Where the charter of a corporation says that the capital stock
of the corporation shall be a sum named, as
ex. gr.,
$100.000, "and may be increased from time to time at the pleasure
of the said corporation," the directors alone, and without the
matter being submitted to and approved by the stockholders, have no
power to increase it unless expressly authorized thereto, and the
fact that the charter declares that
"all the corporate powers of the said corporation shall be
vested in and exercised by a board of directors and such officers
and agents as said board shall appoint"
does not alter the case. The powers thus granted to the
directors &c., refer to the ordinary business transactions of
the corporation.
The Chicago City Railway Company was a corporation owning a
street railroad in Chicago. The directors of the company, without
consulting the stockholders or calling a meeting of them, resolved
to increase the capital stock of the company from $1,250,000 to
$1,500,000. To this one Allerton, who was a stockholder, objected
and filed a bill praying for an injunction to prevent the increase.
His position was that it could not be lawfully made without the
concurrence of the stockholders, and in support of this view he
relied upon the Constitution of Illinois, adopted in July, 1870, by
the thirteenth section of the eleventh article of which it is
declared as follows:
"No railroad corporation shall issue any stock or bonds except
for money, labor, or property actually received and applied to the
purposes for which such corporation was created, and all stock
dividends, and other fictitious increase of the capital stock, or
indebtedness of any such corporation, shall be void. The capital
stock of no railroad corporation shall be increased for any purpose
except upon giving sixty days' public notice in such manner as may
be provided by law."
He also relied on an Act of the Legislature of Illinois passed
March 26, 1872, to execute and carry out the above provision of the
constitution, by which, amongst other
Page 85 U. S. 234
things, it was enacted that no corporation should change its
name or place of business, increase or decrease its capital stock,
or the number of its directors, or consolidate with other
corporations without a vote of two-thirds of the stock at a
stockholders' meeting.
The railway company in its answer relied upon its charter,
granted February 14, 1859, the third and fourth sections of which
were as follows:
"SECTION 3. The capital stock of said corporation shall be one
hundred thousand dollars, and may be increased from time to time at
the pleasure of said corporation."
"SECTION 4. All the corporate powers of said corporation shall
be vested in and exercised by a board of directors and such
officers and agents as said board shall appoint."
The position of the company was that the third section conferred
an unrestricted right to increase the capital stock at will, and
that the fourth vested this power in the board of directors, and
that the constitutional provision and act above referred to, if
applied to this corporation, would impair the validity of the
contract. It was further set up, however, that the said provision
did not apply to railways worked by horsepower. The court below
decreed in favor of the complainant, and the company took the
present appeal.
MR. JUSTICE BRADLEY delivered the opinion of the Court.
Without attempting to decide the constitutional question or to
give a construction to the act of the legislature, we are satisfied
that the decree must be affirmed on the broad ground that a change
so organic and fundamental as that of increasing the capital stock
of a corporation beyond the limit fixed by the charter cannot be
made by the directors alone unless expressly authorized thereto.
The general power to perform all corporate acts refers to the
ordinary
Page 85 U. S. 235
business transactions of the corporation, and does not extend to
a reconstruction of the body itself or to an enlargement of its
capital stock. A corporation, like a partnership, is an association
of natural persons who contribute a joint capital for a common
purpose, and although the shares may be assigned to new individuals
in perpetual succession, yet the number of shares and amount of
capital cannot be increased except in the manner expressly
authorized by the charter or articles of association.
Authority to increase the capital stock of a corporation may
undoubtedly be conferred by a law passed subsequent to the charter,
but such a law should regularly be accepted by the stockholders.
Such assent might be inferred by subsequent acquiescence, but in
some form or other it must be given to render the increase valid
and binding on them. Changes in the purpose and object of an
association or in the extent of its constituency or membership,
involving the amount of its capital stock, are necessarily
fundamental in their character and cannot, on general principles,
be made without the express or implied consent of the members. The
reason is obvious.
First, as it respects the purpose and object. This may be said
to be the final cause of the association, for the sake of which it
was brought into existence. To change this without the consent of
the associates would be to commit them to an enterprise which they
never embraced and would be manifestly unjust.
Secondly, as it respects the constituency, or capital and
membership. This is the next most important and fundamental point
in the constitution of a body corporate. To change it without the
consent of the stockholders would be to make them members of an
association in which they never consented to become such. It would
change the relative influence, control, and profit of each member.
If the directors alone could do it, they could always perpetuate
their own power. Their agency does not extend to such an act unless
so expressed in the charter or subsequent enabling act, and such
subsequent act, as before said, would not bind
Page 85 U. S. 236
the stockholders without their acceptance of it or assent to it
in some form. Even when the additional stock is distributed to each
stockholder
pro rata, it would often work injustice
because many of the stockholders might be unable to take their
respective shares, and might thus lose their relative interest and
influence in the corporate concerns.
These conclusions flow naturally from the character of such
associations. Of course, the associates themselves may adopt or
assent to a different rule. If the charter provides that the
capital stock may be increased or that a new business may be
adopted by the corporation, this is undoubtedly an authority for
the corporation (that is, the stockholders) to make such a change
by a stockholders' vote in the regular way. Perhaps a subsequent
ratification or assent to a change already made, would be equally
effective. It is unnecessary to decide that point at this time. But
if it is desired to confer such a power on the directors so as to
make their acts binding and final, it should be expressly
conferred.
Where the stock expressly allowed by a charter has not been all
subscribed, the power of the directors to receive subscriptions for
the balance may stand on a different footing. Such an act might
perhaps be considered as merely getting in the capital already
provided for the operations and necessities of the company, and
therefore as belonging to the orderly and proper administration of
the company's affairs. Even in such case, however, prudent and fair
directors would prefer to have the sanction of the stockholders to
their acts. But that is not the present case, and need not be
further considered.
Decree affirmed.