230 F. 233 | S.D. Ohio | 1916
The constitutionality of the so-called “blue-sky” law of Ohio (sections 6373-1 to 6373-24, General Code, as amended by 103 Ohio L. pp. 743-753, 104 Ohio L. pp. 110-119, 105-106 Ohio L. pp. 363-364) is assailed in each of the above-mentioned
The Geiger-Jones Company, an Ohio corporation, is engaged in buying and selling in Ohio and other states stocks and bonds principally of industrial corporations, domestic and foreign. It seeks to prevent the revocation of the license heretofore granted it to transact such business and the threatened enforcement of the law against its continued prosecution of the same. Coultrap, a citizen of the state of Pennsyl
Rose was heretofore arrested, indicted, and convicted in one of the state courts for violating the act by selling the stocks and bonds of industrial concerns, and, particularly, the stock of his coplaintiff, a West Virginia corporation, and is now awaiting sentence. Both he and the RiChard Auto Manufacturing Company allege that the enforcement of the statute by the defendants named in their bill will prevent Rose from prosecuting his business of selling securities and his coplaintiff from completing its organization and capitalization for the manufacture of automobiles.
Briefly stated, the validity of the act is assailed on the grounds that (1) it is violative of the commerce clause of the federal Constitution; (2) it is constitutionally obnoxious, in that it deprives plaintiffs of property without due process of law and denies them the equal protection of the laws; (3) it delegates legislative and judicial power to an executive officer, in violation of the state Constitution; and (4) it is a law of a general nature, but does not operate uniformly throughout the state, as required by section 26, article 2, of the state Constitution. If the act be unconstitutional, each of the plaintiffs is, as he must be, within the class whose constitutional rights are invaded. Standard Stock Food Co. v. Wright, 224 U. S. 540, 550, 32 Sup. Ct. 784, 56 L. Ed. 1197. The prayer of each bill is for general as well as specific relief.
The act, which is entitled “An act to regulate the sale of bonds, stocks, and other securities, and of real estate not located in Ohio, and to prevent fraud in such sales,” prohibits, under severe penalties, the disposition of all securities subject to its provisions, without discrimination as to and regardless of their value, unless authority so to do is first obtained from the superintendent of banks (termed the commissioner). The term “dispose of” is broadly construed to mean “sell, barter, pledge, or assign for a valuable consideration or obtain subscriptions for.” The first section, 6373-1, in comprehensive language declares that, except as otherwise provided in the act, no dealer may within the state dispose of or offer to' dispose of any stocks, stock certificates, bonds, debentures, collateral trust certificates or other similar instruments (all termed “securities”) evidencing title to or interest in property issued or executed by any private or quasi public corporation, copartnership or association (except corporations not for profit), or by any taxing subdivision of any other state, territory, province or foreign government, without being first licensed so to do. Promissory notes are not within the terms of the act, as was the case in the original Michigan statute. A limited number of other securities are also excluded from its provisions. The inclusive character of the act extends, not only to “securities” coming within its provisions, but also to the persons subject to its exactions, prohibitions and penalties, as is
Because a certificate of stock is only evidence of the ownership of shares, the interest represented by them being held by the company for the benefit of the true owner (Citizens’ Sav. & Tr. Co. v. Ill. Cent. R. R., 205 U. S. 46, 57, 27 Sup. Ct. 425, 51 L. Ed. 703; Ball v. Mfg. Co., 67 Ohio St. 306, 314, 65 N. E. 1015, 93 Am. St. Rep. 682), it does not follow, as defendants’ counsel contend, that such certificate is of less value than an unprinted sheet of paper of corresponding size and quality, and that it cannot therefore be a subject of interstate commerce. If it be but written evidence of an interest in corporate property, the same may be said of-notes and bills, which are mere evi-
“In the business world such obligations or securities are treated as something more than mere muniments of title. They are daily bought and sold like ordinary chattels, they may be hypothecated or pledged, they have an inherent market value, and, while differing in some respects from chattels, they are generally classified as personal property.”
In Ohio a stock certificate is so far property that it may be seized by an officer making an attachment or levy. Section 8673 -13, G. C. (See Page & A. Gen. Code.)
