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Subject Area: Law
Topic: The American Revolution and Constitution

§ 211.: Police regulations of corporations in general.— - 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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§ 211.

Police regulations of corporations in general.—

But the corporation is no more subject to arbitrary regulations than is the individual; except, possibly, as it has been stated in the preceding section.1 In order that the regulation of a corporation may be within the constitutional limitations of police power, it must have reference to the welfare of society by the prevention or control of those actions which are calculated to inflict injury upon the public or the individual. As in all other cases of the exercise of the police power, the police regulations of corporations must be confined to the enforcement of the maxim, sic utere tuo, ut alienum non lædas, subject to the observance of which every corporate charter must be supposed to have been granted. Any attempt, under the guise of police regulations, to repeal or amend the charter, where the right of repeal or amendment has not been expressly reserved, or to abridge any of the corporate rights and privileges, would of course be unconstitutional and void.2 The property of the corporation cannot be confiscated, under pretense of being a police regulation, without payment of compensation. Thus, it was held unconstitutional for a law to require an existing turnpike company to set back its first gate two miles from the corporate limits of a town, which had grown up at the original gate, under penalty of forfeiting all right to tolls.3 The two miles of road, included within the existing turnpike, might have been confiscated in the exercise of the power of eminent domain, but compensation for the loss would have been required. So, also, would it be unlawful to compel a railroad or turnpike to permit certain persons to make use of the road without paying the customary toll.1 And while it is permissible to prohibit a corporation from doing the thing, or engaging in the business, for which it was created, no law can make the corporation responsible for the damages suffered by the public, as a consequence of what the corporation was authorized to do. Thus, for example, where the legislature authorized the construction of a bridge over a navigable stream, of such dimensions that it would necessarily become an obstruction to the navigation of the river, the bridge company could not be made responsible to those whose navigation of a stream was impeded, for that would in effect be a deprivation of the corporate rights.2 So, also, would it be unlawful for the legislature to provide by a subsequent law for the complete forfeiture of the charter as a penalty for a prohibited act, which under the existing law was a cause for only a partial forfeiture, because the enforcement of the new penalty against a corporation for acts already done would operate to impair the obligation of contracts.3 So, also, it has been held to be unconstitutional for a statute to provide for the forfeiture of the franchise of a corporation like a turnpike road, in a proceeding of a summary character, in which the right of trial by jury was possible and was denied.4

But there is no constitutional objection to the application to existing corporations of new remedies for the attainment of justice, and to secure a performance of the corporate duties to the public.5 For example, it is lawful for a legislature to extend the individual liability of the stockholders of a bank for any debt thereafter incurred.1 But while the liability of stockholders may be increased, or imposed for the first time, without affecting the constitutional rights of the stockholders, an existing liability to creditors cannot be reduced or taken away altogether, without violating the constitutional rights of the creditors, whose claims against the corporation were acquired prior to the enactment of the amendatory statute.2 So, likewise, may not the existing claims of creditors against the trustees of a corporation, who are under existing law personally liable under stated contingencies, be affected by subsequent legislation, changing this liability.3 But a law is valid which provides that existing corporations shall maintain their corporate organizations for a limited period after their dissolution, and continue their capacity for being sued, for the purpose of winding up its affairs.4 So, likewise, may the laws provide for the sale of the property of an insolvent corporation, and for the distribution of the proceeds of sale among the creditors.5

In like manner may the rights of stockholders in existing corporations be regulated and changed, in the protection and promotion of their interests. Provision for minority representation in the directory of a corporation is constitutional.1 And where the State, under a contract with a railroad corporation, has the right to vote a given number of shares, this right of representation may be surrendered by the State by subsequent enactment, and the directors whom the State had a right to appoint and did appoint may be removed summarily.2 The State may in the same way temporarily waive its rights as a voting stockholder in a turnpike company.3

The State may also grant to stockholders reasonable right of interference in the management of the business of the corporation, such as demanding the right to inspect the books of the company.4 And it has been held in one case to be constitutional, to authorize any stockholder of a private corporation to require that all the real estate owned by the corporation, which may not be necessary to the transaction of the corporate business, or for the payments of debts, be appraised and partitioned among the stockholders.5 On the other hand, it is not unconstitutional for a statute, in providing for the closing up of the affairs of mining and manufacturing corporations, not to provide for making all the stockholders necessary parties to the suit, inasmuch as they may become parties, if they want to.6

