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Subject Area: Law
Topic: The American Revolution and Constitution

§ 208.: The inviolability of the charters of private corporations.— - Christopher G. Tiedeman, A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, vol. 2 [1900]

Edition used:

A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint (St. Louis: The F.H. Thomas Law Book Co., 1900). Vol. 2.

Part of: A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, 2 vols.

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§ 208.

The inviolability of the charters of private corporations.—

At a very early day, it was decided by the Supreme Court of the United States that the charter of a private corporation constituted a contract between the State and the stockholders or members of the corporation, by which the State, in consideration of the public benefit, and of the investment of capital in the corporate business, grants to these capitalists the power to act together as one legal personality, with corporate powers and liabilities, separate and apart from the individual responsibilities of the members. The opinion of Chief Justice Marshall, in the leading case on this subject,1 has been so often affirmed by the Federal courts, as well as by the State courts,2 that it may now be laid down as a settled principle of constitutional law, that an act of incorporation is such a contract between the State and the incorporators as is protected by the clause of the Federal constitution, which denies to the States the power to pass any law impairing the obligation of a contract.1 Any law, therefore, of a State which impairs the corporate rights, or which repeals, annuls or amends the corporate charter, against the wishes of the members of the corporation, impairs the obligation of a contract, and is consequently void.

But this has reference only to private corporations, i. e., corporations, which are composed of private persons. Although it is frequently stated by the courts that municipal corporations have a quasi-private character, their charters do not constitute contracts between the State and the municipality, which would preclude the repeal or amendment of the charters, or a curtailment of the charter powers, in accordance with the doctrine of the Dartmouth College case.2

Some illustrations, not intended to be exhaustive, may be added in explanation of the general principles herein set forth.

In the first place, the charter must be accepted, or the parties investing their capital in the enterprise must have entered upon the project, or must have made provision for the same. Where, therefore, corporations are formed under general incorporation laws, the provisions of those laws do not constitute contracts with a corporation, until the charter has been granted in compliance with the provisions of those laws. These incorporation laws may be changed at the pleasure of the legislature and subsequent incorporators cannot claim that the subsequent amendments to the incorporation law have impaired the obligation of a contract, because of prior contracts which they had entered into looking to incorporation. Thus, a New York statute authorized the purchasers of a railroad franchise, at a sale under foreclosure, to form a new corporation, with all the rights, powers and privileges of the old corporation. An amendment to this law imposed, as a condition precedent to the procurement of a new incorporation, the payment into the State Treasury of a sum, equal to one-eighth of one per cent of the proposed amount of capital. The authorization of incorporation, as just explained, was held not to be a contract in the constitutional sense, but was only a regulation of law, which could be amended at the will of the legislature, and parties applying subsequently for a charter must comply with the law as amended; although property rights may have been acquired previously, in reliance upon the law of incorporation remaining unchanged.1 And even where a special charter is granted to a corporation, the charter is always subject to amendments, contracting the corporate rights or increasing the corporate burdens, as long as the incorporators have not accepted the charter or acquired vested rights thereunder. In one case, in which this ruling was made, an amendment to the charter of a railroad was passed four days after the passing of the original charter, and at the same session of the legislature.1 Of the same character is the statutory right to issue stock in exchange for deposits, which is granted in a bank charter. The Supreme Court of the United States held that this provision did not create a contractual right, which was beyond modification by law.2

A subsequent statute cannot change the conditions, prescribed in the charter or in the incorporation laws under which the charter was obtained, which must be observed in procuring amendments to the charter;3 nor can the conditions, under which property is donated to an eleemosynary corporation, be changed by subsequent legislation; as where property and capital are donated for the maintenance of a certain kind of school or college, and a corporation is formed with the express power of receiving the gift and to carry out the purpose of the donor.4 So, likewise, is it beyond the power of the legislature to interfere by subsequent statute with the priority of liens, or other rights of the creditors of an existing corporation.5

In accordance with the ruling of the Supreme Court of the United States, in the Charles River Bridge v. Warren River Bridge,6 the grant of a franchise is universally held in this country not to be exclusive, unless it is expressly declared to be exclusive in the charter of incorporation or law, under which the franchise is acquired. In such a case, the grant of a parallel and competing franchise may be granted without impairing the vested rights of the first corporation, even though, through successful competition, the value of the first franchise may be seriously impaired or completely destroyed. But if the franchise is made by express terms of the law or charter to be exclusive, the subsequent grant of a competing franchise would be unconstitutional, as an impairment by subsequent law of the obligation of a contract. This has been held repeatedly in the case of street railways, whose charters contain express limitations of the power of the State or municipality to grant competing franchises to other street railway companies.1

The protection, which the principles of the Dartmouth College case afforded to private corporations, against any modification by subsequent laws of its charter rights and privileges, is very considerably reduced by the almost universal reservation to the State of the power to amend or repeal the charters of private corporations, which are subsequently granted.

