C. H. Venner Co. v. United States Steel Corp.

This 'suit is brought to enjoin the carrying out of a proposed readjustment of stock and bonds of defendant corporation. There is now authorized $304,000,000 first mortgage bonds, $550,000,000 of preferred stock, and $550,000,000 of common stock. It is proposed to retire $200,000,000 of preferred stock by exchanging therefor $200,000,000 of bonds, additional and subordinate to the first mortgage bonds, at the same time selling $50,000,000 of new bonds for cash to be used for betterments, et cetera. The corporation was organized a little over a year ago, under an act of the state of New Jersey concerning corporations (Revision of 1896), and the acts amendatory and supplemental thereto. It was disputed between the parties, upon the argument, whether, under the provisions of these acts and of the certificate of incorporation, there was power in the corporation to take the action it proposed. It will not be necessary to discuss that issue, because it is not disputed that an . amendatory act which was passed March 28, 1902, expressly authorizes the changes proposed in the very manner in which they are sought to be made. It is contended, however, that the act of March 28, 1902, is null and void, because it “impairs the obligation of a contract,” contrary to the provisions of the constitution of the United States; the “contract” being the contractual relation's established- between the holders of the different securities by reason of the respective amounts of such securities of different classes, the differing rates of interest thereon, their different measures of participation in profits, or dividends, or assets, which were prescribed when the corporation was organized and the present holders bought their stock. Examination *1013of the statute and of the certificate of incorporation shows that it was expressly provided that the bonded debt might be increased by new issues “for any object in and about its business”; that its capital might be decreased by the purchase at not above par of certain shares for retirement. Certainly permanency in the relative proportions of the different securities was no part of the contract. There was no express provision when the corporation was formed that bonds might be issued to retire stock, instead of purchasing it for cash. But the New Jersey act concerning corporations contains the provision so frequently found in constitutions and statutes, that “the charter of every corporation shall be subject to alteration, suspension and repeal, in the discretion of the legislature.” This reservation of the right to alter a charter is as much a part of the contract entered into by the stockholders when they subscribe or buy into the corporation as is the most minute provision as to some detail of organization, specifically expressed. Similar words in other statutes have been given a very broad construction by the supreme court. In Sherman v. Smith, 1 Black, 587, 17 L. Ed. 163, it appeared that a bank had been formed in 1844, under a general banking act of the state of New York, which provided that no shareholder of any association formed thereunder should be individually liable for its debts, unless the articles of association signed by him should declare that he should be liable. There was no such declaration in the articles. By subsequent provisions in the New York constitution of 1846 and the General Statutes of 1849, the shareholders of all banks were made liable for debts contracted by the bank after January 1,1850. The court held that this did not impair the obligation of a contract, because a section of the general banking act under which the bank was formed expressly reserved to the legislature the right to alter or repeal. It might be suggested that the amendments in the case last cited affected only the relations between the bank and outside parties, not those subsisting between different members of the association. In Miller v. State of New York, 15 Wall, 478, 21 L. Ed. 98, however, the amendment affected only the stockholders. The general railroad law of New York authorized the formation of railroad corporations with 13 directors. A company was formed with a capital of $800,000 to build a railroad 50 miles long. The legislature authorized the city of Rochester to subscribe $300,000 to it, and enacted that, if the company accepted the subscription, the city should appoint one director for every $75,000 subscribed by it; that is to say, should appoint four directors out of the thirteen, the other stockholders appointing the remaining nine. Fifteen years later the legislature passed another act, giving the city power to appoint one director for every $42,855.57 of stock owned by it, the effect being to give the city seven directors and to leave the other 'stockholders but six. The court held that, in view of the reserved power to “alter, suspend, and repeal,” the -act of 1851 and the articles did not make such a contract as the later act might be held to “impair,” within the meaning of the federal constitution. These cases were recently affirmed in Locker v. Maynard, 179 U. S. 46, 21 Sup. Ct. 21, 45 L. Ed. 79, where it was held that, under the general reservation to alter or amend, the legislature may, by a subsequent act, provide that stockholders in existing corporations *1014may cumulate their votes upon any one or more candidates for directors.

In the light of these authorities, it must be held that, although the result of carrying out the alteration provided for in the act of 1902 may be to change, to some extent, the relations of the different security holders to each other, such statute is not obnoxious to the provisions of the constitution forbidding the passage of laws impairing the obligations of contracts.

The motion is denied.