Corporations may also be required to submit to an inspection of their affairs by a public official, in order to ascertain any breaches of duty to the public,7 or to file with State officials, an annual statement of its condition.1 And the legislature may lawfully provide the extreme remedy of dissolving the bank or other corporation, whenever, upon examination by the public inspector, it should be found in an insolvent condition.2 In the case last cited,3 it was held that a law was constitutional, which provided for the judicial dissolution of an insurance company, chartered under the laws of the State, whenever the auditor, upon examination of its affairs, should be of the opinion that its financial condition is such as to render its further continuance in business hazardous to those who are insured in the company. In pronouncing the law to be constitutional, the court says:—

“With certain constitutional limitations, the rights of all persons, whether natural or artificial, are subject to such legislative control as the legislature may deem necessary for the general welfare, and it is a fundamental error to suppose there is any difference in this respect between the rights of natural and artificial persons. They both stand precisely upon the same footing. While personal liberty is guaranteed by the constitution to every citizen, yet, by disregarding the rights of others, one may forfeit not only his liberty, but even life itself. So a corporation, by refusing to conform its business affairs as to defeat the objects and purposes of its promoters, and the design of the legislature in creating it, may forfeit the right to further carry on its business, and also its existence as an artificial being. The fact, that the stockholders may be personally injured by declaring a forfeiture of the company’s franchises, and causing its affairs to be wound up in a case of this kind, is not a sufficient reason why it should not be done, if the further continuance of its business would be dangerous to the community. In the proper exercise of the police power, laws are often enacted by the legislature for the common good which materially affect the value of certain kinds of property, by which a particular class of persons are injured; yet such consequences do not at all affect the validity of the legislation, and to such losses the maxim damnum absque injuria applies. It is generally said one may do as he pleases with his own property, but this is subject to the important qualification—he must please to do with it as the law requires. * * * The maxim sic utere tuo, ut alienum non lædas, applies to all such cases. * * *

“These general principles would seem to warrant the conclusion that the legislature is authorized, in the proper exercise of the police power, to adopt such necessary legislation and regulations as will effectually protect the community from losses incident to a public business, conducted by a corporation under a charter from the State, where such business has become hazardous, and will probably result in financial distress and disappointed hopes to those who, ignorant of its condition, do business with it.”1

As illustrative examples of the scope of police regulation of corporations and of their business, I refer to the following cases of the special regulation of certain corporations.

A Missouri statute provided that, in determining whether the assets of a building and loan association are sufficient to pay the face value of the stock, and to bring the stock to maturity, the average premiums which are paid by the borrowing members of the association should be credited on the stock accounts of the non-borrowing members. The statute was declared to be unconstitutional, so far as it was made to apply to subscription contracts, which were made prior to the enactment of the statute.2

The constitution of Colorado provides that the general assembly shall have power to alter, revoke or annul any charter of a private corporation, “in such manner, however, that no injustice shall be done to the incorporators.” It was held that this qualification of the authority to alter or revoke a charter did not make a statute unconstitutional, which, in the exercise of the police power, required a canal corporation to cover over the canal, for the protection of the life and property of the inhabitants of the city, through which the canal was laid.1

The regulation of the business of insurance has been extensively treated in preceding sections,2 to which the reader is referred. Reference is made in the present connection to only a few particular cases. It has been held in Pennsylvania to be constitutional to prohibit by statute an insurance company from making discriminations, in prosecution of the business and the making of contracts of insurance, against certain individuals and in favor of others.3 So, elsewhere, it has been held to be constitutional to control the terms of a policy of fire insurance, so as to require the insurance company to pay the losses under the policy in full, whatever may be the agreement of the parties to the contrary,4 and to prohibit insurance companies from denying that the property insured was worth the full amount of the policy, when it was issued.5 The imposition of a penalty of twelve per cent of the amount recoverable on a policy of insurance, for failure to pay the same when it became due, was likewise held to be a reasonable exercise of the police power.6