Whether interstate transactions in the securities whose disposition is within the purview of the act directly burden interstate commerce must be determined by testing its provisions by the federal Constitution. The act (section 6373-3) requires as a condition precedent to the authorization and right of an applicant to do business in the state that such applicant shall submit, with a filing fee of $5, to the commissioner: (a) The names and addresses of the applicant’s directors and officers, if the applicant be a corporation or association, and of all partners, if it be a partnership, and of the individual, if it be such, and also the names and addresses of all agents of such applicant, assisting or about to assist in the disposition of securities; (b) the location of its principal office without and within the state, if it have both;
, Notwithstanding the granting of a license to an ■ applicant, it may not dispose of any given securities until it has also filed, unless excused by the commissioner from s,o doing, a further statement (section 6373-9) touching the issuer of such securities, if the issuer be a company, setting forth (a) its name and the location of its principal office and the names of its officers and directors, or, if it be a copartnership, the names of the partners; (b) a general detailed showing of its assets, liabilities, and capital stock, as of a date not later than tire close of the last fiscal year, and also of its gross income, expenses, and fixed charges for the year last prior thereto, or for such other time as the issuer has been in business, if that time be longer than a year; (c) a pertinent description of such securities and the purpose of their issue; and (d) the approximate price at which the licensee proposes to dispose of them. The exemptions from the filing of the information called for by such section which the statute permits the commissioner
The statute further provides that no issuer or underwriter, nor any person or company acting in behalf of either (section 6373-14), shall, within the state, for the purpose of organizing or promoting any company or of assisting in the flotation of its securities, dispose or attempt to dispose of any such securities until the commissioner has issued a certificate permitting such to be done, the granting of which must be subsequent to the issuer or underwriter filing an application (except in certain instances which need not now be noted), with a fee of ,$5, containing the information required by paragraphs (a), (b), (c) and (d) of section 6373-9, a certified copy of the issuer’s articles of incorporation or association, regulations and by-laws, of all minutes of stockholders and directors relative to the issuance of such securities, of any contracts which have been made between the issuer and its underwriter of such securities (copies of all such subsequent contracts also to be filed when made), and of all contracts between any underwriter and any sales agent or broker, and also a sworn statement made by the president and secretary of the issuer showing in detail the items of cash, property, services, patents, good will, and any other consideration for which such securities have been or are to be issued in payment. The commissioner (section 6373-16) may, as he deems advisable, examine the issuer of such last-named securities at any time, both before and after his grant of the certificate named in section 6373-14. In the exercise of his discretion, he may require all or 'any part of the expense of such examination to be borne by the applicant, who is compelled to deposit with him in advance for such purpose whatever sum he may order. The applicant receives an itemized statement of expenditures made, but this follows the conclusion of the examination. If the commissioner finds that the applicant has complied with the law, is not fraudulently conducting its business, is not- proposing to dispose of its securities on grossly unfair terms and is solvent, a certificate authorizing the disposal of such securities shall issue, providing, except in case of a licensed dealer, a fee of $10 be paid; but, if the commissioner does not affirmatively so find, the certificate must be refused. It must be issued or denied within a reasonable time after application for it is made, which time shall be within 30 days after the applicant or certificate holder, whose certificate has been revoked, has fully complied with all the requirements of the act; but as the commissioner is the sole judge of what constitutes compliance, and as the examination, especially of large concerns, would in some instances be prolonged and at times have to be conducted at distant points in this or another country, the issuing of a certificate may be delayed indefinitely and beyond the 30-day period. After the applicant is authorized to proceed with its proposed business, the commissioner may still revoke its certificate and deny it the privilege of continuing to dispose of the securities in question, if he has reason to believe that the certificate holder’s business is fraudulently conducted,.
Violation of the act constitutes a misdemeanor or felony, regard being had to the character of the offense, and is visited by a fine or imprisonment, or both.
The draughtsman of the act here in question, unwittingly, no doubt, but with strange fatality, incorporated into it substantially all of the vices of the statutes considered in the above-named cases, and added others equally, if not more, obnoxious. The burdens which it imposes on interstate commerce are so direct, positive and substantial as. to lend peculiar force to the rule announced in the Pigg, Vickers, and Crutcher Cases, and to vitiate the entire act for the reason that its constitutionally offensive features are so distributed through its various parts as to be inseparable. The enforced suspension from all business activity for a period of 30 days, imposed by the original Michigan act, was held to be a fatal “30-day paralysis.” In the later decision rendered by the same court (Halsey & Co. v. Merrick) the subsequent act of that state was overthrown, notwithstanding the absence of such restrictive provision. In the present act the prohibition from the transaction of business must extend for a week, and possibly 20 or 30 days, or more; it therefore offends against the Constitution quite as much as the first of the Michigan acts.
