Stockholder's Suit

• Author: Jonathan D. Varat
• Pages: 2543

Page 2543

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)...