Union Pacific Railroad Company v. Trustees, Inc.

HENRIOD, Justice.

Appeal from a judgment 1) declaring ultra vires a resolution of plaintiff’s directors, authorizing a $5,000 contribution of corporate funds to the Union Pacific Railroad Foundation, a non-profit corporation organized by plaintiff, dedicated to charitable, scientific, religious or educational purposes, and declaring 2) that the plaintiff was powerless statutorily or charter-wise to make contributions for the public welfare or for charitable, scientific, religious or educational purposes. Reversed. No costs awarded.

Plaintiff urges that 1) the contribution was a proper exercise of corporate power under a May 10, 1955 statute,¹ since a) the legislation permitted a pre-existing corporation like plaintiff to exercise the power b) which would not represent any change in the shareholders’ contract objectionable on state or federal constitutional i) impairment of contracts ² or ii) due process ³ principles; and that 2) the contribution was valid as having been made under a corporate implied power.

We feel constrained to hold that plaintiff was empowered impliedly to contribute the sum mentioned. It is unnecessary, therefore, to entertain other contentions urged. In concluding as we do we are not unmindful of the principles urged by counsel for the parties to the effect that a strict interpretation is to be given to expressed corporate powers,⁴ except as implemented by “implied powers * * * incidental to and connected with the carrying into effect or the accomplishing of the general purposes of the corporation, as expressed in the object clauses of its articles,” ⁵ or except as are “necessary, usual, or incidental to its business⁶ that “every stockholder has a vested equity in and to the assets of the corporation⁷ and that charitable gifts by non-charitable corporations generally are ultra vires,⁸ unless beneficial to the corporation.⁹

One case has sustained a contribution of corporate funds to Princeton University, where the corporation had existed prior to passage of a statute authorizing such contributions.¹⁰ It was sanctioned on both implied power and statutory grounds. We subscribe to the former. As to any statutory question, Utah’s policy demands the inclusion of an express authorization to justify any retrospective application of a statute.¹¹ That policy was approved in previous pronouncements,¹² so we need not discuss problems sired by the Dartmouth College Case (Trustees of Dartmouth College v. Woodward) ¹³ relating to an “immutable contract”¹⁴ and “reserved powers.” ¹⁵

Plaintiff was incorporated in 1897 to operate a railroad, at a time when there were comparatively few corporations. There was not the concentration of wealth that exists in the corporate world of today. Plaintiff’s charter gave no express power of contribution, there was no legislation authorizing it, and none existed until and unless it was provided by the 1955 legislation.¹⁶

Four Denver, Colorado shareholders,— three of them on September 26 and one on September 27, 1955, dispatched identical communications addressed to plaintiff in New York, challenging the contribution and suggesting litigation to test it. Plaintiff saved them the trouble, filing a declaratory judgment suit against them in Salt Lake City on September 28, 1955, in what appears to have been one of the speediest, most understanding corporate responses to benevolent shareholder belligerency on record.

Although not determinative, it may be pointed out, at least parenthetically and to illustrate a type of corporate power that we would consider implied, that within the first decade of its existence, on the occasion of the San Francisco earthquake,¹⁷ the Union Pacific, without charge, shipped in 1,600 carloads of food and material and gave $200,000 cash to, and evacuated a quarter of a million persons from the stricken area gratis. No immediate benefit was apparent, but it cannot be gainsaid, it would seem, that the future interests of the company derived from good will, must have been priceless.

In 1935 Congress encouraged corporate contributions to eleemosynary causes by allowing a deduction for tax purposes in such cases.¹⁸ That encouragement persists.¹⁹ From 1940 such corporate contributions rose from $40,000,000 to half a billion dollars in 1955. Since World War II, operating costs have soared. Increasing tax burdens pretty much have relegated large personal fortunes to an almost forgotten era. Many endowment rivers that yesteryear coursed into private education, charitable and religious institutions have become but trickles, portending a thinning of the ranks of top business executives, most of whom were recruited from private institutions. Such des-sication initiated new calls upon industry and hence upon the business corporation as a means of securing funds to perpetuate these private institutions. The dissent correctly points out that there are more donors today but fails to state that operational costs have spiraled far beyond the same percentage of dollar volume of giving that obtained in previous years,

The federal policy reflected in tax deductions finds-its counterpart on the local level by passage of legislation in 80% or more of our states and territories. Most of this legislation was passed in the past decade'.²⁰ The American Bar Association Committee on Businss Corporations also has encouraged, by resolution, legislation empowering corporate donations to charitable, scientific, religious and educational institutions. The new concept of corporate responsibility seems to have become fait accompli.