Telegraph, telephone, electric light and other companies, which, in the prosecution of their business, require the stringing of wires for the transmission of the necessary electrical current, are peculiarly subject to police regulation, in order to protect the public against the nuisance, and the dangers to life and property, which are threatened by the network of wires which now encircle and interlace a large city. The dangers and annoyance are greatest when the wires are overhead, and strung on the unsightly poles which disfigure all of our streets. But the electrolysis of water, sewer and other pipes, by the want of sufficient covering of electrical wires when they are buried in the ground, both justifies and requires police regulation in such cases, as when the wires are strung upon poles above ground. In both cases, the regulations are constitutional, provided they are reasonable, even though conformity to the police regulation may prove both expensive and difficult.1 It has also been held to be constitutional to prohibit the stretching of wires over the roofs of houses.2

Telegraph companies are also subjected to police regulations of their business, in order to insure reasonable accommodations to patrons, and the safe and accurate transmission and delivery of telegraphic messages. These regulations are both reasonable and constitutional.3 And it has been held to be constitutional for a statute to give to the addressee of a telegram the right to recover a penalty, where the company had failed to deliver the telegram with reasonable dispatch. And it was held that this imposition and recovery of the penalty was not a regulation of interstate commerce, nor did it unconstitutionally impair the obligation of the contract, which the company had made with the sender of the message, that the company was not liable for mistakes in transmission unless the telegram was repeated.1

The State or municipality may also impose a tax upon the telegraph companies, doing business within their borders, without laying themselves open to the charge of interfering with interstate commerce. Usually, the tax is rated according to the number of poles which the company may erect within the limits of the city or State; and the Supreme Court of the United States has held that such a tax was rather in the nature of a rental charge for the use of the streets and highways, by the erection of poles and the stringing of wires on them.2 In imposing a similar license tax upon an electric light company, it was held in Pennsylvania that the tax could not be laid against poles and wires, which were used exclusively in lighting the streets and public places under a contract with the city; but it must be confined to the poles and wires which were employed to furnish light to private consumers.3

Wherever privileges are bestowed by statute upon a corporation, the statute may prescribe a return of some equivalent to the public, as a condition precedent to the enjoyment of the privilege; and the acceptance of the benefits of the statute makes it obligatory upon the corporation to perform its duties to the public. These principles were applied in one case to a water company, who was charged, as a condition of its acceptance and enjoyment of the privileges granted to it by statute, with the duty of furnishing free of charge all the water that may be needed by a city for fire purposes, and other public necessities, as the statute had stipulated. The statute was sustained as constitutional.1

[1]See ante, pp. 957-959.

[2]State v. Noyes, 47 Me. 189; Washington Bridge Co. v. State, 18 Conn. 53; Benson v. Mayor, etc., of N. Y. 10 Barb. 223; Hegeman v. Western R. R. Co., 13 N. Y. 9; Commonwealth v. Pennsylvania Canal Co., 66 Pa. St. 41; Bailey v. Philadelphia, etc., R. R. Co., 4 Harr. 389; People v. Jackson, etc., Plank Road Co., 9 Mich. 285; Attorney-General v. Chicago, etc., R. R. Co., 35 Wis. 425; Sloan v. Pacific R. R. Co., 61 Mo. 24. See, also, §§ 208, 209.

[3]White’s Creek Turnpike Co. v. Davidson Co., 3 Tenn. Ch. 396. See Detroit v. Plankroad Co., 13 Mich. 140; Goodrel v. Kreichbaum, 70 Iowa, 362.

[1]Pingry v. Washburn, 1 Aiken, 264.

[2]Bailey v. Philadelphia, etc., R. R. Co., 4 Harr. 389.

[3]People v. Jackson, etc, Plankroad Co., 9 Mich. 285.

[4]Salt Creek Val. Turnpike Co. v. Parks, 50 Ohio St. 568; West Alexandria & E. Turnpike Co. v. Gay, 50 Ohio St. 583.

[5]Crawford v. Branch Bank, 7 How. 279; Gowen v. Penobscot R. R. Co., 44 Me. 140; Commonwealth v. Cochituate Bank, 3 Allen, 42.

