Court Opinion

ID: 6380371
Source: CourtListenerOpinion
Date Created: 2022-06-24 23:59:49.460063+00
Date Added: 2024-06-11T15:50:19.932612
License: Public Domain

Sinkler, J.,
dissenting. — With the conclusion of the majority and the grounds upon which it is based we do not agree, for the following reasons:
The term “security” used iii its relation to the investment of trust funds in this State should be judicially construed not according to the vernacular use but in its accurate sense. So construed the term “security” does not include shares of stock in a corporation as a class.
We are not concerned at this time with the relative merits of a certain form of legal investment for trust funds, to wit, mortgages in contrast with shares of common stock. The question is solely whether shares of common stock as a class have the attributes which compose the elements of safety and certainty necessary to constitute a security, when the power to invest trust funds is construed.
Authority to invest in “safe, sound and substantial *107securities” does not empower a trustee to invest in shares of common stock.
The Constitution of this State contains provisions which limit the investment of trust funds to the specified classes. If any doubt existed as to the intention of the framers of our Constitution it would be dissolved by reading the debates on this subject preceding its adoption. The substance is to be found in a recent adjudication of this court.1 The legislative intent is manifest from a reading of the statutes. The courts of this State have been consistent in construing strictly any grant of authority giving latitude in investment by trustees otherwise than as prescribed by the Constitution and statutes. For example, a case frequently cited and followed2 in effect defines good securities as legal investments for trust funds. Throughout in our Constitution, statutes, and judicial decisions, the aim is to safeguard the investment of trust funds by restricting the trustee to what may be broadly described as the position of creditor rather than that of owner or partner.
In order to reach our conclusion respecting the pertinent clauses of the will before us for consideration, analysis must be made of the attributes of what is properly called a security and the quality of shares of stock. If the former involve requirements lacking in the latter, and, if the latter have elements which are not consistent with the requirement of the former, then shares of stock are not securities.
A well-recognized authority says:
“Corporate shares have also been classed as ‘securities’, and, although they may be thus designated within the meaning of particular statutes, yet it is plain that they are not securities in the proper sense of the word.” 3
Analysis of elements composing a security and certain incidents to ownership of corporate shares corroborates this pronouncement. Such analysis is predicated upon the following: “Security” must be interpreted in its restricted and accurate sense when the word is used in relation to the investment of trust funds, in like manner as *108the grant of power to purchase other than legal investments must be strictly construed. The inclusion of corporate shares for the purpose of a statute in respect of the issuance or taxation of the shares thereof is to be distinguished from such cases as the present. Likewise, judicial decisions are not authority wherein shares of common stock are referred to as securities, unless it be in construing the word in its strict sense and in- such instances as the present.
The respective merits at this moment of shares of common stock and corporate bonds, mortgages and other like investments, are not involved in determining the question now before us. Dur conclusions affect only the powers of investment by trustees in this State and are to be reached in the light of the policy of our legislature and courts alike.
An element of security is certainty as to the status of the investment. Whether it be secured by the lien of a first mortgage, or otherwise, certainty in this respect is essential. An issue of general mortgage bonds of a great railway system may be subject to the lien of prior mortgages of the obligor and to scores of issues made by constituent companies. Nevertheless the owner of the general mortgage bonds is assured of his status. The owner of shares of common stock has no such security. The corporate property may at the time he purchases his shares be free of lien or debt. Thereafter it may be encumbered by lien, subjected to other obligations created by the corporation or by judgments obtained against it for debts incurred in the operation of the corporate business. An excellent illustration is to be found in what actually occurred in the corporation in question. During the past 10 years obligations exceeding one hundred million dollars have been created, yet the status of the general mortgage bonds remains unchanged, while prior indebtedness to which the corporate property has been subjected, and the property rights of the stockholders have been affected to that extent.
*109Another incident of security is the covenant to pay a certain amount on a fixed date. This feature exists in a bond which matures at the expiration of a stated period, but is not present in shares of common stock, whether with par value or without.
