Miller v. The State (82 U.S. 478)

ERROR to the Supreme Court of New York; the case being thus:

Section 1 of article 8 of the constitution of the State, just named, adopted by it A.D. 1826, ordains as follows:

'Corporations may be formed under general laws, but shall not be created by special act except in certain cases. All general laws and special acts passed pursuant to this section may be altered from time to time or repealed.'And title 3 of chapter 18 of the first part of the Revised Statutes of 1828, enacts thus:

'The charter of every corporation that shall hereafter be granted by the legislature shall be subject to alteration, suspension, and repeal, in the discretion of the legislature.'

With this provision of the constitution and this enactment of the Revised Statutes of the State in force, the legislature of New York passed in 1850 a general act for the formation of railroad companies and the regulation of the same. This act authorized any number of persons, not less than twenty-five, to form a company for the purpose of constructing, maintaining, and operating railroads for public use,. . . and for this purpose to make and sign articles of association in which the name of the company should be stated, the places from which and to which the road was to be constructed, the amount of the capital stock, which should not be less than $10,000 for every mile of road constructed, the number of shares of which the capital stock should consist, and the names and places of residence of thirteen directors of the company who should manage its affairs for the first year, and until others were chosen in their place. Each subscriber was to state what number of shares he would take; and the articles were to be filed in the office of the Secretary of State, and after certain formalities gone through with them, the persons who had subscribed the articles of association, and all who should become stockholders in the company, 'shall,' says the act 'be a corporation by the name specified in such articles of association, and shall possess the powers and privileges granted to corporations, and be subject to the provisions contained in title 3 of chapter 18 of the first part of the Revised Statutes.'

The formation of a railroad company to be styled the Rochester and Genesee Valley Railroad Company, and to run between the city of Rochester and the town of Portage, fifty miles south of it, being contemplated by a course which should run through the town of Avon, about eighteen miles south of Rochester, an act of the State just named amending the charter of that city was passed July 3d, 1851, by which its common council were authorized to borrow upon its credit $300,000, to be invested in the stock of the new company, and by virtue of the subscription thus authorized, the city was declared to acquire all the rights and privileges and be liable to the same responsibilities as other stockholders of the company, except as otherwise provided in the act. In case the railroad company elected to receive the subscription, the common council were authorized to nominate and appoint one director for every $75,000 of capital stock held by the city at the time of each election of directors, but the city could have no voice in the election of the remaining directors. On the 10th of July, 1851, the articles of association of the new company were filed in the office of the Secretary of State, organizing the corporation under the general railroad act of 1850, already in part quoted. The corporation was declared in the article to be created for the purpose of constructing, owning, and maintaining a railroad from the city of Rochester to the town of Portage, a distance, as already said, of fifty miles, with a capital stock of $800,000, divided into 8000 shares of $100 each. On the 15th of June, 1852, the mayor of Rochester subscribed for 3000 shares of the stock of the company, and, on the same day, at a meeting of the directors of the railroad, such subscription was unanimously accepted. Other parties subscribed for stock to the amount of $677,500, so that the whole amount subscribed, including the stock taken by the city, was $977,500. The whole amount of capital stock fully paid up was:

By the city of Rochester, $300,000

By all other parties, 255,200

Total amount, $555,200

The balance of the stock subscribed was extinguished or forfeited before March 9th, 1867. Before this time also the Rochester and Genesee Valley Railroad Company had abandoned the construction of their road south of Avon, and assigned all their rights and franchises beyond that point to another corporation.

On the 9th of May, 1867, an act was passed, amending the act of 1851 by giving the common council authority to appoint one director for every $42,855.57 of stock owned by the city; in other words, establishing the same ratio that existed among the subscribers for stock at the time the original subscription was made. The effect of this act was to give the city of Rochester power to appoint seven of the thirteen directors, and the other stockholders six. At the next annual election, however, the stockholders, other than the city, alleging that the act of July 3d, 1851, made a contract between the city and the other stockholders, that the city should elect but four directors out of the thirteen, and that the act of 1867, authorizing the election of seven, violated the obligation of that contract, proceeded to elect one Miller and eight others directors as the directors eligible by them; and on the same day the common council, in pursuance of the act of 1867, appointed seven other persons as directors eligible by them. Thereupon, the attorney-general of New York, on the relation of Powers and the six other directors appointed by the city, issued a quo warranto against Miller and his eight co-directors; and the case coming to the Court of Appeals that court held that the appointment by the city was valid, and the election of the nine directors by the other side irregular. Miller and his co-directors now brought the case here.

The only question involved was the constitutionality of the act of 1867. If that act was constitutional the decision of the State court was correct, and was to be affirmed. If the act was a violation of the Constitution of the United States, the decision was erroneous and was to be reversed.

