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Ashwander v. Tennessee Valley Authority

Supreme Court of the United States · 1936 · Civil Procedure

Civil ProcedureConstitutional LawShareholder derivative suitsJusticiabilityFederal property powerWar powerCommerce powerderivative suit

Facts

TVA contracted with Alabama Power to buy certain transmission lines and related properties for $1,000,000, buy adjacent real property for $150,000, interchange hydroelectric energy, and sell Alabama Power TVA's surplus power on stated terms. The transmission lines ran from Wilson Dam and served seven Alabama counties, and the record showed that electric energy generated at Wilson Dam was sufficient to meet the contract's requirements without interconnection with other dams or plants. Plaintiffs, preferred stockholders of Alabama Power, demanded that the board challenge the contract as injurious and unconstitutional, but the board refused and the common-stock holder declined to call a stockholders' meeting. Plaintiffs then sued derivatively to enjoin performance of the contract and also sought broader relief against TVA's policies and programs.

Issue

Could these preferred shareholders maintain a derivative suit in equity to challenge the TVA-Alabama Power contract as unconstitutional, and if so, was the January 4, 1934 contract valid insofar as it involved disposition of electric energy generated at Wilson Dam and TVA's acquisition of transmission lines to market that energy?

Rule

When a corporation refuses to protect itself, shareholders may seek equitable relief to prevent an injurious and illegal transaction without showing fraud, legal duress, or that the transaction is ultra vires of the corporation, so long as no adequate legal remedy exists. Federal courts will decide only definite and concrete controversies, not abstract objections to governmental policies. Congress may construct a dam in the exercise of its war and commerce powers, and under Article IV, Section 3 may dispose of property belonging to the United States, including electric energy generated at such a dam, by appropriate means in the public interest, including acquiring transmission lines as facilities to reach a wider market, so long as the case presents no invasion of rights reserved to the States or the people.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lena Ortiz owns a small block of voting preferred shares in Prairie Light Utility, a Kansas corporation. After she demanded that the board challenge a proposed sale of several substations to a federal power agency on the ground that the agency lacks constitutional authority to enter the transaction, the board refused and the controlling common shareholder declined to convene a meeting; damages after closing would be difficult to measure or undo.

If Lena files suit in federal court seeking to enjoin the transaction derivatively on behalf of Prairie Light Utility, which is the best argument that she may proceed?

Explanation. The majority allowed a derivative suit in equity where shareholders had a real proprietary interest, made demand, were refused, and challenged an injurious and allegedly illegal transaction for which no adequate legal remedy existed. The Court said fraud, legal duress, and ultra vires corporate action were not necessary predicates; illegality may lie in the lack of lawful authority of the entity with whom the corporation is dealing.