ArtI.S10.C1.6.10 Reservation of Right to Alter or Repeal Corporate Charters

Article I, Section 10, Clause 1:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

There are four principles or doctrines by which the Court has broken down the force of the Dartmouth College decision in great measure in favor of state legislative power. By the logic of Dartmouth College itself, the state may reserve in a corporate charter the right to amend, alter, and repeal the same, and such reservation becomes a part of the contract between the state and the incorporators, the obligation of which is accordingly not impaired by the exercise of the right. 1 Later decisions recognize that the state may reserve the right to amend, alter, and repeal by general law, with the result of incorporating the reservation in all charters of subsequent date. 2 There is, however, a difference between a reservation by a statute and one by constitutional provision. Although the former may be repealed as to a subsequent charter by the specific terms thereof, the latter may not. 3

Is the right reserved by a state to amend or alter a charter without restriction? When it is accompanied, as it generally is, by the right to repeal, one would suppose that the answer to this question was self-evident. Nonetheless, there is judicial dicta to the effect that this power is not without limit, that it must be exercised reasonably and in good faith, and that the alterations made must be consistent with the scope and object of the grant. 4 Yet, although some state courts have applied tests of this nature to the disallowance of legislation, the U.S. Supreme Court has apparently never done so. 5

It is quite different with respect to the distinction that some cases point out between, on the one hand, the franchises and privileges that a corporation derives from its charter, and, on the other hand, the rights of property and contract that accrue to it in the course of its existence. Even the outright repeal of the former does not wipe out the latter or cause them to escheat to the state. The primary heirs of the defunct organization are its creditors, but whatever of value remains after their valid claims are met goes to the former shareholders. 6 By the earlier weight of authority, however, persons who contract with companies whose charters are subject to legislative amendment or repeal do so at their own risk; any such contracts made between individuals and the corporation do not vary or in any manner change or modify the relation between the State and the corporation in respect to the right of the State to alter, modify, or amend such a charter . . . .7 But later holdings becloud this rule. 8

Footnotes

  1.  Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518, 712 (1819) (Justice Story).
  2.  Home of the Friendless v. Rouse, 75 U.S. (8 Wall.) 430, 438 (1869); Pennsylvania College Cases, 80 U.S. (13 Wall.) 190, 213 (1872); Miller v. New York, 82 U.S. (15 Wall.) 478 (1873); Murray v. Charleston, 96 U.S. 432 (1878); Greenwood v. Freight Co., 105 U.S. 13 (1882); Chesapeake & Ohio Ry. v. Miller, 114 U.S. 176 (1885); Louisville Water Company v. Clark, 143 U.S. 1 (1892).
  3.  New Jersey v. Yard, 95 U.S. 104, 111 (1877).
  4.  See Holyoke Company v. Lyman, 82 U.S. (15 Wall.) 500, 520 (1873), See also Shields v. Ohio, 95 U.S. 319 (1877); Fair Haven R.R. v. New Haven, 203 U.S. 379 (1906); Berea College v. Kentucky, 211 U.S. 45 (1908). Also Lothrop v. Stedman, 15 Fed. Cas. 922 (No. 8519) (C.C.D. Conn. 1875), where the principles of natural justice are thought to set a limit to the power.
  5.  See in this connection the cases cited by Justice Sutherland in his opinion for the Court in Phillips Petroleum Co. v. Jenkins, 297 U.S. 629 (1936).
  6.  Curran v. Arkansas, 56 U.S. (15 How.) 304 (1853); Shields v. Ohio, 95 U.S. 319 (1877); Greenwood v. Freight Co., 105 U.S. 13 (1882); Adirondack Ry. v. New York, 176 U.S. 335 (1900); Stearns v. Minnesota, 179 U.S. 223 (1900); Chicago, M. & St. P. R.R. v. Wisconsin, 238 U.S. 491 (1915); Coombes v. Getz, 285 U.S. 434 (1932).
  7.  Pennsylvania College Cases, 80 U.S. (13 Wall.) 190, 218 (1872). See also Calder v. Michigan, 218 U.S. 591 (1910).
  8.  Lake Shore & Mich. So. Ry. v. Smith, 173 U.S. 684, 690 (1899); Coombes v. Getz, 285 U.S. 434 (1932). Both these decisions cite Greenwood v. Freight Co., 105 U.S. 13, 17 (1882), but without apparent justification.