Messrs. Theodore Bacon and H. R. Selden, for the plaintiff in error, argued the case orally, and submitted also the opinions of certain of the judges in the court below who dissented from the judgment there. A part of one follows: The act of July 3d, 1851, made it lawful for two corporations to enter into an arrangement by which one of them might become a stockholder in the other if both should consent, and declared what the rights of the parties to the arrangement should be as between each other if they availed themselves of this permission. There was no exercise of legislative will further than to confer this power; all beyond that depended upon the mutual consent of the parties.

The making and the acceptance of the subscription to the stock were acts of the parties, and they thereby adopted the conditions contained in the act of the legislature and mutually consented to be governed by them. The consent of each party must be deemed to have been given in consideration of the obligation thus assumed by the other, and a valid contract was thus made between the subscriber to the stock and the other stockholders of the railroad company, or the company representing the rights of such stockholders, unless it can be shown that the subject-matter of the arrangement was one concerning which a contract could not be made or authorized by the legislature to be made.

The city of Rochester, by this arrangement, secured to itself the right of appointing four out of the thirteen directors. This was a valuable right, for in its absence, if the stock of the company should all be paid up, the city holding but a minority of the stock might not have been able to obtain the election of any director of its selection. In consideration of this privilege the city surrendered to the other stockholders the right to elect the remaining nine directors. The railroad company, in consideration of that surrender, bound itself to admit the four city directors. Neither party can be presumed to have acted on the assumption that this arrangement could be changed without its consent. It may well be supposed that those interested in the company and who had embarked, or were about to embark, their capital in it, would not have consented to place so large an amount of stock in the hands of the city, had they not been secured against the possibility of the control of the affairs of the company becoming invested in so changing and uncertain a body as a municipal corporation, whose officers would have no personal interest in the road and no special inducement to manage it in the interest of its stockholders.

It will be argued, however, that the power reserved in the constitution and statutes of the State of New York, to alter, suspend or repeal the charters of all corporations, gives power to the legislature to change the terms upon which the subscription was received, and to enlarge the number of directors to be appointed by the city, and that the act of 1867, which purports to authorize the city to appoint seven directors instead of four, thus giving to the city the majority instead of a minority representation in the board, is valid as an amendment of the charter of the railroad company.

The purpose and object of this reservation of power is generally conceded to have been to prevent the alienation by the State of corporate franchises, in such form that they could be held as against the State free from that legislative control which the public interests might from time to time require. When it was settled by the Supreme Court of the United States that an unconditional charter to a private corporation was a contract between the State and the corporation, which could not be impaired by State laws, and that franchises thus granted could never be withdrawn, several of the States resolved to make no more such irrevocable contracts, and either by general laws or provisions in the charters themselves inserted the condition that such charters might be altered or repealed.

In New York the constitution has deprived the legislature of the power of granting irrepealable charters, and there is now no power to make a grant of this description which shall operate as an irrevocable contract on the part of the State. But this reservation is for the benefit of the State alone, and affects only the relations between it and the corporation. The exercise of this reserved power may, undoubtedly, indirectly affect private rights and interests which are dependent upon the powers and franchises of the corporation itself, but no others. The individual rights and interests of the members of the corporation, or of persons dealing with it, cannot be acted upon directly by the legislature even under the form of an amendment of the charter. A contract between individuals or between a corporation and individuals is not subjected to the action of the legislature by the mere fact that it is embraced in a charter or an amendment to a charter, or results from a dealing had with reference to such an enactment. The State has power to revoke its own contracts where it has in making them reserved such right. But it has no power to impair the lawful contracts of its citizens, or even of corporations created by it. When such contracts relate to the rights of individuals and not to the powers of the corporation, any attempt to reserve such a power would be ineffectual. And a State constitution is no more effectual for such purpose than a statute.

In Zabriskie v. Hackensack and New York Railroad Co., the doctrine is stated, that the reservation in a charter that the State may at any time alter, amend, or repeal it, is a reservation of the State for its own benefit and is not intended to affect the rights of corporators as between each other; that it does not empower the State to authorize one part of the stockholders for their own benefit and at their mere option to change their contract with the other part, but is confined to the powers and franchises granted to the corporation by the charter. And although in the case cited the doctrine was applied in a manner inconsistent with some of our own adjudications, none of the latter will be found to conflict with the doctrine itself.

In Oldtown and Lincoln Railroad Co. v. Veazie the charter required that not less than 11,000 shares should be subscribed before the subscriptions could be enforced by calls. The defendant subscribed for 1000 shares. Only 9500 shares were subscribed in all. A supplemental act was then passed, reducing the limit to 8000 shares. It was held that the reserved power to amend the charter did not authorize a change in the liability of the stockholders as between themselves.

