Summary
In Market St. Ry. Co. v. Hellman, 109 Cal. 571, [42 P. 225], and Boyd v. Heron, 125 Cal. 453, [58 P. 64], the construction of these two sections, it is said, is distinctly laid down in harmony with appellants' contention.
Summary of this case from Moss v. SmithOpinion
Appeal from a judgment of the Superior Court of the City and County of San Francisco. William T. Wallace, Judge.
COUNSEL:
The consolidation was not legally effected, for the reason that some of the constituent corporations were organized under the old laws, and did not continue their existence under the code; while others elected to continue their existence under the code, and the consolidation proceedings were had under the provisions of the code. There is no authority of law for the consolidation of code corporations with corporations organized under the old laws. (Civ. Code, sec. 288.) The provisions of the Civil Code under which the consolidation proceedings were had (secs. 473, 510) are unconstitutional and void; for the direct and necessary effect is to force upon nonconsenting stockholders of one corporation the debts and obligations of others which they never agreed to assume. (Ashton v. Dashaway Assn ., 84 Cal. 61; Cook on Stockholders, 3d ed., sec. 896; Mowrey v. Indianapolis etc. R. R ., 4 Biss. 78; Clearwater v. Meredith, 1 Wall. 39; McCray v. Junction R. R Co ., 9 Ind. 359; Black v. Delaware etc. Canal Co ., 24 N. J. Eq. 455; Mills v. Central R. R. Co ., 41 N. J. Eq. 1; New Orleans etc. R. R. Co. v. Harris , 27 Miss. 517; Mansfield etc. R. R. Co. v. Brown, 26 Ohio St. 223; Kean v. Johnson , 9 N. J. Eq. 401; Kenosha etc. R. R. Co. v. Marsh , 17 Wis. 13; Gardner v. Hamilton etc. Ins. Co ., 33 N.Y. 421; Stevens v. Rutland etc. R. R. Co ., 29 Vt. 545; New Jersey etc. Ry. Co. v. Strait , 35 N. J. L. 322; Hamilton Ins. Co. v. Hobart, 2 Gray, 543.) The attempted consolidation was illegal and void, because no plan or manner of consolidation was agreed to in writing by three-fourths in value of the capital stock of each constituent corporation, as required by section 473 of the Civil Code. (Mowrey v. Indianapolis etc. R. R. Co., supra ; Mansfield etc. R. R. Co. v. Drinker , 30 Mich. 124; Tuttle v. Michigan etc. R. R. Co ., 35 Mich. 247; Clearwater v. Meredith, supra ; McCray v. Junction R. R. Co., supra .) The consolidation had the effect of prolonging the existence of the constituent corporation beyond fifty years, which is prohibited. (Civ. Code, secs. 290, 401.) The requisite number of stockholders of many of the constituent corporations did not consent to the consolidation. All that was attempted was to get three-fourths of the outstanding stock, which was not sufficient. (Civ. Code, sec. 473.) Executors have no authority to vote stock standing in the name of the decedent, and the subsequent ratification by a person holding a power of attorney from the heirs amounts to nothing. (Civ. Code, sec. 313; Johnston v. Wright , 6 Cal. 375; Blum v. Robertson , 24 Cal. 140.) One corporation cannot hold stock in another corporation. (Holmes etc. Mfg. Co. v. Holmes etc. Metal Co ,. 127 N.Y. 252; 24 Am. St. Rep. 448.) The notice of the consolidation was not sufficient in that it was not given before the completion of the proceedings, nor were the various publications synchronous for the period of a month. (Civ. Code, sec. 473.) The notice of the meeting of stockholders to create a bonded indebtedness is entirely insufficient, as it does not state the amount of bonded indebtedness which it is proposed to create, or the amount to which it is proposed to increase such indebtedness. (Civ. Code, sec. 359.)
Robert Y. Hayne, for Appellant.
J. E. Foulds, for Respondent.
Where there is a reserved power of amendment or repeal of a railroad charter in the constitution, the legislature may extend the powers of railroad corporations to any business of the same kind, or authorize their consolidation, without the unanimous consent of the stockholders, and all subscriptions of stock are to be deemed as made with reference to the power of the legislature to authorize such changes, as much so as if there were original authority therefor. (Durfree v. Old Colony etc. R. R. Co ., 5 Allen, 230, 242-46; Bish v. Johnson , 21 Ind. 299; Sparrow v. Evansville etc. R. R. Co ., 7 Ind. 369; Hanna v. Cincinnati etc. R. R. Co ., 20 Ind. 30; Agricultural Branch R. R. Co. v. Winchester, 13 Allen, 32, 33; Northern R. R. Co. v. Miller, 10 Barb. 281, 282; Moore v. Hudson River R. R. Co ., 12 Barb. 159; Schenectady etc. Plankroad Co. v. Thatcher , 11 N.Y. 108, 109, 114; Buffalo etc. R. R. Co. v. Dudley , 14 N.Y. 338; Matter of Lee etc. Bank , 21 N.Y. 9; Bailey v. Hollister , 26 N.Y. 116; Albany etc. R. R. Co. v. Brownell , 24 N.Y. 350; Meadow Dam Co. v. Gray , 30 Me. 547; New York etc. R. R. Co. v. Waterbury , 60 Conn. 1; Bangor etc. R. R. Co. v. Smith , 47 Me. 34; Oldtown etc. R. R. Co. v. Veazie , 39 Me. 580; Illinois River R. R. Co. v. Beers , 27 Ill. 185; Banet v. Alton etc. R. R. Co ., 13 Ill. 504; Mowrey v. Indianapolis etc. R. R. Co ., 4 Biss. 79; Bishop v. Brainerd , 28 Conn. 289, cited and approved in Nugent v. Supervisors, 19 Wall. 241, 242.) It is immaterial whether the corporate existence of the Potrero and Bay View Railroad Company has or has not become legally merged in that of the consolidated body, as in addition to the unanimous consent of all its officers and stockholders to the consolidation, there is a conveyance of all its property rights and its street railway franchise to the consolidated corporation, with the unanimous consent of its stockholders. (Colton v. Seavey , 22 Cal. 501; Scott v. Whipple, 5 Greenl. 