It is now a very common statutory or constitutional provision, that all charters of private corporations are held subject to the power of the State to repeal or amend. Sometimes, this reservation is inserted in every charter; but this is not necessary. It has been repeatedly held that, where there is a general statutory or constitutional reservation of such power to amend or revoke all charters, the reservation of such power enters into and becomes a constituent of every charter contract, which is subsequently made by the legislature.2 If the reservation of the power to amend or revoke a charter is a constitutional provision, there is, of course, no discretion to the legislature. But if it is only a provision of the statutory incorporation law, it is within the power of the legislature, in granting a charter by special law, where special laws are constitutional, to except the particular charter from the operation of this reservation of the power to amend or revoke the charter.1 These cases, just cited, also hold that a statute, which reserves the right to amend or repeal a charter, applies to any subsequent renewal of an old expiring charter. But this is not true, where the statute does not expressly refer to renewals of charters. In such case, the renewed charter is as free from the reserved power to amend or repeal as was the original charter.2

But, even in the case of such a reservation, the charter cannot be so amended or repealed as to interfere with the vested rights of property, which the stockholders may have acquired by and through the corporation.3 But when the statutory amendment to a charter does not involve any practical confiscation of the rights of property of the corporation, it cannot be successfully attacked, it matters not how radical it may be. It has even been held that it is within the reserved power, to amend existing charters of private corporations, to impose upon the stockholders of such a corporation a personal liability to creditors, in double the amount of their stock in the corporation.4 And where a city gas company fails to carry out its obligations to a city to furnish light to all parts of the city, and to extend its supply pipes, make new connections, as the city grew, its exclusive franchise may be forfeited and the city be given the power to establish and maintain its own gasworks.1 In this connection, it must be borne in mind that franchise rights in real property, like ordinary rights therein, are acquired subject to the right of eminent domain by the State. In the exercise of the right of eminent domain, the property of a railroad may be appropriated by the State to a public use, as much so as may be the property of any natural person.2

Still, the statement of the text, that vested rights of property cannot be infringed by subsequent legislation, notwithstanding the reservation of the power to amend and revoke a charter, is supported very generally by the authorities. Thus a provision, that no toll bridge or ferry shall be established within one mile immediately above or below an existing ferry or toll bridge, becomes a part of the charter rights of a toll bridge or ferry company, and cannot be abrogated by a subsequent statute, except in the cases, which the statute expressly excepts, if there be such exceptions.3 It is also an unconstitutional impairment of the obligation of a contract for a constitutional convention by subsequent enactment to repeal a statute which granted to a railroad certain vacant public lands within a certain defined area, and to declare such lands to be open to purchasers, settlers, and holders of genuine certificates.4 So, also, would a law be unconstitutional, which, in providing for the sale of the franchise of an insolvent street railway, provided that the cost of the obligation, instead of the amount set forth in the contract, shall be the measure of liability to the creditors.5

[1]Dartmouth College v. Woodward, 4 Wheat. 518.