Directors of the plaintiff testified with singular unanimity that such new concept conceived in a shifting socio-economic atmosphere was born of new corporate business policy. It seems to be nurtured by legislative, corporate and judicial thinking. A reasonable percentage of corporate income, they urge, should be earmarked for worthy causes, as a necessary and proper item of business expense, just as funds are tagged for advertising, public relations and the like.

Mr. E. Roland Harriman, Chairman of plaintiff's Board,²¹ said "I think it is good business to do so; in the long run beneficial to our stockholders * * * I think the public has come to expect that we will support worthwhile local and national causes, and, in effect, we agree with this viewpoint.” Mr. John S. Sinclair, director,²² said: “We halve come to expect corporations to behave in the field of social consciousness’ as individuals would behave,— that is, with a prudent eye to its financial capacity and selectivity as to the objects of its generosity * * * Corporate donations create good will in the community.” Mr. William C. Mullendore, director,²³ said “The. basis of our policy of making contributions in aid of * * * educational and charitable institutions is, first of all, as a citizen of the community dependent upon the good will of the customers * * *. We have included in our regular operating expenses the provision for those donations, as necessarily included in a much larger * * budget for maintenance pf our physical equipment.”

There seems to be no good reason to challenge the convictions of these men, the bona fides of their support for the contribution in question or their belief that it was for the best interests of the company and its shareholders. If their personal judgment was unsound, it is not reflected in this record, in the expressed national and state legislative encouragement of such practice, in the expressed opinions and thinking of members of legal groups concerned with the matter, nor by the mushrooming statistics dating from 1940 that clearly reflect an ever-increasing belief on the part of those who manage and run institutions flying- a corporate ensign that it is sound business to contribute to agencies fostering charity, church, science and school.

It strikes us as being rather inconceivable, in what seems to be a visible, substantial national trend, that men heretofore known for their administrative and executive experience and ability, suddenly and deliberately would espouse a program on behalf of a corporation in which they are interested, and to whose shareholders they are amenable and accountable, if they were not confident that their company presently and directly, or within the foreseeable future, would receive a quid pro quo as the resultant of good will engendered by contributions. It strikes us also that to condemn the contribution in this case, as constituting a dissipation of corporate assets, is to indulge not only an ipse dixit, but a basic non sequi-tur, since it has not been demonstrated that the contribution has been wasted or that no benefit will accrue therefrom.

The iconoclast may discount the suggestion that corporations have been endowed with a new kind of altruistic conscience, as being mythical and hardly a reason to support corporate action based on implied power, but aside from any desire to assist others without hope of reward, when a contribution to a laudable cause has been made, a real, important and serious question is posed: Why was the contribution made? We believe that if it were made with the studied and not unreasonable conviction that it would benefit the corporation, it should be the type of thing that should rest in the sound discretion of management and within the ambit of a legitimate exercise of implied authority in the ordinary course of the company’s business. It is not too much unlike the sponsoring of a baseball team, subsidizing promising scholars with a view toward possibly employing them later on, giving to the local community chest, paying the salary of a public relations expert, sponsoring a concert or television program, or conducting a newspaper or radio advertising program. Such actions seldom produce any immediate and direct corporate benefits, but all involve use of corporate funds that otherwise could have gone to shareholders had such funds remained unspent. Few would venture that the company could not do all these things without express, specific authority in the charter. We think that a power once denied today may be implied under changed conditions and philosophies, and that in the light of present day industrial and business exigencies, common sense dictates that included in the implied powers of a corporation, an authority should be numbered that allows contributions of reasonable amounts to selected charitable, scientific, religious or educational institutions, if they appear reasonably designed to assure a present or foreseeable future benefit to the corporation; that management’s decisions in such matters should not be rendered impotent unless arbitrary and unreasonably indefensible, or unless countermanded or eliminated by action of the shareholders at a proper meeting

The contribution in the instant case appears to fall within implied corporate powers under such principles.