336; Jackson v. Stanford , 19 Ga. 14; Tustin v. Faught , 23 Cal. 239; St. John v. Kidd , 26 Cal. 269; People v. La Rue , 67 Cal. 526.) A trustee in whose name stock stands on the books of a corporation holds the legal title, and may vote and represent the stock for the purposes of consolidation. (Brewster v. Sime , 42 Cal. 139; In re Barker, 6 Wend. 510; Wilson v. Central Bridge Co ., 9 R.I. 590; In re Mohawk etc. R. R. Co ., 19 Wend., 135; In re St. Lawrence Steamboat Co ., 44 N. J. L. 540; Conant v. Millaudon, 5 La. Ann. 542; Hoppin v. Buffum, 9 R.I. 513; 11 Am. Rep. 291; Matter of North Shore etc. Ferry Co ., 63 Barb. 556; Langan v. Francklyn , 20 N.Y.S. 404.) A railroad company allowed by statute to consolidate with another may purchase and hold its stock. (In re Rochester etc. Ry. Co ., 45 Hun, 126; Terhune v. Potts , 47 N. J. L. 218; Terhune v. Midland R. R. Co ., 38 N. J. Eq. 423.) Section 303 of the Civil Code permits a corporation to provide by its by-laws for the mode of voting by proxy, and it is well settled by authority that the right of voting by proxy may be so conferred. (State v. Tudor, 5 Day, 329; 5 Am. Dec. 162; Commonwealth v. Bringhurst , 103 Pa. St. 137; Phillips v. Wickham, 1 Paige, 590; Cook on Stock and Stockholders, sec. 610.) The executor or administrator of the estate of a deceased person may represent the stock of the decedent. (Civ. Code, sec. 313.)
JUDGES: In Bank. Searls, C. Haynes, C., and Britt, C., concurred. McFarland, J., Van Fleet, J., Garoutte, J., Henshaw, J., Beatty, C. J., concurred in the judgment. Harrison, J.
OPINION
SEARLS, Judge
[42 P. 226] This is an appeal from a judgment in favor of plaintiff upon an agreed case submitted in accordance with the provisions of section 1138 of the Code of Civil Procedure.
The plaintiff, the Market Street Railway Company, claimed to be a consolidated corporation, the result of proceedings taken by eleven constituent corporations under sections 473 and 510 of the Civil Code of the state of California. After consummating its consolidation and obtaining its final certificates, it took proceedings for the issuance of bonds secured by a mortgage or deed of trust upon all its property, which mortgage or deed of trust was made to the Union Trust Company of San Francisco. It then made and entered into a contract with the defendants herein for the sale to them of one million dollars' worth of said bonds, for which defendants were to pay the sum of one million dollars, subject, however, to the conditions expre ssed in the contract in the following terms: [42 P. 227] ". .. . On the express condition that the amalgamation and consolidation of all of said constituent corporations into the Market Street Railway Company above mentioned was properly and legally effected, and the said Market Street Railway Company is a duly amalgamated, consolidated, and incorporated corporation, and the legitimate successor of all of said constituent corporations and the owner of all the property formerly owned by said constituent corporations respectively, and entitled to dispose of and encumber the same as against every one, including all and every of the stockholders of said constituent corporations, and of each of them, and that all the proceedings authorizing the issuance of said bonds were properly and legally taken, and that the said bonds are valid bonds of said Market Street Railway Company, and are properly secured by said mortgage or deed of trust upon all the property mentioned and described therein, and that said mortgage or deed of trust is a valid security upon all the property mentioned and described therein for the payment of said bonds, according to the tenor thereof."
The plaintiff tendered the bonds to the defendants, who refused to accept and pay for them upon the ground of their supposed invalidity, and thereupon, and for the purpose of avoiding the expense and delay of an ordinary action at law to determine the liability of the defendants to purchase said bonds, the agreed statement herein was prepared and the controversy submitted to the superior court without action.
The cause comes up on the judgment-roll, supported by a bill of exceptions, the appeal having been brought within sixty days next after the entry of judgment. The first point made by appellant in favor of reversal is that the consolidation was not legally effected for the reasons: 1. Some of the constituent corporations were organized under the statutes in force prior to the adoption of the Civil Code, and did not continue their existence under such code, and hence that under section 288 of such Civil Code these corporations were independent of and not subject to its provisions, and could not consolidate with other corporations by virtue of the authority therein given so to do. The Potrero and Bay View Railroad Company was organized in 1866, under an act entitled "An act to provide for the incorporation of railroad companies and the management thereof," etc., approved May 20, 1861, and of the several acts supplementary to and amending the same. The City Railroad Company was incorporated in 1863. The Central Railroad Company was incorporated as a street railroad company in 1862.
The three corporations above mentioned were all incorporated prior to the adoption of the Civil Code, and were constituent corporations, with eight others organized under said Civil Code in the amalgamated and consolidated corporation, plaintiff herein. If we read the record correctly the City Railroad Company and the Central Railroad Company elected to continue their existence under section 287 of the Civil Code, while the Potrero and Bay View Railroad Company has not done so.
Section 288 of the Civil Code, which took effect at 12 o'clock noon on January 1, 1873, provides as follows: "No corporation formed or existing before 12 o'clock noon of the day upon which this code takes effect is affected by the provisions of part IV of division I of this code, unless such corporation elects to continue its existence under it as provided in section 287; but the laws under which such corporations were formed and exist are applicable to all such corporations, and are repealed, subject to the provisions of this section."
