10 Comm LWorld Rev 73

Citation: 10 Comm. L. World Rev.
73 1981
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ANGLO-AMERICAN LAW RE VIEW
CORPORATE POOLING AGREEMENTS AND
RESTRICTION-OF-DIRECTORS
AGREEMENTS*
By STEPHEN KRUGER**
A Introduction
Recurring problems arise in close corporations' from the use
of pooling agreements and of restriction-of-directors agreements.
Each is a useful, but potentially dangerous, instrumentality. An
agreement intended by its draftsman to prevent majority oppression
or minority obstruction can be suborned, and brought to bear by
one faction or the other in the internecine strife endemic to close
corporations. The legal battles are often savage, because they are
fueled by personal or familial rivalries, grievances, or bitternesses.
Rarely, however, are psychological factors considered in judicial
decisions.
The right of shareholders to enter into agreements inter se or
inter sese is an aspect of the common law
2
and constitutional
3
right to contract. The generic term for a contract between or
among shareholders in relation to corporate activity permitted to
them is "shareholders' agreement".
4
Among the usual kinds of
shareholders' agreements are pooling agreements, restriction-of-
directors agreements, voting trust agreements, proxy agreements,
and restriction-of-transfer agreements.
This article considers pooling agreements in Part B, below, and
restriction-of-directors agreements in Part C, below. The two are
conceptually different. A pooling agreement relates to the voting
of shares, and a restriction-of-directors agreement transfers part
or all of the directors' authority to the shareholders. Nonetheless,
both may be appropriate to a particular corporate circumstance.
B Pooling Agreements
Pooling agreements found early judicial acceptance,' and were
established in case law by Manson v. Curtis (223 N.Y. 313,
119 N.E. 559 (1918)). Therein, the plaintiff, the defendant, one
* 1981 Stephen Kruger
** Member of the New York Bar. The support and assistance of Antje Kruger, Henri
Winter, and Sari Winter are acknowledged gratefully.
ANGLO-AMERICAN LAW REVIEW
Culver, and a number of others owned all the shares of a successful
corporation. None of the shareholders owned the majority of the
shares. The plaintiff and Culver, who between them owned the
majority of the shares, agreed to act as a unit in the management
of the corporation, and agreed further that neither would dispose
of his shares without giving the other the first option to purchase
them.
The defendant sought to purchase Culver's shares, and gain
thereby for himself ownership of the majority of the shares.
The plaintiff agreed to the sale, and entered into a shareholders'
agreement with the defendant, which provided among other things
that the plaintiff would continue as general manager and policy-
maker of the corporation for a period of one year, and that
the president of the corporation would be only its nominal head.
The plaintiff fulfilled his contractual obligations insofar as he was
able, but the defendant violated the agreement. The defendant
ran the corporation as he pleased; he ran it to the ground, and
forced it into bankruptcy.
The plaintiff sued for the loss in the value of his shares, and for
the value of the corporation's liabilities to him. The defendant
argued that the contract between the parties was an unlawful
restriction-of-directors agreement, in that the contractual right
of the plaintiff to determine corporate policy gave rise to a passive
board of directors. The Court of Appeals agreed that the Manson-
Curtis shareholders' agreement was void for that reason, but
noted that pooling agreements are valid:
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.
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. 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. Agreements upon a sufficient
consideration between them, of such intendment and effect, are valid
and binding, if they do not contravene any express charter or statutory
provision or contemplate any fraud, oppression or wrong against other
stockholders
or other illegal
object.
6
The language of Manson v. Curtis was given statutory basis in
Business Corporation Law ("BCL" herein) s.620(a), the pooling-
agreements provision of New York law.
7
The form of BCL s.620(a)
was suggested by but is a modification of North Carolina Business
Corporation Act s.55-73(a) in effect during the drafting period of
the New York statute (New York Joint Legislative Committee to
Study Revision of the Corporation Laws, Working Draft, s. 6.12
(p.2
0
)). The North Carolina law read:
An otherwise [-1 valid contract between two or more shareholders that the
shares held by them shall be voted as a unit for the election of directors
shall, if in writing and signed by the parties thereto, be valid and en-
forcible as between
the parties thereto ... 8
This section covered only one use (election of directors) of
pooling agreements. BCL s.620(a) is broader, in that it includes
the other permitted use (corporate control) as well. It provides:
An agreement between two or more shareholders, if in writing and signed
by the parties thereto, may provide that in exercising any voting rights,
the shares held by them shall be voted as therein provided, or as they may
agree, or as determined in accordance with a procedure agreed upon by
them. (Emphasis added.)
From the above history, it is seen that, under BCL s.620(a)
and its kindred statutes,
9
a pooling agreement is a contract between
or among shareholders to vote all their shares as a unit for a
specified objective.
1
0
A pooling agreement is eo ipso contractual;1 1 the consideration
is the mutual promises to vote according to its terms.