“the right of the citizen to be free in the enjoyment of all his faculties, to be free to use them in all lawful ways, to live and work where he will, to earn his livelihood by any lawful calling, to pursue any livelihood or avocation, and for that purpose to enter into all contracts which may be proper, necessary and essential to his carrying out to a successful conclusion the purposes above mentioned.”
If an issuer or owner of or dealer in securities issued in good faith, and based on value fairly commensurate with their face or selling value, is deprived of the right of disposal or of offering them for disposal, he is deprived, not only of his property, within the meaning of the Constitution, by talcing from him one of the incidents of ownership (City of Chicago v. Netcher, 183 Ill. 104, 130, 55 N. E. 707, 48 L. R. A. 261, 75 Am. St. Rep. 93), but also of his liberty, as appears from Mr. Justice Matthews’ saying in Yick Wo v. Hopkins, 118 U. S. 356, 370, 6 Sup. Ct. 1064, 1071 [30 L. Ed. 220], that:
“The very idea that one man may bo compelled to hold his life, or the means of living, or any material right essential to the enjoyment of life, at the mere will of another seems to he intolerable in any country where freedom prevails, as being the essence of slavery itself.”
Legitimate commercial transactions, such as the disposal of securities of the kind above mentioned, cannot be regulated by legislative enactment. The act in question seeks to regulate private transactions,
“The issuing of * * * stocks or bonds by a private company to get money for its own business no one can suppose is a public or quasi public enterprise; the business of buying and selling stocks and bonds and other securities is no more ‘affected by a public interest’ than is the business of buying and selling groceries. When we thus recall that the prohibition applies to a private business, the question at once presents itself whether frauds and opportunities for fraud sufficiently characterize the business to justify its entire prohibition save under drastic restrictions.”
Every proposed offering of securities must first be submitted to the commissioner, subject to the delay incident to his investigation or examination, which, should he temporarily grant a license or a certificate, may thereafter be continued and repeated, and in case of an issuer mentioned in section 6373-16, at its expense, limited only by his unrestrained discretion. Every investigation and examination authorized is ex parte. The applicant, whether a dealer or issuer, is not permitted to be heard as to the granting or revocation of a license or the award of a certificate, on the important questions of his own good repute, his alleged or surmised violations of the provisions of the statute, the legitimacy of his business, tire honesty of his conduct, the fairness of the terms under which his disposals are made, or his own solvency. No rules of procedure are prescribed in accordance with which the investigation or examination shall be made, nor is the commissioner required to establish any rule or regulation as to what shall constitute good repute, solvency, or fraudulent conduct. He may at will deal with each case as it arises and vary his course to suit his pleasure. He is at liberty to hear, if he chooses, only evidence unfavorable to the investigated party. None' of it need he safeguarded by an oath. The uncontrolled discretion, and even the whim and caprice (if he gives them play), of the commissioner or of his assistant (subject to the commissioner’s supervision), may not only halt, hut injure and perhaps destroy, a worthy business enterprise and cast a cloud on the name of the applicant or licensee, and when such applicant or licensee seeks redress in the courts he must assume the burden of disproving the findings made against him, however groundless they may be. Even an effort is in effect made to deny him access to the federal courts. Butler Bros. Shoe Co. v. U. S. Rubber Co., 156 Fed. 1, 84 C. C. A. 167 (C. C. A. 8). In given respects the above-named law.is more severe than that of any of the states whose “blue-sky” laws have been held unconstitutional. They afforded some opportunity, at least, to the applicant to be heard when his right to do business was under investigation, and, when his business and good name were assailed, opened to him the doors of all the courts of the state for redress against adverse rulings and limited the burden of cost to which he might be subjected in consequence of an examination into his affairs.
