Constitutional Limitations upon Legislative Power to Alter Incidents of the Shareholder's Status in Private Corporations
Shareholder's Status in Private Corporations
Constitutional Limitations upon Legislative Power to Alter Incidents of the Shareholder's Status in Private Corporations
William Clark Schmidt 0
St. Louis Bar Association 0
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Part of the Business Organizations Law Commons; and the Constitutional Law Commons
BY WILLIAM CLARK SCHMIDT
If, in this day of bank failures, corporation receiverships,
defaulting bonds and passed dividends one were to walk up to an
owner of twenty-five shares of stock in the American Telephone
and Telegraph Company' and question him as to the incidents of
his status as a shareholder in that corporation, his answer or
reply would probably consist of little more than a cynical smile.
The ordinary stockholder of today is resigned to his fate. If a
dividend is declared on his holdings he considers himself lucky,
almost as though he had received something for nothing. If
dividends are never declared and if the value of his shares
depreciates he accepts such a loss as the result of his own
foolishness.
Perhaps in the last few years this characteristic laxity has
been disappearing to some extent, especially among the larger
stockholders, who have both greater interests to protect and a
greater knowledge of their rights with which to protect them.
But the important thing to note is that the average stockholder
is a small stockholder,2 and the tendency seems to be toward an
even greater dispersion of holdings. Add to this the fact that
the average stockholder is the ordinary garden variety of
American citizen, lacking both the means and the knowledge necessary
to an adequate protection of his rights," and the problem becomes
even more acute. Thus it appears that the question as to what
are the incidents of the shareholder's status and how these
incidents may be protected is an important one, and one deserving of
more attention than it has been given. It is with this in mind
I Approximately 25 shares is the average individual holding in A, T&T.
The 18,662,275 outstanding shares are held by 700,851 persons. Moody's
FinancialService, 1933.
2The following figures will serve to illustrate the fact that the tendency
is toward small holdings in the hands of a great number of individuals.
Cities Service Co. 40,154,673 shares outstanding, 650,000 shareholders.
United States Steel Corp. 12,300,000 shares outstanding, 251,025
shareholders. Radio Corp. of America 14,393,965 shares outstanding, 287,813
shareholders. General Motors 44,900,000 shares outstanding, 351,761
shareholders. Moody's Financial Service, 1933.
3 Sears, The New Place of the Stockholder, p. 60.
that an attempt will here be made to deal with some of the more
important rights of the shareholder and to determine how, if at
all, these rights are protected.
All of the many phases of this subject could not possibly be
adequately treated in a paper of this nature. The incidents
resulting from the shareholder's status in a corporation are many
and varied, 4 and several problems may revolve about each of
these several incidents. Thus this paper will be confined to an
attempt to discuss the constitutional protection that may be
afforded the more important rights of the present day shareholder.
Because of the nature of the subject and the problems involved,
no clear cut division is possible, but for the sake of convenience,
and possibly greater clarity, the following topics will be treated
separately: Evercise of the Reserve Power-Generally; Dividend
Rights; Voting Rights; Stockholders' Liability and Stock
Assessments; The Pre-emptive Right; Merger and Change in Corporate
Enterprise.
I EXERCISE OF THE RESERVE POWER- GENERALLY
The problems arising under this topic are all the offspring
of the famous and oft-cited Dartmouth College Case.5 An
extended discussion of this case is here unnecessary. Suffice it to
say that the United States Supreme Court held that a corporate
charter constituted a contract between the corporation and the
state and that this contract is within the constitutional clause
preventing the impairment of the obligation of contract by
subsequent state legislation. Almost immediately it became apparent
to the various states that in creating corporations by the
issuance of charters they were establishing instrumentalities over
which they retained little or no control. To obviate this difficulty
and to protect themselves from the dire results that might
otherwise follow, the state legislatures were quick to seize upon the
suggestion made by Justice Story in his concurring opinion. He
pointed out that if a state legislature wished to amend or repeal
a corporate charter it should reserve the power to do so.7 St (...truncated)