[2]See Planters’ Bank v. Sharp, 6 How. (U. S.) 301; Trustees, etc., v. Indiana, 14 How. (U. S.) 268; Piqua Bank v. Knoop, 16 How. (U. S.) 369; Hawthorne v. Calef, 2 Wall. 10; Binghamton Bridge Case, 3 Wall. 51; State v. Noyes, 47 Me. 189; Wales v. Stetson, 2 Mass. 143; Central Bridge v. Lowell, 15 Gray, 106; Grammar School v. Burt, 11 Vt. 632; Backus v. Lebanon, 11 N. H. 19; People v. Manchester, 9 Wend. 351; Commonwealth v. Cullen, 13 Pa. St. 133; Cleveland, etc., R. R. Co. v. Speer, 56 Pa. St. 325; Zabriskie v. Hackensack, etc., R. R. Co., 17 N. J. Eq. 178; State v. Mayor of Newark, 35 N. J. L. 157; Bank of Old Dominion v. McVeigh, 20 Gratt. 457; Bank of State v. Bank of Cape Fear, 13 Ired. 75; Mills v. Williams, 11 Ired. 558; Young v. Harrison, 6 Ga. 130; State v. Accommodation Bank, 26 La. Ann. 288; State v. Tombeckbee, 2 Stew. 30; Commercial Bank v. State, 14 Miss. 599; Mobile, etc., R. R. Co. v. Moseley, 52 Miss. 127; Sala v. New Orleans, 2 Wood (U. S. C. C.), 188; State v. Southern, etc., R. R. Co., 24 Tex. 80; Hamilton v. Keith, 5 Bush, 458; Marysville Turnpike Co. v. How, 14 B. Mon. 429; Mechanic’s Bank v. DeBolt, 1 Ohio St. 591; Edwards v. Jagers, 19 Ind. 407; Flint v. Woodhull, 25 Mich. 99; Bruffet v. G. W. Ry. Co., 25 Ill. 353; St. Louis v. Manufacturers’ Sav. Bank, 49 Mo. 574; Farrington v. Tennessee, 95 U. S. 679.

[1]See an ingenious argument against the correctness of the decision of the court in the Dartmouth College Case, in 8 Am. Law Rev. 190. The writer of the article, inter alia, makes the point that, inasmuch as the author of this clause of the constitution, Judge Wilson, of Pennsylvania, afterwards of the Supreme Court of the United States, was a Scotch lawyer, and therefore learned in the Roman or Civil law, we must look to that system for the real meaning of the phrase “obligation of a contract.” In the Roman law, obligatio ex contractu, invariably meant a pecuniary liability.

[2]See Gas & Water Co. of Downington v. Corporation of Borough of Downington, 175 Pa. St. 341.

[1]People v. Cook, 110 N. Y. 443; s. c. 148 U. S. 397. See, to same general effect, Ashley v. Ryan, 153 U. S. 436.

[1]Cincinnati, H. & I. Ry. Co. v. Clifford, 113 Ind. 460.

[2]Bank of Commerce v. State of Tennessee, 163 U. S. 416.

[3]Loewenthal v. Rubber Reclaiming Co., 52 N. J. Eq. 440.

[4]Graded School Dist. No. 2 v. Trustees of Bracken Academy, 95 Ky. 436; Webster v. Cambridge Female Seminary, 78 Md. 193; State v. Neff, 52 Ohio St. 375.

[5]Giles v. Stanton, 86 Tex. 620; Giles v. East Line & R. Ry. Co. (Tex.), 26 S. W. 1111.

[6]11 Pet. 420.

[1]City Ry. Co. v. Citizens’ Street Ry. Co., 166 U. S. 557; s. c. 56 Fed. 746. See Shreveport v. Cole, 129 U. S. 36; Hamilton Gas Co. v. Hamilton City, 146 U. S. 258.

[2]Hamilton Gaslight & Coke Co. v. City of Hamilton, 146 U. S. 258; People v. Cook, 148 U. S. 397; State v. Montgomery Light Co., 102 Ala. 594; Bissell v. Heath, 98 Mich. 472.

[1]McCandless v. Richmond & D. Ry. Co., 38 S. C. 103; Mobile Ins. Co. v. Columbia & Greenville Ry. Co., 41 S. C. 408.

[2]Citizens’ Street Railway Co. v. City of Memphis, 53 Fed. 715.

[3]Holyoke Co. v. Lyman, 15 Wall. 500; Southern Pac. Co. v. Bd. of R. R. Comrs. (C. C. A.), 78 Fed. 236; Inland Fishery Commissioners v. Holyoke Water Power Co., 104 Mass. 446; Worcester v. N. and W. R. R. Co., 109 Mass. 103; Thornton v. Marginal Freight Railway, 123 Mass. 32.

[4]Bissell v. Heath, 98 Mich. 472.

[1]Hamilton Gaslight & Coke Co. v. City of Hamilton, 146 U. S. 258.

[2]City of Terre Haute v. Evansville & T. H. Ry. Co., 149 Ind. 174. To the same effect, see Citizens’ Gaslight of Reading, etc. v. Inhabitants of Wakefield, 161 Mass. 432.

[3]Fortain v. Smith, 114 Cal. 494.

[4]Houston & T. C. Ry. Co. v. Texas & P. Ry. Co., 70 Tex. 649.

[5]People v. O’Brien, 111 N. Y. 1.