If more than 50 per cent, of the bonds of a given issue by a corporation are included in a sale to one purchaser, such issue is not embraced within the act. Section 6373-2 .(1), as amended by 104 Ohio Laws, p. 110. The residue of the bonds, whether worthless or of value, may be sold without the supervision which the law provides. Another corporation of similar or precisely the same character, having no single purchaser for a majority of its bonds, is subjected to the onerous provisions of the law, although its securities may be of the highest financial character. An owner who is not the issuer of the securities he holds is at liberty to dispose of his holdings for his own account regardless of the statute, providing he can do so without resorting to repeated and successive transactions of a similar character; but, if such transactions are expedient or necessary, he may not sell, unless, at inconvenience and financial cost and through delay and the commissioner’s approving stamp of “good repute in business,” he obtains a dealer’s license so to do. A natural person, who has not underwritten and is a bona fide owner-of his securities, whether he be of good repute or. not in business, may dispose of them for his own account; but the underwriter, although he may possess the same moral qualities and wealth as the natural person, or outrank him in both of these respects, may not dispose of his holdings, except by compliance with the none too clear provisions of the act. Although a natural person may dispose of his holdings as above indicated, a partnership or association may not do so. The exemptions based on market reports of a daily newspaper of general circulation (section 6373-10 [b] and [a]) would fail to embrace large numbers of meritorious issuers of the different classes of securities, for it is well known that many securities are not listed on the market or mentioned in any standard manual of information. Section 6373-10 (c) can have no application to an issuer, if some disposee is found who in a single transaction acquires securities of a given issue to the amount of $5,000 or more. There are many worthy concerns, each capitalized for a considerable sum, in which no one’s investment reaches that amount. There would, moreover, seem to be no reason why, if .some one person who, risking that sum, should be defrauded, others should be cheated of smaller sums by sales of stock without the supervision which the law is intended to provide. A licensee may be relieved from giving information concerning the issuer of securities (section 6373-10 [f]), if the disposal of such securities is at a commission of less than 1 per cent, of their par value through a licensed member of a regularly organized and recognized stock exchange, having an established and lawfully conducted place
“Corporations may be classified and there may be conferred upon proper boards, commissioners or officers, such supervisory and regulatory powers over their organization, business and issue and sale of stocks and securities, and over the business and sale of the stocks and securities of foreign corporations and joint stock companies in this state, as may be prescribed by law.”
It is to be regretted that the Supreme Court of Ohio has not been called upon either to construe this provision or to pass upon the statute now under consideration; nor have we had the benefit of the discussion of this constitutional provision by counsel. We are, however, impressed with the belief that the provision cannot be so construed as to change the conclusions we have reached concerning the operation and effect of the. statute. The effect of'the constitutional provision, in our judgment, is simply to give distinct expression to powers which were plainly implied under the same section and article of the Constitution of 1851, which provided that:
“Corporations may be formed under general laws; but all such laws may, from time to time, be altered or repealed.”
It is settled by Berea College v. Kentucky, 211 U. S. 45, 57, 29 Sup. Ct. 33, 35 [53 L. Ed. 81], that:
“A power reserved to the Legislature to alter, amend or repeal a charter authorizes it to make any alteration or amendment of a charter granted subject to it, which will not defeat or substantially impair the object of the grant, or any rights vested under it, and which the Legislature may deem necessary to secure either that object or any public right. Commissioners on Inland Fisheries v. Holyoke Water Power Co., 104 Mass. 446, 451 [6 Am. Rep. 247]; Holyoke Co. v. Lyman, 15 Wall. 500, 522 [21 L. Ed. 133]; Close v. Glenwood Cemetery, 107 U. S. 466, 476 [2 Sup. Ct. 267, 27 L. Ed. 408].”
It was there further held that, while the language of a statute may not in terms amend a charter, yet, where such appears to havé been the legislative intent, the statute will be regarded as an amendment; Mr. Justice Brewer saying (page 57 of 21 U. S., page 35 of 29 Sup. Ct. [53 L. Ed. 81]):
“It would be resting too much on mere form to hold that a statute which in effect works a change in the terms of the charter is not to be considered as an amendment, because not so designated.”