1
2 The
statutory requirement that a pooling agreement be written is a
modification of case law, under which an oral pooling agreement
was valid.
1
3 The writing requirement is analogous to a Statute of
Frauds, so an oral pooling agreement is unenforceable, not void.
1 4
The unit is the whole number of votes subject to the pooling
agreement. This whole number of votes is the pool, from which
this type of shareholders' agreement derives its name.
1
s The
parties to a pooling agreement are joint tenants, in a manner of
speaking, of all the votes in the pool, and each has an individual
interest in the casting of those votes for the specified objective.
This interest may be enforced in equity by specific performance.
(Samuelson v. Starr, 28 M.2d 479, 213 N.Y.S.2d 889 (Sup. Ct.
1961); Puddephatt v. Leith, supra, n.5).
A pooling agreement must be voted "as therein provided,
... or as determined in accordance with a procedure agreed upon
by [the parties to it] ." (BCL s. 620(a)). That is, a pooling agreement
must specify its objective by setting torth its purpose (election
or control or both) and its immediate aim (who or what or both).
Alternatively, the parties may formulate their purpose or aim
by a binding procedure, such as arbitration or majority vote.'
6
Consider the written shareholders' agreement in Leeds v.
Marcus:
17
It is hereby agreed . . . (1) we shall each vote all of our respective shares
of common stock of the [Leeds-Marcus] corporation in such manner as to
cause [the plaintiff] and [the defendant] to be [each] elected a director
of the corporation, and (2) in such manner so that [the plaintiff] and [the
defendant] shall have an equal number of votes with respect to all matters
involving the corporation requiring stockholder approval. notwithstaniding
the number of shares owned by [the plaintiff and by the defendant] .18
Subsection (1) is a pooling agreement. The writing is a contract,
the consideration for which is the mutual promises to vote. The
unit consists of all the parties' shares of common stock. The pur-
pose of subs. (1) is election of directors, and its immediate aim is
the election of the plaintiff and of the defendant. It is a pooling
agreement for the mutual election of shareholders as directors, and
is unquestionably valid. (Liberman v. Liberman, 23 A.D.2d 545,
356 N.Y.S.2d 145 (1st Dep't, 1965), appeal dismissed, 16 N.Y.2d
611, 209 N.E.2d 109, 261 N.Y.S.2d 64 (1965)).
Subsection (2), however, is not a pooling agreement, in that it
does not specify a lawful corporate purpose (i.e., election of cor-
porate directors or adoption of corporate policy). It operates only
in relation to Leeds and Marcus, who purported to agree between
them how they will value the one vote attached by law to each
share
1
9 held by one or the other of them. In addition, subs. (2) is
not a pooling agreement because it does not create a pool of votes.
On the contrary, it presupposes two blocs of votes, the plaintiff's
and the defendant's, the separateness of which is not undone by
the artificial and unlawful ascription of equal numbers of votes to
unequal numbers of shares.
Without the combination of all the votes into a unit, there is no
pooling agreement. In Stein v. Capital Outdoor Advertising, Inc.
(273 N.C. 77, 159 S.E.2d 351 (1968)), Hannon and Hicks entered
into two written contracts, one entitled "Agreement" and the
other entitled "Stock Voting Proxy". The Agreement provided
that Hannon "transfers and assigns unto [Hicks] the right to vote
all of his stock in the said corporation" (id., 273 N.C. at 79, 159
S.E.2d at 353 (emphasis added)). The Stock Voting Proxy was
intended by Hannon and Hicks to effectuate the Agreement,
"the parties seemingly being of the opinion that without the
'Stock Voting Proxy' Hicks would have no authority to vote the
stock then standing in the name of Hannon" (id., 273 N.C. at 81,
159 S.E.2d at 354-55). Thereafter, Hannon sold 600 shares to the
plaintiff. Also, Hannon advised Hicks in writing of Hannon's
revocation of the Agreement and of the Stock Voting Proxy.
At the special shareholders' meeting subsequent to the sale and the
revocation, Hicks, as president of the corporation, declared that he
was entitled to vote not only his shares, but, also, the shares re-
tained by Hannon and the shares sold by Hannon to the plaintiff.
The court held that the Stock Voting Proxy had expired prior
to the convening of the special shareholders' meeting, and, so, did
not affect the rights of any of the parties.
2
0 The court held fur-
ther that the Agreement was not a pooling agreement under North
Carolina Business Corporation Act s. 55-73(a):
This statute does not apply to the agreement in question. First, the agree-
ment is not limited to the election of directors but applies to all corporate
business to be transacted at meetings of the stockholders. Second, the
agreement does not provide that the shares standing in the name of Hicks
shall be votes as a unit with the shares standing in the name of Hannon.
There is nothing in this agreement which purports to restrict the right of
Hicks to sell all or any part of his shares as he may from time see fit to do.
There is nothing in the agreement which purports to restrict a transferee of
any shares originally issued to Hicks in the voting of such shares purchased
by the transferee
from Hicks.
