McQuade v. Stoneham

I concur in the decision of the court on the second ground stated in the opinion. I desire to state the reasons why I do not accept the first ground.

The defendant Stoneham owned the majority stock of the corporation and could exercise the control of the corporation which the holder of the majority stock possesses. He could choose the directors of the corporation who in turn would elect the officers and determine the corporate policies. The agreement between the defendant Stoneham, the plaintiff, McQuade, and McGraw provided, in effect, that, in consideration of the sale by Stoneham of part of his majority stock, the power of control which Stoneham had previously exercised should be shared with McQuade and McGraw and, specifically, that mutual assurance should be given that this power of control would be used in concert to continue each of the three parties to the contract as directors and officers of the corporation at stipulated salaries and to preclude change without common consent in "matters regarding the policy of the business of the corporation or any matters which may in any wise affect, endanger or interfere with the rights of minority stockholders."

We have said: "An ordinary agreement, among a minority in number, but a majority in shares, for the purpose of obtaining control of the corporation by the election of particular persons as directors is not illegal." (Manson v. Curtis, 223 N.Y. 313,319.) We are agreed that if the contract had provided only for the election of directors it would not have been illegal. Its vice, if any, is inherent in the provisions intended to give assurance that the directors so elected would act according to the prearranged design of the stockholders in apportioning the corporate offices and emoluments of such offices among the majority stockholders.

The corporate charter and statutory provisions fix the manner in which the corporate affairs must be conducted. The majority stockholders do not own the corporation nor have they unlimited power of control. Their corporate powers are conferred by the charter and may be exercised only in the field defined by the charter. They act at stockholders' meetings in relation to matters which may be decided at such meetings. There, the directors are chosen by the vote of the holders of a majority of the stock, but the stockholders have no power, except as provided by charter or statute, to divest directors of any of their functions or direct them in the exercise of their functions. The directors are constituted managers of the corporate affairs. They determine the corporate policies, they elect the corporate officers. In the functioning of the corporate machinery the power of control of the holders of the majority stock is, as in such matters, exhausted with the election of the directors. When elected the directors must act in behalf of the corporation, not in behalf of any group of stockholders. It would constitute a wrong to the corporation and its minority stockholders if the directors were permitted to transfer their powers and functions to the holders of a majority of the stock or to bind themselves to accept direction from any persons not vested with power of control by law.

There can, I think, be no doubt that shareholders owning a majority of the corporate stock may combine to obtain and exercise any control which a single owner of such stock could exercise. What may lawfully be done by an individual may ordinarily be lawfully done by a combination, but no combination is legal if formed to accomplish an illegal object. No such combination or agreement may "contravene any express charter or statutory provision or contemplate any fraud, oppression or wrong against other stockholders or other illegal object." (Manson v. Curtis,supra.)

In that case we held invalid, on that ground, an agreement for the selection "of directors who should remain passive or mechanical to the will and word" of one of the parties to the agreement. Now it is said that, for the same reason, this agreement must be held unenforceable, though here the agreement contemplated no restriction upon the powers of the board of directors, and no dictation or interference by stockholders except in so far as concerns the election and remuneration of officers and the adhesion by the corporation to established policies.

It seems difficult to reconcile such a decision with the statements in the opinion in Manson v. Curtis that "it is not illegal or against public policy for two or more stockholders owning the majority of the shares of stock to unite upon a course of corporate policy or action, or upon the officers whom they will elect," and that "shareholders have the right to combine their interests and voting powers to secure such control of the corporation and the adoption of and adhesion by it to a specific policy and course of business." Obviously a combination intended to effect the election of certain officers and to obtain control of the corporation and adhesion by it to a specific policy and course of business can accomplish its ends only to the extent that directors will bow to the will of those who united to elect them. The directors have the power and the duty to act in accordance with their own best judgment so long as they remain directors. The majority stockholders can compel no action by the directors, but at the expiration of the term of office of the directors the stockholders have the power to replace them with others whose actions coincide with the judgment or desires of the holders of a majority of the stock. The theory that directors exercise in all matters an independent judgment in practice often yields to the fact that the choice of directors lies with the majority stockholders and thus gives the stockholders a very effective control of the action by the board of directors. In truth the board of directors may check the arbitrary will of those who would otherwise completely control the corporation, but cannot indefinitely thwart their will.

A contract which destroys this check contravenes "express charter or statutory provisions" and is, therefore, illegal. A contract which merely provides that stockholders shall in combination use their power to achieve a legitimate purpose is not illegal. They may join in the election of directors who, in their opinion, will be in sympathy with the policies of the majority stockholders and who, in the choice of executive officers, will be influenced by the wishes of the majority stockholders. The directors so chosen may not act in disregard of the best interests of the corporation and its minority stockholders, but with that limitation they may and, in practice, usually are swayed by the wishes of the majority. Otherwise there would be no continuity of corporate policy and no continuity in management of corporate affairs.

The contract now under consideration provides, in a narrow field, for corporate action within these limitations. Its purpose and intent is to fix the manner in which control vested in the stockholders shall be exercised. It is not designed to create a control which is itself illegal. True it does contemplate that the parties will, as directors, vote to place each other in specified offices. If this represented a corrupt bargain intended to despoil the corporation, it would be an illegal combination, but there is no evidence or finding that it had such purpose or result. Neither the corporation nor any minority stockholders are complaining and the findings establish that the arrangement resulted in protection which the minority stockholders would not otherwise have had and that it was repudiated by defendant (Stoneham) because such protection proved irksome to him. It does constrain the parties while acting as directors to vote for officers in a predetermined manner, but there is no suggestion that such vote would not accord with their best judgment and be in the interests of the corporation. It is subject to the implied condition that the officers so elected will be loyal to the corporation. (Fells v. Katz, 256 N.Y. 67. ) It binds the directors only in a matter where freedom is a fiction rather than a fact. If this contract is unenforceable and contrary to public policy, then every purchase of a substantial block of stock upon the promise of the majority stockholders that the purchaser will be elected a director and officer of the corporation is likewise against public policy.

We have said: "The law requires of the majority of the stockholders the utmost good faith in their control and management of the corporation as regards the minority, and in this respect the majority stand in much the same attitude towards the minority that the directors sustain towards all the stockholders." (Farmers L. T. Co. v. New York Northern Ry.Co., 150 N.Y. 410, 430.) The courts should and do enforce the rule of good faith towards all stockholders. No group of stockholders may use their power to wrong others. No director may repudiate his trust to exercise his best judgment. A contract calculated to deprive the corporation and its minority stockholders of statutory safeguards constitutes such a wrong. So, too, does a contract by directors to repudiate their trust. A contract which merely provides for the election of fit officers and adhesion to particular policy determined in advance constitutes an agreement by which men in combination exercise a power which could be lawfully exercised if lodged in a single man. It is legal if designed to protect legitimate interests without wrong to others. Public policy should be governed by facts, not abstractions. The contract is, in my opinion, valid. It is unenforceable only because it resulted in an employment which was itself illegal.

CRANE, KELLOGG, O'BRIEN and HUBBS, JJ., concur with POUND, Ch. J.; LEHMAN, J., concurs in result in opinion in which CROUCH, J., concurs.

Judgments reversed, etc.