McDonough, c. j., and wade, j., concur. CROCKETT, J., does not participate herein.

1 . Chap. 22, Laws of Utah 1955 (Title 16-2-14, Utah Code Annotated 1953, as amended) : “The corporation in its name shall have power * * * (8) to make donations for the public welfare or for charitable, scientific, religious or educational purposes. * * * ”

2 . Utah Const. Art. I, Sec. 18; U.S.Const. Art. I, See. 10, cl. 1

3 . Amend. XIV, Sec. 1, U.S.Const.; Utah Const. Art. I, Sec. 7.

4 . Zion’s Sav. Bank & Trust Co. v. Tropic & East Fork Irr. Co., 1942, 102 Utah 101, 126 P.2d 1053; Art. XII, Sec. 10, Utah Constitution: “No corporation shall engage in any business other than that expressly authorized in its charter, or articles of incorporation.”

5 . Tracy Loan & Trust Co. v. Merchants’ Bank, 1917, 50 Utah 196, 167 P. 353, 355.

6 . Hadlock v. Callister, 1935, 85 Utah 510, 39 P.2d 1082, 1085.

7 . Garey v. St. Joe Mining Co., 1907, 32 Utah 497, 91 P. 369, 377, 12 L.R.A.,N.S., 554.

8 . Fletcher Cyc. of Corp., Perm.Ed. See. 2939, p. 667.

9 . Hutton v. West Cork Ry., 23 Ch.D. 654 (1883).

10 . A. P. Smith Mfg. Co. v. Barlow, 1953, 26 N.J.Super. 106, 97 A.2d 186, affirmed 1953, 13 N.J. 145, 98 A.2d 581, 39 A.L.R. 2d 1179.

11 . Since 1898, in a number of compilations and revisions, lastly in Title 08-3-3, U.O.A.1953, it has been enacted that “No part of these revised statutes is retroactive, unless expressly so declared.”

12 . Petersen v. State Tax Commission, 1944, 106 Utah 337 148 P.2d 340; McCarrey v. Utah State Teachers’ Retirement Board, 1947, 111 Utah 251, 177 P. 2d 725.

13 . 1819, 4 Wheat. 518, 4 L.Ed. 629.

14 . Zabriskie v. Hackensack & N. Y. R. Co., 1867, 18 N.J.Eq. 178.

15 . Durfee v. Old Colony & F. R. R. Co., 1862, 5 Allen 230, 87 Mass. 230.

16 . See footnote $1.

17 . 1906.

18 . Aug. 30, 1935, Chap. 829, Sec. 102(c), Vol. 49, Part I, Public Laws U.S. 1016.

19 . Sec. 170, Internal Revenue Code 1954, 26 U.S.C.A. § 170.

20 . Ark. (1951), Cal. (1949), Colo. (1947), Conn. (1953), Del. (1941), Dist. of Col. (1951), Fla. (1955), Ga. (1953), Hawaii (1947), Ill. (1919), Ind. (1949), Kan. (1951), Ky. (1952), La. (1954), Me. (1951), Md. (1945), Mass. (1953), Mich. (1953), Minn. (1949), Miss. (1952), Mo. (1937), Neb. (1953), Nev. (1953), N.H. (1953), N.J. (1931), N.M. (1951), N.Y. (1941), N.C. (1945), Ohio (1953), Okl. (1949), Ore. (1953), Penn. (1945), R.I. (1952), Tenn. (1925), Tex. (1955), Utah (1955), Vt. (1953), Va. (1954), Wash. (1953), W.Va. (1949), Wis. (1951).

21 .Also, Chairman, American National Red Cross, Trustee, American Museum of Natural History, and holder of other kudos.

22 . Also, President of the National Industrial Conference Board.

23 . Also, Chairman of the Board, Southern California Edison Co., Director, North American Aviation, Trustee, Mutual Life Ins. Co., and Trustee, University of California.