The cases of Sherman v. Smith and The Reciprocity Bank, which will probably be relied upon by the other side, are in strict accordance with these views. The alterations in charters there, related to the franchises. One of the chief privileges which may be granted by an act of incorporation is that of doing business as an aggregate body without that individual liability of the members which, but for the incorporation, would necessarily attach. By the amendatory acts the prospective enjoyment of that privilege was taken away from corporations there. No attempt was made to impose on the members liability for existing contracts of the corporation. The amendment affected the whole body alike, and declared that for all contracts the corporation should make after January, 1850, the members should be liable. This was clearly within the scope of the power reserved, and essentially different from the present case. In all the adjudications to be found in which the exercise of this power has been maintained the amendment has related to the corporate franchises and only incidentally affected the rights of the stockholders, through the interest which they had in the tranchises of the corporation itself, and affected the interests of all the stockholders alike. The cases which have gone the greatest length in support of this power are within this limit. They are those in which the corporate powers have been enlarged after subscriptions to the stock, and the subscribers held not to be discharged by this enlargement of the corporate enterprise. In these and kindred cases the alteration affected purely the powers and duties of the corporation in its relations to the State and to the public, and the subscriber to stock as well as the purchaser of stock must be deemed to have contracted with reference to the conceded power of the legislature over those subjects.

There are other acknowledged limits to the exercise of the reserved power of amendment where it trenches upon vested rights or rights of property of the corporation. In Commonwealth v. Essex Company the doctrine is maintained that, 'when under power in a charter rights have been acquired and become vested, no amendment of the charter can take away the property or rights which have become vested under the legitimate exercise of the powers granted.' See also Durfee v. Old Colony Railroad and Roxbury v. Boston and Providence Railroad.

It will be argued, however, that, conceding the principle that contracts between the corporation and its stockholders, though resulting from provisions of the charter, may be protected by the Constitution of the United States when they do not relate to the franchises of the corporation, yet the right of stockholders to vote on their stock or to appoint the directors or managers of the company is a chartered right and subject to the reservation in the State constitution.

This position necessarily leads to the result that the right of stockholders in private business corporations to vote upon their stock is wholly under the control of the legislature; that it cannot be secured by any contract; and that whether claimed under the provisions of the charter or under a contract made in pursuance of legislative authority, it may at any time be taken away in toto from the stockholders by a mere exercise of the will of the legislature; or it may be taken from a portion and vested in the residue.

This result is inevitable, for if the right of voting and the extent of the voice which each stockholder shall have in the management of the property and the affairs of the corporation are mere charter rights or franchises created by the act of incorporation, and within the scope of the power to suspend, alter, and repeal reserved in the constitution, they cannot, even by authority of the legislature, be withdrawn from the exercise of that power, and they can at any time be taken away entirely from the stockholders without their consent.

The most essential element of a right of property is the right to manage or control the management of the object which is in common parlance designated as property.

Is it argued that by investing property in a corporate enterprise, the owner consents to subject its management to the control of the legislature?

This is true to a certain extent; but the fallacy of this argument as applicable to the point now in question consists in the omission to qualify the extent to which the owner has, by thus investing his property, parted with his own power over it.

He has doubtless restricted himself to the use of the property while so invested, in such business as the State may sanction, and through such agencies as the State may permit him to appoint; but he has not consented to part with his control over its management within those limits.

The legislature which creates the artificial body must necessarily have power to prescribe the organs through which it shall act. But this is a different thing from arbitrarily taking possession of the corporation itself, and through it of the property of the parties for whose benefit the corporation was created. They cannot be presumed to have anticipated that a charter giving them the privilege of managing their property for their own benefit, in a certain way, could be transformed by this reserved power of amendment into a vehicle which should transfer from them to the State, or its appointees, all control over the property which they have invested in the corporate enterprise. To hold such a doctrine would be to place all property invested in corporate enterprises beyond the pale of the protection of the Federal Constitution. Such an act would approach nearer to one of confiscation than of legislation.

It is no answer to say that the act of 1867 works so as to secure an equitable result. If the arrangement which it assumes to change was a contract, it makes no difference whether it was unduly beneficial to one party or another. The legislature has no power over it.

It is a misnomer to call the act of 1867 an amendment of the charter of the railroad company. It affects no corporate right or franchise of the company. Its more appropriate description would be 'An act to enlarge the rights of one of the stockholders of the company.'

Mr. J. C. Cochrane, contra.

Mr. Justice CLIFFORD delivered the opinion of the court.