Stockholder's Suit

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Stockholders suing their corporations rarely raise constitutional questions, although the Supreme Court accepted jurisdiction of a case involving such a suit as early as 1856. (See dodge v. woolsey.) Yet several celebrated constitutional decisions in review of acts of Congress have come in stockholder actions brought to prevent corporate compliance with tax or regulatory programs the stockholders deemed unconstitutional. Having failed to convince management to challenge the programs' constitutionality, dissenting stockholders have used the device of a stockholder's action to accomplish the same result. In most nonconstitutional cases, dissenting stockholders are not permitted to bypass the business judgment of corporate managers and sue on the corporation's behalf, but—ironically, and controversially—this rule has not always prevailed in constitutional cases. The device has not been used effectively since the New Deal era, but when it was used, the Supreme Court seemed eager to render major constitutional decisions, an orientation perennially opposed to the Court's professed practice.

Three celebrated examples tell the story. In pollock v. farmers ' loan & trust co. (1895) the Supreme Court held a federal income tax law unconstitutional. The corporate taxpayer had planned to accept the tax obligation, and a federal statute prevented an injunction suit by the corporation, but the dissenting stockholders were permitted to seek an injunction preventing compliance. No one objected to the stockholders' right to sue; the plaintiff asserted that the suit was not a collusive suit between the stockholder and the company; and the Court rendered its controversial decision on the merits—a decision subsequently overturned by the sixteenth amendment (1913). In ashwander v. tennessee valley authority (1936) preferred stockholders of the Alabama Power Company sued to prevent their corporation from performing a contract with the TVA, claiming that Congress lacked constitutional power to authorize the TVA to develop and contract for the sale of electricity. The Supreme Court, over Justice louis d. brandeis's famous objection that the stockholders lacked standing to sue and that the Court generally should seek to avoid constitutional questions, permitted the suit. The Court held the TVA's action constitutional, thereby ending a major legal threat to an important New Deal program. A few months later, however, in carter v. carter coal co. (1936), another stockholder suit, the Court invalidated the Guffey Act of 1935, an important anti-Depression measure. The president of Carter Coal, whose parents were majority stockholders and who had set company policy in compliance with the act, initiated the suit as a dissenting stockholder the day after the law was enacted.

These stockholder actions raise several questions of justiciability. One is similar to that raised in taxpayers' and citizens' suits: are they suits to prevent individual injury, suits that incidentally necessitate constitutional interpretation, or are they public actions to assure constitutional governance for the whole citizenry? The allegation that corporate compliance with the questioned law will injure the corporation's (and therefore the stockholders') financial interests, may distinguish stockholder from taxpayer or citizen standing, despite a similar element of remoteness. A second question is raised by the possibility of a collusive suit, with both the dissenting stockholder and the corporate management desiring the same result. The possibility is real, but the drawbacks of collusive suits have not been a serious problem in stockholder suits. Despite the trumped-up appearance of Carter v. Carter Coal Co., for example, the federal government vigorously opposed Carter. There was strongly adversary presentation, and, in a companion case, another company directly challenged the government's enforcement of the new act. The most significant danger may be that the stockholder suit is really a request for a premature advisory opinion, because stockholder, corporation, and government all want a constitutional ruling when the corporation plans to comply with the law and no present controversy exists. The Court was eager to rule in Pollock, Carter, and Ashwander. The first two produced substantial interferences with congressional power, both subsequently overturned, and the last consciously legitimated government policy. Plainly, the stockholder suit has been used as an instrument of the Supreme Court's judicial activism in the exercise of judicial review.

Jonathan D. Varat