec. 501; In re Umpire City Bank, 18 N. Y. 199; In re Lee's Bank, 21 N. Y. 9; In re Reciprocity Bank, 22 N. Y. 9; McGowan v. McDonald, 111 Cal. 57, 43 Pac. 418; Bis-sell y. Heath, 98 Midi. 472, 57 N. W. 585; Dam, Go. v. Gray, 30 Me. 547; Bleeper y. Goodwin, 67 Wis. 577, 31 N. W. 335; Bpring Valley Water Works v. Bchottler, 110 IT. S. 347; Sinking Fund Cases, 99 U. S'. 700; Market Bt. Ry. v. Heilman (1895), 109 Cal. 571; Durfee y. Old Colony & F. R. Ry. Co., 5 Allen, 240; Crease y. Babcock, 23 Pickering, 342; Buffalo, etc. R. R. v. Dudley, 4 Neman (N. Y), 336, 348, 354; Northern R. R. v. Miller, 10 Barbour, 282; Madow Dam Co. v. Gray, 30 Me. 547; Old Town, ele. R. Co. V. Veasie, 39 Mr. 580; 1 Thompson on Corporations, Secs. 67, 75, 89; 4 Thompson on Corporations, Secs. 5409, 5410, 5411, 5417.) Again, inasmuch as the statute provides (Section 2) that if a disposition of all the company’s property is had the corporation shall thereby be dissolved, it may be construed as a method of repeal of the charter. That the right to repeal, under the reserved power, either wholly or in part and without the consent of the stockholders, exists is unquestionable (Deposit Bank v. Davis Co., 44 R. R. A. 825, 829, et seep; Citizens Saw. Bank v. Owensboro, 173 U. S'. 636; Williams v. Nall, 55 S. W. 706, .708.) The provisions for the payment to dissenting stockholders contained in Sections 2 and 3 of the Act are ample, valid and in line with similar statutes in other states. (3 Cook on Corporations (5th Ed.), See. 896, p. 2583.) The Act in question is neither special nor class legislation. (Williams v. Nall, 55 S. W. 709; King v. Filing, 24 Mont. 476; Home B. £ L. Ass'n v. Nolan, 21 Mont. 205.) Since the decision of the Da/rtmouth Colloge Case by the Supreme Court of the United States in 1819 (4 Wheat. 504), the principles have been recognized as established (though frequently and vigorously criticized) that a corporate charter granted by a state is, when accepted by the corporation, a contract within the meaning" of Section 10 of Article I of the Constitution of the United States, and that unless power to alter or amend it has been reserved by the state which granted it, any alteration of it is an attempted impairment of that contract and so forbidden by that section. Since the announcement of these principles in the Dartmouth College Case, it has been the almost invariable practice of the states to reserve in their respective constitutions and laws the power to repeal, alter or amend the corporate charters granted by them. This the state of Montana has done in the sections of our Constitution and statutes cited in appellants’ brief; and the authorities are all agreed that the effect of doing this is to take out of the operation' of the rule laid down in the Dartmouth College Case a charter granted by a state reserving these rights, and to retain in the state full legislative control over it. The principle that the charter is a contract is not denied; but the reservation is read into- and becomes a part of the contract, and leaves it subject to repeal, alteration or almendment at the hands of the state. As counsel for appellants have pointed out, however, the contract thus arising with the state is not the only contract incident .to the formation of the corporation. There arises besides a contract which is spoken of as a contract between the stockholders themselves, or as a contract between the corporation on one hand and the stockholders on tlio other; and of this contract, as of every other, the existing law, so far as it applies, of course becomes a part. The defendant corporation was organized under the laws of the state of Montana prior to the year 1899 ; plaintiff has been a member of it since its organization ; during all of that period it was the law of this state that no solvent, prosperous, going corporation could dispose of all of its property without the unanimous consent, of all of its stockholders. Every person who became a member of a Montana corporation during that period had the security which this law gave to him, and might feel that- so long as the corporation was solvent and prosperous, its property could not be disposed of without his consent. These principles were clearly stated in the case of Forrester v. Boston & Montana Consolidated Copper & Silver Mining Co'mpamj, 21 Mont. 544, 55 Pac. 229 (1898), and are not disputed by counsel for the appellants. On February 28, 1899, the Act in question became a, law. By its terms it, professes to authorize any corporation, whether then existing or thereafter to be created, and whether solvent or insolvent, to dispose of all its property, despite the protest of the holders of one-third of its stock. The effect of this enactment as applied to an existing’ corporation is two-fold. First, it augments the powers previously conferred upon it and so far is unexceptionable; because aside from the fact that it was a bestowal of a benefit on the corporation, the right to' add to, subtract from or wholly withdraw the powers previously conferred had been expressly reserved. But, second, it altered, or rather destroyed, the contract previously existing between the stockholders themselves. That contract was, that so long as, the corporation remained solvent its, property would not be disposed of without the consent of all of its members. Any attempt by a portion of its members to make a disposition of such property involves a violation of this contract, and any law assulming to authorize such an attempt impairs, the obligation of the'contract within the meaning of the constitutional prohibition. These propositions are supported by the following authorities: Cook on Corporations (6th Ed.), Sec. 501; Zdbriskie v. Hackensack & N. 7. B. B. Co.., 18 N. J. E'q. 1Y8; Black v. Canal Co., 24 N. J. Eq. 455; Miles v. By1. Co., 41 N. J. Eq. 1; Intiso v. State, 53 Atl. 206; Bahway v. Munday, 44 N. J. Law, 395; Johnson v. Sherman, 66 N. J. Law, 683; Schwartzivaelder v. Ins. Co., 59 N. J. E'q. 589; In re Newark Library Ass’n, 43 Atl. 435; Kenosha, etc. By. Co. v. Marsh, 1Y Wis. 13; Union Pac. By. Co. v. United States, 99 U. S. Y00; Dissenting Opinion of Mr. Justice Bradley in the Sinkink Fund Casesj Dissenting Opinion of Mr. Justice Field in the Sinking