The first clause in the foregoing section is certainly broad enough to apply to all then existing corporations which should not elect under the previous section to continue their existence under the code.
When, however, we consider the probable object of the legislature in its passage, in connection with the latter clause of the same section, and with other sections in the same title, we are led to doubt the legislative intent as broadly expressed in the first clause of section 288. We must bear in mind that under the constitution of 1849 corporations could be formed under general laws, but could not be created under special acts, and that all laws pursuant to the section (art. IV, sec. 31) were subject to amendment or repeal. Under that provision of the constitution general laws had been enacted for the formation of corporations, specifying their powers, the mode of their exercise, etc. These laws constituted the charters under which corporations, when organized pursuant to them, acted. The laws conferred and measured their powers and prescribed the mode of their exercise.
The codes when adopted constituted a comprehensive system of laws, and repealed all existing statutes not specially saved from their operation. To save existing corporations from annihilation we may fairly presume was the paramount object of the legislature. Hence this section. But the latter clause of the same section throws light upon the more general declaration of the first clause. It is as follows: "But the laws under which such corporations were formed and exist are applicable to all such corporations and are repealed, subject to the provisions of this section ."
Now, the laws under which corporations were formed and existed constituted but a small portion of the whole body of laws which related to and controlled corporate action. As only those laws under which corporations were formed and existed were saved, it must follow that the residue of such laws were repealed, whether consistent with the code or not.
[42 P. 228] Section 20 of the Civil Code is as follows: "No statute, law, or rule is continued in force because it is consistent with the provisions of this code on the same subject; but in all cases provided for by this code, all statutes, laws, and rules heretofore in force in this state, whether consistent or not with the provisions of this code, unless expressly continued in force by it, are repealed or abrogated."
To enumerate all or any considerable part of the provisions of law applying to and regulating the conduct of corporations, some of which were penal in character, and which in nowise related to their formation or existence, would be a work of supererogation. It is sufficient to say that they were not saved by the code, and hence, having ceased to exist, there are no regulations binding upon corporations, unless the provisions of the Civil Code and the several amendments thereto are applicable.
We are of opinion the clause in section 288 that, "No corporation formed," etc., is affected by the provisions of part IV, when read in the light of the later clause in the same section and in the light of other provisions of the same title and part, must be construed as relieving existing corporations only from such provisions as were saved to them from existing laws, viz., those relating to their formation and existence .
In the interpretation of statutes force and effect should be given to every part thereof where it can be done, and the natural import of words is their literal sense; but where it is apparent, from the language used or from the context, that words are used in a restricted sense, and such sense is essential in order to give force and effect to other provisions of the same statute, then the literal sense is not controlling.
" The mere literal construction of a section in a statute ought not to prevail if it is opposed to the intention of the legislature apparent by the statute.. .. . General words or clauses may be restricted to effectuate the intention or to harmonize them with other express provisions." (Sutherland on Statutory Construction, sec. 246, and cases there cited.) The necessity of a restricted construction to the first clause of section 288 is made apparent by the subsequent sections in the same title. Section 401 of the code, which is a part of the same subject, title, and part as section 288, as adopted at the same time, reads as follows: "Every corporation heretofore formed for any purpose enumerated in this title for which corporations may be formed for a period of time less than fifty years may at any time" extend the term of its existence to fifty years, etc. That this section was intended to apply to existing corporations goes without saying.
Again, section 403, the last section in title I, which relates to corporations generally, is as follows: "The provisions of this title are applicable to every corporation, unless such corporation is excepted from its operation, or unless a special provision is made in relation thereto, inconsistent with some provision in this title, in which case the special provision prevails."
These are samples selected from others which might be cited tending to illustrate the legislative intent to apply the provisions of this part of the code to existing as well as to future corporations, except as to the law of their formation and existence. Part IV of division I of the Civil Code contains a comprehensive system for the organization, existence, and duration of corporations; divides them into classes; defines their powers and duties; regulates the mode in which those powers are to be exercised and in which their duties are to be discharged. In all these matters relating to future conduct no reason is observed why existing corporations should not be governed by the same laws as those formed subsequently to the adoption of the code and for like purposes.
To say that they shall not be is to select from the Mass. of entities known as corporations a class to which legislative action does not apply, thus constituting partial and special legislation applying only to certain units in the class, to the exclusion of others of the same class. This would amount to an arbitrary discrimination between persons standing in the same relation to the subjects of legislation, which is not permissible.
As was said in Pasadena v. Stimson , 91 Cal. 238: "A law is constitutional and general when it applies equally to all persons embraced in a class founded upon some natural or intrinsic or constitutional distinction; it is not general or constitutional if it confers particular privileges, or imposes peculiar disabilities or burdensome conditions in the exercise of a common right upon a class of persons arbitrarily selected from the general body of those who stand precisely in the same relation to the subject of the law."
Again, waiving all question as to the application of the Civil Code as originally passed, or any part of it, to existing corporations, section 510, as adopted in 1874, applied the provisions of title III to all street railroads not especially excepted therefrom. The section reads as follows: "Street railroads are governed by the provisions of title III of this part, so far as they are applicable, unless such railroads are therein specially excepted."
" Particular expressions qualify those which are general." (Civ. Code, sec. 3524.) According to this rule of construction the particular expressions of section 510 must be held to qualify and limit the meaning of section 288 to "the laws under which such corporations were formed and exist," and not to the whole body of laws enacted for the government and control of the future acts and conduct of corporations.