[1]Stanley v. Stanley, 26 Me. 196; Coffin v. Rich, 45 Me. 507; Hathorne v. Calef, 53 Me. 471; Child v. Coffin, 17 Mass. 64; Gray v. Coffin, 9 Cush. 200; Bissell v. Heath, 98 Mich. 472; Berwind-white Coal Min. Co. v. Ewart, 32 N. Y. S. 716; 11 Misc. Rep. 490; Hirshfield v. Bopp (N. Y.), 39 N. E. 817; Tuttle v. Nat. Bank of the Republic, 161 Ill. 497.

[2]Close v. Noye, 26 N. Y. S. 93; 4 Misc. Rep. 616, following Hawthorne v. Calef, 2 Wall. 10.

[3]Fitzgerald v. Weidenbeck, 76 Fed. 695.

[4]Lincoln, etc., Bank v. Richardson, 1 Greenl. 79; Franklin Bank v. Cooper, 36 Me. 179; Foster v. Essex Bank, 10 Mass. 245; Nevitt v. Bank of Port Gibson, 6 Smedes & M. 513. And a State law of this kind may be made to apply to foreign corporations, in the endeavor to secure a just distribution of their assets lying within the jurisdiction of the State, which enacted the law. McGoon v. Scales, 9 Wall. 31; Stetson v. City Bank, 2 Ohio St. 114; Lewis v. Bank of Kentucky, 12 Ohio St. 132.

[5]Bass v. Roanoke Nav. & W. Power Co., 111 N. C. 439; Ellerbe v. United Masonic Benefit Assn., 114 Mo. 501.

[1]Attorney-General ex rel. Dusenbury v. Looker, 111 Mich. 498.

[2]Tucker v. Russell, 82 Fed. 263.

[3]Cassell v. Lexington, H. & P. Turnpike Co. (Ky.), 9 S. W. 502.

[4]Montana Co. v. St. L. Min. & Milling Co., 152 U. S. 160.

[5]Merchant v. Webster Land Assn. 56-Minn. 327.

[6]Brown v. Mesnard Min. Co., 105 Mich. 653; Brown v. Pontiac Min. Co., 105 Mich. 653; Brown v. Houghton, Circuit Judge, 105 Mich. 653.

[7]Hunter v. Burnsville Pike Co., 56 Ind. 213; Commonwealth v. Farmers’ and Mechanics’ Bank, 21 Pick. 642. See Planters’ Bank v. Sharp, 5 How. 340.

[1]Eagle Ins. Co. of Cincinnati v. State, 153 U. S. 446; Insurance Co. v. Needles, 113 U. S. 574.

[2]Commonwealth v. Farmers’ & Mechanics’ Bank, 21 Pick. 542; Nevitt v. Bank of Port Gibson, 6 Smedes & M. 513; Ward v. Farwell, 97 Ill. 693.

[3]Ward v. Farwell, supra.

[1]Ward v. Farwell, 97 Ill. 608, 609.

[2]Fisher v. Patton, 134 Mo. 32.

[1]Platte & Denver Canal & Milling Co. v. Dowell, 17 Colo. 376.

[2]§§ 90, 105.

[3]Commonwealth v. Morningstar, 144 Pa. St. 103.

[4]Dugger v. Mechanics’ &c. Ins. Co., 95 Tenn. 245.

[5]Daggs v. Orient Ins. Co. of Hartford, 136 Mo. 382.

[6]Union Cent. Life Ins. Co. v. Chowning, 86 Tex. 654.

[1]People v. Squire, 107 N. Y. 593; s. c. 145 U. S. 175; Western Union Tel. Co. v. City of New York, 38 Fed. 552.

[2]Electric Imp. Co. v. City and County of San Francisco., 45 Fed. 593; Electric Imp. Co. v. Scannell, 45 Fed. 596.

[3]Connell v. Western Un. Tel. Co., 108 Mo. 459.

[1]Western Un. Tel. Co. v. Howell, 95 Ga. 194; s. c. 162 U. S. 650.

[2]City of St. Louis v. West. Un. Tel. Co., 148 U. S. 92; City of Philadelphia v. Am. Un. Tel. Co., 167 Pa. St. 406; City of Philadelphia v. Postal Tel. Cable Co., 67 Hun, 21.

[3]New Castle v. Electric Co., 16 Pa. Co. Ct. 663; 26 Pittsb. Leg. J. (n. s.) 197.

[1]City of Boise City v. Artesian Hot & Cold Water Co. (Idaho), 39 P. 562.