It is also settled that, where such power to alter or repeal a charter is reserved, it is competent for the Legislature to repeal the charter as well as to amend it. Greenwood v. Freight Co., 105 U. S. 13, 26 L. Ed. 961; Hamilton Gaslight & Coke Co. v. Hamilton City, 146 U. S. 258, 269, 270, 271, 13 Sup. Ct. 90, 36 L. Ed. 963; Shields v. State, 26 Ohio St. 86, 93, 94, affirmed 95 U. S. 316, 324, 24 L. Ed. 357; State v. City of Hamilton, 47 Ohio St. 52, 73, 74, 23 N. E. 935. The most, then, that can be said of the statute in question is that its provisions operate to amend the articles of incorporation, the charters,
Again, the power to supervise and regulate the business here involved was never before and cannot now be understood to signify authority so to burden the business of domestic corporations as in practical effect to destroy it, regardless of its actual character and merit. We are not to be understood by anything said in this opinion to intimate that it is not within the power of the state Legislature reasonably to regulate the business of corporations of its own creation or that of foreign corporations and joint-stock companies which are operating within the borders of the state (Alabama & N. O. Transp. Co. v. Doyle [D. C.] 210 Fed. 186, 187; Bracey v. Darst [D.C.] 218 Fed. 494, 495); such power of regulation being more extensive as to such artificial entities than as to individuals, copartnerships and voluntary associations. We do mean, however, to say, as we have already in effect stated, that the things attempted to be done by the present statute cannot be sanctioned under the guise of “supervisory and regulatory” measures in respect of the business of issuing and selling stocks and securities, whether of domestic or foreign corporations.
Other features of the act and other points argued have been considered; the treatment of the one and the discussion of the other would prolong this lengthy opinion and are not necessary.
The licenses mentioned in the first two of the above-entitled causes expired on December 31, 1915. No occasion, therefore, exists for enjoining their cancellation. The bill in each of them is drawn on narrow lines. The prayer of each, however, taken in conjunction with certain averments, is such as to warrant the temporary enjoining of the defendants therein named against enforcing or attempting to enforce the statute in question. In the third of the above cases, the motion filed by the defendants to dismiss is overruled. A temporary injunction is awarded in each case.
In Sioux Falls Stockyards Oo. et al. v. Caldwell no opinion was filed by the court, but a decree was entered reading as follows:
“On this 18th day of November, A. D. 1915, the case above entitled came on for hearing upon the order to show cause why an interlocutory injunction herein should not issue.
“Mr. George J. Danforth appeared and argued the matter for the plaintiffs, and Mr. C. C. Caldwell, Attorney General of the state of South Dakota, appeared and argued the questions in controversy for the defendants.
“And now, after consideration of the pleadings and the arguments, because, in the opinion of the court, chapter 275 of the Session Laws of the State of South Dakota for the year 1915, is violative of the Constitution of the United States, and! this opinion is confirmed by the decisions in Alabama & N. O. Transportation Co. v. Doyle (D. C.) 210 Fed. 173, Wm. R. Compton Co. v. Allen et al. (D. C.) 216 Fed. 537, and Bracey v. Darst (D. C.) 218 Fed. 482:
“It is hereby ordered, that the defendants Clarence C. Caldwell, as Attorney General of the state of South Dakota, Harry O’Brien, as insurance commissioner of the state of South Dakota, and ex officio member of the state securities commission of that state, Joseph L. Wingfield, as public examiner of the state of South Dakota, and ex officio member of the state securities commission, and Dan E. Hanson, as state’s attorney of Turner county, South Dakota, and each of them individually, and each and all of their agents, servants, and assistants, and all others to whom knowledge of this order may come, be and they are hereby enjoined from instituting and prosecuting any actions, civil or criminal, against the complainants under the aforesaid act of the Legislature of the state of South Dakota, for alleged violations thereof and from taking any proceedings for the, enforcement of said act, against the complainants, except such proceedings as may be deemed proper by them in the criminal actions already pending against the complainants.
“This injunction shall take effect upon the filing of a bond, approved by the judge of the United States District Court for the District of South Dakota, to the United States, in the sum of three thousand dollars ($3,000.00), conditioned upon the payment of s.ueh costs and damages as may be incurred.or suffered by any party who may be found to have been wrongfully enjoined or restrained thereby; such bond to contain a clause providing that any damages sustained thereunder are to be ascertained as the court shall direct.
“And this injunction shall continue until the final decision of this case, or the further order of the court.”