Yet again, if it be admitted that the code does not apply to any corporations organized before its adoption, what follows? Simply this: All of the corporations involved in the present case, except one, have been organized since the adoption of the code, or have elected to continue their existence under it, and under section 473 of the Civil Code are authorized [42 P. 229] to "consolidate their capital stock, debts, property, assets, and franchises in such manner as may be agreed upon by their respective boards of directors." As to the one company organized before the adoption of the Civil Code, the statute of 1861, in relation to the formation of railroad companies, provides for their consolidation in precisely the same manner as that specified in the Civil Code. (Hittell's Gen. Laws, art. 865.) Indeed, the code provision was but a re-enactment of the existing law, with a few slight changes of verbiage, none of which go to any essential requisite in a consolidation.
We are of opinion the provisions of the Civil Code in relation to the consolidation of railroad corporations (Civ. Code, sec. 473) applies equally to corporations formed and existing before and after the adoption of the such code, and that section 510 applies the same rule to the consolidation of all street railroad corporations.
The objection that the proceedings under which the consolidation was had were violative of the constitutional rights of nonconsenting stockholders does not call for extended comment.
Section 1 of article XII of the constitution of 1879 provides that "Corporations may be formed under general laws, but shall not be created by special act. All laws now in force in this state concerning corporations, and all laws that may be hereafter passed pursuant to this section, may be altered from time to time, or repealed." The constitution of 1849 contained a similar provision. Under them the legislature may by general laws provide for the organization of corporations; may repeal or amend and change such general laws at will.
When an individual becomes a stockholder in a corporation, it is with the implied assent on his part to the right of the legislature to alter and amend the law within the scope of the constitutional provision, and is as binding upon him as a contract to like effect of his own making would be.
Authorities drawn from states in which no such legislative power over corporations is reserved are without application to cases in this state.
The power to amend comes from the constitution, and whether the act of 1861, under which some of the corporations were formed, provided for such amendments or not is of no moment, as the power of the legislature to change the laws of corporate existence and powers is not dependent on statutory reservation.
Corporations cannot, without the consent of all their stockholders, consolidate with others, except where the power so to do is given by their charters or by a general statute existing at the date of incorporation, or in those cases where the right is reserved by constitutional or statutory provision to the legislature to alter or amend the charter. There is some conflict of authority as to the power of the legislature to so amend the statute as to authorize corporations, without the consent of all the stockholders, to consolidate, but the weight of authority is, as we think, clearly in favor of the position that it may do so, and that the legislature, corporation, and majority are not subject to the will of dissenting stockholders. (Cook on Stock and Stockholders, sec. 896; Durfee v. Old Colony etc. R. R ., 5 Allen, 230; Bishop v. Brainerd , 28 Conn. 289; Buffalo etc. R. R. Co. v. Dudley , 14 N.Y. 336; Mowrey v. Indianapolis etc. R. R. Co ., 4 Biss. 79.)
In England there is no restriction on the power of parliament to amend a charter. (Heathcote v. North Staffordshire Ry. Co ., 2 Macn. & G. 100; M'Donnell v. Grand Canal Co ., 3 Ir. Ch. Rep. 578.)
In this state, where the power is expressly reserved to the legislature by our constitution, the right should equally exist. The contract of the stockholders was made in view of the existence of our constitutional provision, which entered into and formed a part of the charter as effectually as did the statutes under which the corporations were organized. Again, so far as the Potrero and Bay View Railroad Company is concerned, no rational objection can be urged for two additional reasons: 1. Its stockholders, by action taken subsequent to the consolidation, ratified and adopted all the proceedings relating thereto; 2. It conveyed all its property to the new corporation.
The other two corporations formed before the adoption of the code, viz., the City Railroad Company and the Central Railroad Company, having elected to continue their existence under the Civil Code, as provided in section 287, are not in a position to object.
2. It is further contended that the consolidation of the several corporations "was illegal and void, because no plan or manner of consolidation was agreed to in writing by three-fourths in value of the capital stock of each constituent corporation, as required by section 473 of the Civil Code."
The material portion of section 473, which confers power upon corporations of this character to consolidate, is as follows: "Two or more railroad corporations may consolidate their capital stock, debts, property, assets, and franchises in such manner as may be agreed upon by their respective boards of directors. No such amalgamation or consolidation must take place without the written consent of the holders of three-fourths in value of all the stock of each corporation." The section further provides that notice of the consolidation must be given in the manner provided, and that a copy of the new articles of incorporation must be filed in the office of the secretary of state, but no question is made as to a compliance with these provisions. It will be observed that the consolidation may be made "in such manner as may be agreed upon by their respective boards of directors ."
The terms of the consolidation are left to the several boards of directors, with no limitations upon their power in that respect, except that the written consent of the holders of three-fourths of all the stock of each constituent corporation is essential to the validity of the consolidation.
Some objection is made to the [42 P. 230] sufficiency of the consent by stockholders, which will be considered hereafter.
For the purposes of the present contention it may be said that what the stockholders did was this: The holders of over three-fourths in value of all the stock in each corporation, at dates varying from September 5, 1893, to October 13, 1893, consented in writing to the consolidation of the several companies (naming them), "in such manner as may be agreed upon by the respective boards of directors of said companies."
Thereafter, and on the thirteenth day of October, 1893, the boards of directors of the several companies executed the "articles of consolidation, amalgamation, and incorporation," in which the manner, terms, etc., of the consolidation were among other things fully set out.
In the absence of more specific directions in the statute the consent of the stockholders is deemed sufficient. It was in the nature of an authorization or power to the directors to act, and might as well be executed before action was taken by the latter as assented to at the time or subsequently. The authority given was broad enough to cover any action that might be agreed upon by the directors and was binding upon the stockholders.