If the security be a mortgage, covenants are to be found in the bond for the protection of the investor, the payment of taxes, maintenance of insurance against fire, and the like. If the security be a corporate bond, the indenture or deed of trust whereby it is secured usually contains numerous, sometimes elaborate, covenants to insure the certainty of the investor’s status, the stability of his investment, the remedies in case of default in the performance of any covenant undertaken by the obligor.
As to income, certainty is likewise an attribute of a security. This is effected by a covenant to pay a fixed amount on stipulated dates. Dividends on shares of common stock are payable ordinarily if earned in amounts and at times determined by the discretion of a board of directors. This element of security is therefore lacking-in shares of common stock.
The foregoing relates to elements of certainty usually present in certain forms of investments. Issues of bonds exist having no specified date of maturity, except, doubtless, in the event of default in some covenant. Likewise, corporate mortgages have been created wherein no limit has been fixed in the amount of bonds which may thereafter be issued. Also there exist what are known as income bonds, wherein no covenant exists for the payment of interest in an amount and at dates specified. Likewise issues of common stock may enjoy covenants on the part of the corporation’s lessee for the payment of dividends at regular dates and amounts. What has been written immediately above as to the convergence of certain types of bonds and a small class of stock is not to be taken as a basis for holding shares of stock generally to be included as securities, but rather a ground for holding certain bonds to be lacking in the essentials thereof. Generally, *110where the investor has the status of creditor and not that of owner, necessary elements of a security are present— that he be secured to a specified extent, that his status be certain, that the time and amount of the payment of both principal and interest be assured.
Certain features of a security are lacking in corporate shares. Certain attributes of such shares constitute insecurity. This appears from the findings in judicial decisions and in the comments contained in recognized authorities upon the subject of corporations.
The first concept of a corporation as an entity and the development of the concept arise from later Roman law. Thence the English common law adopted this artificial concept, and from this source spring the early American corporations. The theory of common-law partnership first appears in England during the seventeenth century: “The law of partnership rests on a foundation composed of three materials: the common law, the law of merchants, and the Roman law.”4 Corporations and partnerships thus not only trace their birth to common ancestors, but have more characteristics in common than is sometimes realized.
In this country the partnership, originally the most common form of business association, involved the disadvantage of individual liability for firm debts on the part of the partner. Therefore the corporation became more popular, and the joint stock association developed as a hybrid of the two.5
The Supreme Court of the United States has declared: “private corporations are but associations of individuals united for some common purpose, and permitted by the law to use a common name, and to change its members without a dissolution of the association”;6 whereas the British Partnership Act (22 Halsbury 3) has defined a partnership to be: “. . . the relation which subsists between persons (a) carrying on a business in common with a view of profit”.
*111The policy of our courts and legislature has become increasingly marked in prescribing rules curbing the corporate power, reducing the advantages of incorporation, and under increasing sets of circumstances “piercing the corporate veil”. The original concept of a distinct corporate personality had become well-nigh unassailable. But today this fiction of corporate entity is disregarded whenever adherence thereto would cause gross miscarriage of justice.
“. . . the courts, again and again, have frustrated each and every attempt to commit inequity, to perpetrate fraud, to achieve monopoly, or to accomplish wrongs, under the guise, and hiding behind the veil, of corporate existence. The refusal of the courts to allow quiddits and quillets to stand in the way of justice is nowhere better exemplified.”7
When the fiction of corporate entity is disregarded the stockholders are transformed into quasi-partners.
The Supreme Court of the United States has refused to permit two corporations to use the corporate fiction to circumvent the prohibition of the Anti-Trust Law.8 Cases in American jurisprudence wherein fiction of corporate entity is disregarded are to be found in growing numbers.
That the legislatures of the several States have recognized these principles is evident in the legislative determination to penetrate the corporate armor. Pennsylvania has long impressed on stockholders of a corporation-the obligation to meet wage claims in the event of insolvency of their company. Similarly, it has until recently subscribed to the doctrine of double liability of stockholders in certain trust and banking corporate set-ups. Other States have adopted similar laws, and in some cases have gone further.9