Fund Cases. Turning now to the cases cited by appellant, it must be conceded at once that some of them are opposed to the views above expressed. As counsel for appellants have said, the authorities on this question are not reconcilable, and the cases just referred to are certainly opposed to those on which we rely as justifying the order appealed from. S.ome of the authorities, however, cited by counsel are, as we think, distinguishable from the case at bar. In the case of Northern Central Railway Company v. Maryland, 187 U. Si 258, the point decided was simply that by virtue of the reserved right to- amend or repeal a charter, the state had the power to change and increase the rate of taxation stipulated for in a law which had become a part of the charter. The question of the state’s power over contracts between stockholders themselves was not touched upon. The same is true of the case of Spring Valley Water Worles v. Schatler, 110 N. S. 247. An Act of the legislature was sustained affecting an alteration only in the contract existing between the state and the corporation. By the original charter (given subject to the reserved right of amendment), one method of fixing upon reasonable water rates was prescribed, and the amendment proposed to substitute another. The right to do so 'under the reservation was clear, and contracts between the stockholders themselves could not be affected by its exercise. In Durfee v. Old Colony Railroad Co.; 5 Allen, 240, the point decided was simply that a corporation organized under the laws of a state, which had reserved the right to amend its charter, could not be restrained by one of its stockholders from engaging in a new enterprise, authorized by a legislative enactment, such new enterprise being of the same kind as that for which the corporation wras originally established. The case of Williams v. Nall; 55 S'. W. 706 (Kentucky 1900), while fully sustaining the doctrine contended for by appellants, affords, as we think, an excellent illustration of the dangers that would attend on the establishment of that doctrine. We respectfully insist that this reasoning is unsound. The reserved right of a state to amend the charters of its corporations has no special force that does not inhere in the right which every state possesses to amend any of its laws. An individual who makes a contract makes it on the faith of existing law; he knows that the law enters into it; he knows, too, that except in very rare cases there exists in the state the power of repealing, altering or aimending that law which does so enter into it. But his contract is protected by the state and federal constitutions, and therefore the legislature is powerless to. make a law which shall alter or impair it. How can the rule be different in the case of a corporation ? How can it be lawful for the state to do> to1 the existing contracts of an association of men what it cannot do to the contracts of a single individual ? The right to change an existing law is no greater in the one case than in the other, and we think it cannot, be given greater effect in the one case than in the other. It. is perfectly apparent that if the principle laid down in the case of Williams v. Nall were to become generally recognized, capital would be slow to1 embark in corporate enterprises for the reason that there could never be any certainty as to what its obligations would be. This reserved power of amending corporate charters exists in the constitutions of all states; and if its effect is to render contracts of corporations uncertain, to make the rights and obligations of the contracting parties alterable at the pleasure of the legislature, no one would think of becoming a member of a corporation and assuming such responsibilities. Surely, full effect can be given to¡ the constitutional reservation by confining its action to the contract between the state and the corporation. Moreover, there appears in our statute, in existence when the defendant corporation was organized (Compiled Statutes of 1887, page 730, Sec. 466, Civil Code, Sec. 394), a clause which we have not found in any of the states from which appellants have drawn the cases on which they rely. This clause seams to recognize the distinction on which we have been insisting. After providing in the usual way that the legislature may repeal, alter or amend, etc., the statute reads : “But such amendment or repeal does not, nor does the dissolution of any such corporation, take away or impair any remedy given against such corporation, its stockholders or officers, for any liability •which, has been previously incurred.” Had the stockholders of the defendant corporation, on the day it was organized, signed a formal agreement, binding upon each other, that so long as its business prospered they would not dispose of its property, unless all consented to do so, no one would doubt that this contract was independent of the contract between the state and the corporate body; nor would any one doubt that a law authorizing some of the contracting parties to violate this contract, and do what all had agreed not to do, would impair its obligation. And yet such a contract was made just as effectively with each man who became a melmber as if it had been made the subject of a special written agreement ; and the legislature has no more right to impair its obligation than if it had been thus independently made. Nor can the statute be regarded as simply effecting the dissolution of a corporation and therefore within the power reserved. The right of the state to repeal the corporate powers which it has granted, whenever the interest of the state requires their repeal, is of course incontestable; but this statute does, not do this. It empowers- the holders of two-thirds of the stock to dissolve the corporation, and this notwithstanding their positive engagement. to continue it. It is not reasons of state that prompt a dissolution, but the mere personal inclination of the majority stockholders to override the will of the minority. And besides, this statute assumes, not simply .to authorize the dissolution of a solvent corporation, but to deprive the minority stockholders of their voice in the disposition of its property. This the legislature cannot do.