The consolidated corporation became a distinct entity -- a new corporation, and as such might be organized for a term of fifty years irrespective of the term of existence of the constituent corporations. (California Southern R. R. v. Southern P. R. R. Co ., 67 Cal. 59; California Cent. Ry. Co. v. Hooper , 76 Cal. 404.) In Maine Cent. R. R. Co. v. Maine , 96 U.S. 499, it was said: "A new corporation may be as readily created by the union of two or more corporations as by the union of individuals." The authorities upholding the position that upon a consolidation of corporations the resulting association is a new corporation are to be found in large numbers emanating from the courts of many states. It follows that the objection that the action here taken had the effect of extending the existence of the constituent corporations beyond the period of fifty years fixed by our statute cannot be maintained. As before stated, it is objected by appellant that the requisite number of stockholders of many of the constituents did not consent to the consolidation, and the objections under this head are:
( a ) In some of the corporations a portion only of the stock was issued, and in estimating the three-fourths of the stockholders whose consent was necessary only the "outstanding stock" was taken into the account.
The case of the Market Street and Fairmount Railway Company will serve to illustrate the facts applicable to all. The capital stock of this company consisted of ten thousand shares, of the par value of one hundred dollars per share; of which number of shares only two thousand and fifty were ever at any time issued or outstanding. The holders of all of said two thousand and fifty shares so issued consented in writing to the consolidation. This is deemed sufficient. When shares of a corporation or a majority of shares are spoken of in statutes it usually refers to the subscribed or issued or outstanding shares.
Section 312 of the Civil Code provides that "at all elections or votes had for any purpose there must be a majority of the subscribed capital stock. .. . represented, either in person or by proxy."
In adopting by-laws the assent of stockholders representing a majority of all the subscribed capital stock is necessary. (Civ. Code, sec. 301.) The liability of a stockholder for the debts of the corporation is for such portion as his share bears to the whole of the subscribed capital stock or shares. (Civ. Code, sec. 322.) Whenever any portion of the capital stock is held by the corporation by purchase, a majority of the remaining shares is a majority of the stock for all purposes of election or voting. (Civ. Code, sec. 344.) Stockholders are the owners of shares in a corporation having a capital stock. (Civ. Code, sec. 298.) Assessments are levied and collected upon the subscribed capital stock. (Civ. Code, sec. 331.) As stock or shares which have never passed to the ownership of stockholders, or, having so passed, have again been purchased by the corporation, cannot be voted or represented by either the corporation or by stockholders, they are not taken into consideration in determining majorities where action in corporate meetings or assent of stockholders is involved, but when a given proportion of the stock is spoken of it must be construed to mean of the shares which have passed from the corporation and which may be voted.
( b ) Some of the stock was held and voted by trustees who not only appeared upon the books of the corporation as such, but were really and in fact trustees for other persons. The contention of appellant is that a trustee of stock has no authority to destroy the corporation by merging it in another corporation. The answer to the proposition must be that the trustee is the legal owner of the stock, and as against the corporation and all the world, except his cestui que trust, no inquiry may be had touching his actions in the premises. (Civ. Code, secs. 307, 312.)
( c ) In many cases the stock of the constituent companies was held by other corporations, and it is contended that one corporation cannot hold stock in another corporation. As to this objection, the record shows that stock in several of the constituent corporations was held by the Pacific Improvement Company, a corporation, organized under the laws of the state of California in 1878, and as specified in its articles of incorporation among other purposes, for the purpose "of buying, selling, and dealing in all kinds of public and private stocks, bonds, and securities."
Whether the purchase by a corporation of shares in another corporation is ultra vires or not is said to depend upon the purpose for which it is made, and whether under the circumstances it is a reasonable or necessary means of carrying out corporate objects. (Hill v. Nisbet , 100 Ind. 341.)
We need not, however, for the purposes of the present [42 P. 231] case, enter upon a discussion or analysis of the adjudicated cases on this subject. It is sufficient to say of them that they in the main turn upon the point as to whether or not the purchase ultra vires vested in the corporation. Our Civil Code, section 286, provides that: "Private corporations may be formed for any purpose for which individuals may lawfully associate themselves."
It is beyond controversy that individuals may lawfully associate themselves for the purpose of purchasing, selling, and dealing in all kinds of public and private stocks, bonds, and securities. The Pacific Improvement Company, having been organized for exactly that purpose, it is infra vires to purchase, hold, and sell stock in other corporations.
Ordinarily, a corporation may only purchase and hold so much real estate as may be necessary to the transaction of its business, but if organized, as in this state it may be, for the specific purpose of purchasing, holding, and selling land, its power in that direction is not limited.
( d ) In the case of the Omnibus Cable Company one thousand four hundred and seventy of its shares were owned by, and stood in the name of Daniel Stein, who died say six months before the consent was signed by his executors, and as the stock was never transferred on the books to the names of such executors it is contended they were not authorized to consent. "The shares of stock of an estate of a minor or insane person may be represented by his guardian, and of a deceased person by his executor or administrator." (Civ. Code, sec. 313.)
No transfer of the stock to the executors was necessary to entitle them to vote it. Spelling on Corporations, at section 380, says: "In case of the death of a stockholder his administrator becomes, by operation of law, vested with the legal title to the stock, and is entitled to vote it at all elections without a transfer upon the stock-book,. .. . and the fact that the decedent held the stock subject to a trust would not alter it. Upon the death of a trustee of personal property the trust would devolve upon his representative, and he becomes legal owner as to all persons except the cestui que trust, and the corporation has nothing to do with the equities between the immediate parties to the trust or between the legal owner and third parties, as regards the rights of voting." (See cases cited by same author in footnote to section 380.)