A stockholder no longer enjoys the impregnable position that he once did. He is variously described as a “quasi partner in the enterprise”, “a cestui que trust” or the principal in principal-agent relationship with the directors of the corporation.10
*112“A share of stock was once a fixed participation in property accompanied by a considerable degree of control over that property . . . today it is a participation stripped of many of its original protections and subject, to indefinite variation”; “the distinctness of the property right has been blurred to the point of invisibility”. “The stockholder has only a set of expectations that the: men who compose the management and control will deal fairly with his interest”.
■ Once owner of a property right, he has evolved into a supplier of capital in exchange for a bare expectation or hope.11
The views of these commentators indicate the presently uncertain status of a stockholder and a hazardous outlook for him. The conclusion to be reached from consideration thereof is that shares of stock are not now to be-included as securities. We, the minority of the court, find this viewpoint as more modern and farseeing then the-decisions upon the subject found in the majority opinion.
A shareholder is, according to prevalent opinion, as. expressed in the authorities just cited, not a security holder. He is a joint owner of property, one of a group-engaged in business, in some instances subject to liability like unto that of a partner. The present trend of judicial decisions seems toward making the lot of the shareholder-one of increasing uncertainty rather than certainty.
Comment is made above upon the fact that corporate-shares lack certain necessary elements of securities. Now we express the view that shares of common stock in turn, have certain attributes foreign to those of securities.
A shareholder is a part owner of corporate property,, his status is uncertain, insecure, unstable. An illustration is a recent occurrence wherein a stockholder in a. corporation operating a plant for the manufacture of paper used for news print, through the will of the majority, became a part owner in a plant for the manufacture of craft paper in Mississippi through the sale of the corporate assets and purchase of other assets. *113Through merger, if the majority will, the corporate property can be altered to a large extent. Another actual occurrence is where a stockholder, and therefore a part, owner, of a plant for the manufacture of special steel products in Ohio, through merger, became a stockholder in a vastly larger corporation owning plants for the manufacture of ships as well as almost every known form of steel product in several States.
The precise question in construing the will before us is this: Does authority to invest “in safe, sound and substantial securities without confining them to technical legal securities” confer power to invest in shares of common stock? More briefly, are such shares included in the category safe, sound, substantial securities. The applicable canon of construction above related is that latitude in investment of trust funds must be expressed in unequivocal terms. The answer to the question before us. is an emphatic negative. Power to invest in safe, sound, and substantial securities is not clear and unmistakable authority to invest in shares of common stock. We, the minority of this court, go farther: the phrase quoted gives no such authority whatsoever, and shares of common stock are not as a class safe, sound and substantial securities.
We are urged to find that testator used the words “safe, sound and substantial securities” in their colloquial sense. The will as a whole is artificially drawn, in legal phraseology. The words following those just quoted, “what are technically known as legal investments”, indicate knowledge of the exact nature of legal investments. Having used words of art elsewhere in his will he may not be held, in the use of the word “securities”, to have lapsed, into argot.
We do not maintain the view that trustees in Pennsylvania may not invest in shares of common stock. In our opinion they may do so if expressly thereto authorized, if given such power by unequivocal words, or by legislative enactment. Corporate shares are not as a class included *114in the category of securities, according to our interpretation of both terms.

 Curran’s Estate, 17 D. & C. 435.

 Plate’s Estate, 30 Dist. R. 902.

 5 Thompson on Corporations (2d ed.) §3467.

 1 Collyer’s Law of Partnership 1 (London 1840).

 Elliott on Private Corporations (5th ed.) secs. 11 to 20; Thompson on Corporations (2d ed.) secs. 7 et seq.

 United States v. Trinidad Coal & Coking Co., 137 U. S. 160, 169.

 Wormser on The Disregard of The Corporate Fiction and Allied Corporate Problems, p. 44.

 Northern Securities Co. v. United States, 193 U. S. 197.

 Elliott on Private Corporations (5th ed.) sec. 538 et seq.

 Berle and Means, “The Modern Corporation”, pp. 275, 279.

 Berle and Means, “The Modern Corporation”, pp. 152, 158.