In further evidence of the authority of Michael D. Stein, one of the executors, to execute the agreement, the record contains a power of attorney from all the heirs of Daniel Stein, executed July 31, 1893, authorizing him to transact any business which they might or could do under or pursuant to any rights which they had or might thereafter acquire as legatees or heirs at law of Daniel Stein, deceased. And under such power the said attorney in fact executed a ratification and confirmation of the agreement for consolidation for and in the names of his principals.
( e ) George Leroy was the owner of nine hundred shares of the stock of the Omnibus Cable Company, and his consent was executed in writing under a power of attorney from said George Leroy, which it is claimed was insufficient to authorize such consent. George Leroy subsequently, and with full knowledge of all the facts, surrendered his certificate of stock in the Omnibus Company, and received in exchange therefor the corresponding certificate in the consolidated company, and still holds the same. It is not clear but that the power of attorney from George Leroy was sufficient, but, waiving that question, the acts of said George Leroy in surrendering his stock and receiving the corresponding stock in the new company with full knowledge of all the facts amounted to a ratification of the acts of the agent. In arriving at this conclusion we need not state the proposition as broadly as is warranted by the authorities.
Wherever an agent acting under a specific authorization has exceeded his authority in the performance of a lawful act, which the principal could have authorized, the principal may thereafter ratify such unauthorized act, and when so ratified it acts retrospectively and the principal is equally bound as he would have been had the original authority been ample, or had he originally performed the act in person. (Wharton on Agency, tit. "Ratification," sec. 61, et seq.)
The case of Kate Johnson, who held two hundred shares in the same company, need not be noticed for the reason that more than three-fourths of the stock issued was represented by the other consenting holders.
( f ) A portion of the stock of the North Beach and Mission Railway Company stood in the names of certain persons who consented in writing to the consolidation, but such persons held it in trust for the Omnibus Cable Company, which it is claimed invalidates it. What has been said hereinbefore as to the right of persons in whose name stock stands on the books of the company to vote and control it applies here.
It further appears that on the thirteenth day of October, 1893, this stock so held in trust was canceled, but the certificates were not canceled until January, 1894. It does not appear that the cancellation took place before the consent to consolidation was executed, but, on the contrary, the resolutions and articles of association recite that the consent in writing of the stockholders had been executed prior to the acts of incorporation. In this and several other cases the consent was executed on the same day with the resolutions of the several companies in favor of consolidation and execution of the articles of the new company -- the plaintiff herein. Under these circumstances the plain inference is that the consent was executed prior to the cancellation.
(g) Objection is also made to the notice of consolidation and to the manner of its publication.
The substance of the notice was that pursuant to the statute the several constituent corporations (naming them), upon the written [42 P. 232] consent of the stockholders holding more than three-fourths in value of all the stock of each of said corporations respectively, and by the agreement of the respective boards of directors of said corporations made and entered in accordance with such consent, and pursuant to the statute, etc., have consolidated and amalgamated their capital stock, debts, properties, assets, and franchises under the corporate name and style of the Market Street Railway Company.
The notice is dated October 14, 1893, and was published daily in the Sacramento Daily Record Union (Sundays excepted), and in every issue thereof from October 18th to November 17th, both days inclusive. The said Record Union is published at Sacramento and is not published on Sundays. This was a publication of one month as provided for in section 473 of the Civil Code. The publication in two newspapers in San Francisco, viz., the Chronicle and Evening Post, was daily and for more than one month. The notice was also published five consecutive times in as many consecutive weeks in the Times-Gazette, a weekly newspaper published weekly in the county of San Mateo from and after October 21, 1893. This was in full compliance with the requirements of the statute.
We have thus noticed consecutively the several objections made by appellant to the several steps taken by the several corporations in the process of consolidating and amalgamating their properties, and, if in so doing the reasoning has not been full and the conclusions seem curt, it should be attributed to a growing consciousness as the work progressed that an opinion should have an ending as well as a beginning.
The conclusion reached is: The several constituent corporations were duly and legally consolidated into and formed the existing corporation known and designated as the "Market Street Railway Company," which is and has been a valid and existing corporation de jure since such consolidation, with a capital stock of eighteen million seven hundred and fifty thousand dollars, divided into one hundred and eighty-seven thousand five hundred shares, of the par value of one hundred dollars each.
Upon what may be termed the second branch of the case -- that is to say, matters relating to the regularity of the proceedings for the issue of the bonds -- we note but two objections calling for special comment: 1. As to the sufficiency of the notice to stockholders, and of the resolution passed at the meeting in pursuance of the notice; 2. As to the right of the stockholders to be represented and have their votes cast by proxies.
Upon the first proposition it is objected that the notice and resolution were indefinite and uncertain, in that the notice specified in substance that the purpose of the meeting was to consider and act upon the proposition to create a bonded indebtedness of the corporation to the amount in the aggregate of seventeen million five hundred thousand dollars, a portion thereof to be used in retiring the existing bonded indebtedness, and to increase the bonded indebtedness in the aggregate to seventeen million five hundred thousand dollars, and to mortgage the property, etc.
The resolution adopted at the stockholders' meeting provided in substance that a bonded indebtedness to the amount of seventeen million five hundred thousand dollars be created, and that the bonded indebtedness be increased to the amount in the aggregate of seventeen million five hundred thousand dollars, etc.
The capital stock of the company, as before stated, is eighteen million seven hundred and fifty thousand dollars, and there was an outstanding indebtedness of the several constituent corporations amounting in the aggregate to seven million and thirty-five thousand dollars. Section 359 of the Civil Code, as amended in 1893, provides that "the bonded indebtedness of a corporation may be created or increased by a vote of the stockholders representing at least two-thirds of the subscribed capital stock, at a meeting called by the board of directors, and after notice of the time and place of the meeting,. .. . which notice shall state the amount of the bonded indebtedness which it is proposed to create, or the amount to which it is proposed to increase such indebtedness," etc. The foregoing section, it will be perceived, provides the method by which the bonded indebtedness of all corporations is to be created or increased. The power to create such bonded indebtedness by railroad corporations is given by section 456 of the Civil Code, which in part is as follows: "Railroad corporations may borrow on the credit of the corporation, and under such regulations and restrictions as the directors thereof by unanimous concurrence may impose, such sums of money as may be necessary for constructing and completing their railroad, and may issue and dispose of bonds or promissory notes therefor. .. . in payment of any debts or contracts for constructing and completing their road, with its equipments and all else relative thereto, and for the purchase of railroads and other property within the purposes of the corporation. The amount of bonds or promissory notes issued for such purposes must not exceed in all the amount of their capital stock."
The residue of the section authorizes them to secure the payment of such bonds or promissory notes by mortgage or deed of trust upon their property and franchises. The power then is given to create a bonded indebtedness, under the circumstances indicated in the statute, to the amount of the capital stock. As the proposed issue of seventeen million five hundred thousand dollars was within this limit, the corporation was authorized to issue its bonds therefor, unless there was an existing issue precluding it from so doing.
Were there any outstanding bonds of the plaintiff corporation? Strictly speaking it cannot be said there were any outstanding bonds of the corporation. The constituent corporations which had united in its organization had outstanding bonds, and "no such amalgamation or consolidation must in any way relieve such corporation or the stockholders thereof from any and all just liabilities."
But duties which a corporation owes to parties who have dealt with it previous to a consolidation, and obligations it has incurred to such parties under contracts, cannot be transferred to the new corporation [42 P. 233] without their consent. The effect of the exercise of such a power would be to impair the obligation of contracts, and, therefore, it cannot be conferred by the legislature. (Spellman on Corporations, sec. 107; Bruffett v. Great Western R. R. Co ., 25 Ill. 353; In re Manchester etc. Loan Assn ., L. R. 9 Eq. 643; New Jersey Midland Ry. Co. v. Strait , 35 N. J. L. 322.)
A creditor may not prevent a consolidation of corporations, but he may insist that the property of the debtor corporation remain subject to his demands, and that its stockholders shall be answerable to him to the extent of their statutory liability. "Novation is made by contract, and is subject to all the rules concerning contracts in general." (Civ. Code, sec. 1532.)
In some of the states there are statutes broad enough to create a primary liability upon consolidated corporations for the liabilities of the several constituent companies. Where this is the case, no doubt but that while creditors are not compelled to have recourse to the new company, they may elect to do so, and recover. There is no evidence of such an election on the part of creditors here. The property of the several corporations, however, is still liable for the debts contracted by them, and, as a corporation may not create debts in excess of their subscribed capital stock (Civ. Code, sec. 309), these several demands, while not primary liabilities of the corporation plaintiff, are yet charges upon its property, which will reduce it by so much, and hence come within the spirit of the rule limiting the indebtedness, under section 309 of the Civil Code. It was in this view, no doubt, that the plaintiff framed its notice, the action of its stockholders, and of its officers in reference to the issue of bonds.
It had, so far as it was able in the articles of consolidation, made itself liable for all the liabilities of the several constituent corporations, and the agreement only needed the consent of creditors to constitute a novation of debtors. Between itself and the constituent corporations it was absolutely bound to make such payment; hence its right to treat the outstanding bonded indebtedness as its own obligation, and to provide in its action for the payment thereof, or, if the creditors refused to receive payment upon their bonds, to treat them as a part of its own bonded indebtedness, and to issue bonds for such less amount as with those outstanding would aggregate a given amount or sum. In this view of the object there is nothing indefinite in the notice and resolution to create a bonded indebtedness of seventeen million five hundred thousand dollars (a portion of which is to be used in retiring existing bonded indebtedness), and thereby to increase its bonded indebtedness up to the amount in the aggregate of seventeen million five hundred thousand dollars.
2. As to the right of stockholders to be represented by proxies in the stockholders' meeting by which the bonded indebtedness was authorized.
The language of the Civil Code, section 359, is: "The increase shall be made by a vote of the stockholders representing at least two-thirds of the subscribed capital stock." It is conceded that the requisite two-thirds of the capital stock was attempted to be voted, but, as many of the shares were voted by proxies, which, if eliminated, would not leave a two-thirds majority in favor of the proposition, it is contended that the whole proceeding was void.
The theory of the appellant is, that while the constitution of this state (art. XII, sec. 12) provides that "in all elections for directors or managers of corporations every stockholder shall have the right to vote in person or by proxy," etc., and while section 307 of the Civil Code in effect enunciates the same thing, still all this has no application to a vote under section 359 for the creation of a bonded indebtedness; that, as to the latter, the authority is given to a vote of the stockholders, and not to the proxies of the stockholders; that express provision is made for voting by proxy where the legislature thus intended, etc. This theory would have been deemed eminently sound a century since, but within that period the law in regard to corporations has undergone important changes. The modern law-writers upon corporations, without exception so far as we have observed, recognize the right of a private corporation, in the absence of any statute on the subject, to provide by by-law for stockholders to vote by proxy.
Taylor, at section 579 of his work on Corporations, says: "It is held that stockholders have no implied right to vote by proxy, but it is competent for a corporation by a by-law to authorize votes to be cast in that manner." (Citing People v. Crossley , 69 Ill. 195; State v. Tudor, 5 Day, 329; 5 Am. Dec. 162.)
Cook on Stock and Stockholders says, at section 610: "At common law a stockholder has no right to cast his vote by proxy. This rule was evolved from the analogous rule governing municipal corporations, which requires all votes to be given in person. The right to vote by proxy is often given by the charter itself. Even if not so given the right may be created by by-law."
Morawetz on Private Corporations, at section 486, says: "The members of a corporation must vote personally, and cannot vote by proxy unless the right to vote by proxy is expressly conferred by the company's charter or by-laws."
That the right of voting by proxy may be conferred through a by-law adopted by the majority appears to be reasonably settled. Beach on Corporations, at section 303, holds the same doctrine. (See 2 Kent's Commentaries, 294, and Phillips v. Wickham, 1 Paige, 598.) Spelling on Corporations, at section 387, says: "Proxy voting was not recognized by the English common law, but has become so universal a custom in this country that the right would at the present day probably be held to exist, even in the absence of statutory provisions, where so provided in the by-laws," and in a foot-note it is said: "The California statute recogn izes the right and empowers all corporations [42 P. 234] to regulate the manner by by-laws, only requiring that proxies shall be in writing. (Civ. Code, sec. 312.)"
Section 312 of the Civil Code is in part as follows: "At all elections or votes had for any purpose there must be a majority of the subscribed capital stock or of the members represented, either in person or by proxy in writing. Every person acting therein, in person or by proxy or representative, must be a member thereof or a bona fide stockholder," etc. This section clearly recognizes the right of a stockholder to appear and act, not only at all elections, but also at all votes had for any purpose, either in person or by proxy. It is true the section just quoted contains a recognition, rather than a grant, of the right of a stockholder to appoint a proxy to represent him.
Turning to section 303 of the Civil Code, and we find it provides that: "A corporation may, by its by-laws, where no other provision is specially made, provide for. .. . 3. The mode of voting by proxy."
It only remains to be said that section 7 of the by-laws of the plaintiff contained the following provision: "At all meetings of stockholders absent members may vote by proxy, duly authorized in writing, signed by the stockholders granting them, and such proxies shall be filed with the secretary." The record further shows that all proxies were in writing and were filed with the secretary, and that the stockholders granting them were absent from the meeting.
The Pacific Improvement Company authorized Douty, its secretary, by resolution duly passed, to vote its stock, and subsequently ratified and confirmed the acts of the proxies, appointed by the pledgees of some of its stock, which stood on the books of the company in the names of such pledgees. What has been said heretofore upon the subject of ratification will suffice.
As to the two thousand eight hundred and thirteen shares standing upon the books of the plaintiff in the name of J. D. Grant and T. L. Barker, executors of estate of Ed Hull, deceased, and voted by proxy from them to J. L. Willcutt, and as to five hundred and fifty-four shares standing upon the books of the company in the name of the Crocker Estate Company (a corporation), no notice need be taken, for the reason that, if it be conceded these votes were irregular, there was still more than two-thirds of all the capital stock voted in favor of the resolutions without these shares. The whole number of shares, as before stated, in the corporation plaintiff was one hundred and eighty-seven thousand five hundred, two-thirds of which is one hundred and twenty-five thousand. The total number of shares represented and voted in favor of the resolution was one hundred and thirty-seven thousand two hundred and forty, being an excess over the required number of shares of twelve thousand two hundred and forty. From this vote deduct two thousand eight hundred and thirteen plus five hundred and seventy-four plus one hundred and fifty shares of Hendry's Son & Co., to which objection is also made, and we still have an excess of eight thousand seven hundred and twenty-seven shares in favor of the resolutions over and above the necessary two-thirds prescribed by section 359 of the Civil Code as amended in 1893. The other objections raised by appellants will not be mentioned in detail. They have been examined and in them no cause for reversal is discovered.
Upon the whole record we are of opinion the judgment appealed from should be affirmed.
For the reasons given in the foregoing opinion the judgment appealed from is affirmed.
DISSENT:
HARRISON
Harrison, J. I am unable to agree with the opinion of the majority of the court upon the first proposition discussed therein, for the reason that in my opinion it is in disregard of the following provision of section 358 of the Civil Code, viz.: "The due incorporation of any company claiming in good faith to be a corporation under this part, and doing business as such, or its right to exercise corporate powers, shall not be inquired into collaterally in any private suit in which such de facto corporation may be a party; but such inquiry may be had at the suit of the state on information of the attorney general"; and that the court is thereby precluded from determining the question in this action.
That the effect of proceedings for a consolidation of two or more railroad corporations, taken by virtue of section 473 of the Civil Code, is to create a new corporation, and that the constating articles by which the consolidation is effected constitute the articles of incorporation of such new corporation is well established by authority, and is recognized by the section itself, which declares: "When the consolidation and amalgamation is completed a copy of the new articles of incorporation must be filed in the office of the secretary of state."
To determine whether the proceedings therefor have been regularly taken in accordance with the provisions of the section, and are sufficient in form to create a de jure corporation, would be to inquire into its "due incorporation," and, as above seen, "shall not be inquired into collaterally in any private suit to which such de facto corporation may be a party."
As it is only at the suit of the state, upon the information of the attorney general, that such inquiry may be had, any conclusion thereon in the present case, however persuasive it may be, is merely obiter, and can have no authoritative force in any subsequent action at the instance of the state; and, consequently, the views of the court upon the subject ought not to be given except in a case in which it shall be properly presented, and after the state, through its attorney general, has had an opportunity to be heard thereon.
The want of authority or jurisdiction in the court to make any inquiry of this nature has been fully argued by counsel for the respondent in its brief, and the sufficiency of this argument has not been contradicted by [42 P. 235] the appellants; and, independent of the express declaration of the statute, I have not been able to find any adjudicated case in which it has been decided that the legality or regularity of its incorporation can be inquired into for the purpose of determining the rights of the corporation under a contract entered into between it and an individual after it had received its charter of incorporation.
I concur in that portion of the opinion which holds that the proceedings for the issue of the bonds were in accordance with the requirements of the statute.