2
1
Not only is subs. (2) not a pooling agreement, it is not even any
kind of valid shareholders' agreement. Its immediate aim is to re-
allocate the statutorily-allocated voting strengths of the parties to
it. Though Leeds was the minority shareholder and Marcus was the
majority shareholder, they sought to establish by contract that
each "shall have an equal number of votes ... notwithstanding the
number of shares owned" by each. This provision is in conflict
with the one share - one vote rule, because the inescapable effect
of an equal-vote agreement in face of unequal share holdings is
alteration of the parties' statutory voting strengths. In contrast, a
pooling agreement maintains the one share - one vote rule, in that
the value of the vote attached to each share is unchanged by it.
2 2
Contractual variation of voting strength is also contrary to the
statutory electoral norms: plurality election of directors and
majority approval of shareholders' resolutions.
2 3
At a share-
holders' meeting of the Leeds-Marcus corporation, at which both
shareholders are in attendance, the majority shareholder's candi-
date for director ought to be elected, since he has a plurality (in-
deed, the majority) of the votes. An equal-vote agreement, how-
ever, purports to create a tie vote. Mutatis mutandis, the majority
shareholder's resolution ought to be approved, since it, too, has
the majority of votes. An equal-vote agreement, however, purports
to create a tie vote in this context as well. Thus, ascription of
equal voting strengths to unequal numbers of votes is in contra-
vention of the statutory electoral norms.
Neither electoral norm stands in the way of a pooling agree-
ment. If a pool has an insufficient number of votes, it can be en-
larged to the extent necessary by the addition to it of uncommit-
ted votes. Alternatively, the shares which are not in the pool con-
stitute the required plurality or majority. Either way, there is at all
times a sufficient number of votes to elect a director or to approve
a shareholders' resolution. It is otherwise with an equal-vote agree-
ment, which makes the statutory plurality or majority impossible
ANGLO-AMERICAN LA W RE VIEW
of achievement.
A case similar to Leeds v. Marcus is Sankin v. 5410 Conn. Ave.
Corp.,
2 4
in which Sankin and Garfield entered into a partnership
for the purchase and improvement of real property. The partner-
ship agreement provided that Sankin and Garfield were to have
equal votes in all partnership decisions, though their interests in
the partnership were one-third and two-thirds, respectively.
Subsequently, Sankin and Garfield formed two corporations to
succeed the partnership. Sankin owned one-third of the shares of
each corporation, and Garfield owned two-thirds of the shares of
each. The two shareholders entered into identical shareholders'
agreements with respect to each corporation. The terms of the
shareholders' agreements were that
"each [shareholder] shall have an equal vote in the affairs of the corpor-
ation", that is that neither "can have a larger or greater vote than the other
irrespective of the numerical amount of stock owned" by each. (Id., 281
F. Supp. at 550 (emphasis added).)
Thereafter, Janet (Garfield's wife), her lover James Benn, and
Garfield entered into a conspiracy to defraud Sankin of his inter-
ests. The relevant machinations of the involved scheme were that
Benn, acting through 5410 Connecticut Avenue Corporation,
would pose as a bona fide purchaser for value of Garfield's shares
in the corporations. By offering a price which Benn knew that
Sankin could not meet, the conspirators would neutralize Sankin's
first option to buy Garfield's shares. After the purchase by 5410
Connecticut Avenue Corporation of Garfield's shares in the two
corporations, Benn, the sole shareholder of the purchasing corpor-
ation, was to assign the shares to Garfield. Benn made the pur-
chases, gained control of the two Sankin-Garfield corporations,
and notified Sankin that he (Benn) was not bound by the Sankin-
Garfield shareholders' agreements. In the ensuing civil action,
there arose the issue of the validity of the Sankin-Garfield share-
holders' agreements.
The District Court found no binding precedent in the juris-
diction.
2
' It argued that ownership of shares imposes no legal
duty to vote them, and that "[i] f Garfield, in accomplishing
[Sankin's and his voting] objective, could have decided not to
vote any of his stock, he surely could agree to vote only half
of his shares - which is exactly what he did." (id., 281 F. Supp.
at 551 (emphasis and punctuation added)). The ex nihilo and
erroneous conclusion of fact upon the extraneous conditional
statements leaves one breathless.
2
v
The differences between an equal-vote agreement (e.g., the
Sankin-Garfield shareholders' agreements) and a shareholders'
agreement to refrain from voting (e.g., the District Court's version)
are substantive. A shareholders' agreement to refrain from voting
is a lawful contract. An equal-vote agreement is not a lawful
contract, but is private legislation designed to negate the one
share - one vote rule. An equal-vote agreement does violence to
corporate structure, in that it is an all-disguised attempt to treat
a corporation (the statutory norm of which is one share - one
vote) as a partnership (the statutory norm of which is equal
management rights). Variations from the norms may be effected,
but only in the manner prescribed by statute. Partnership law
permits allocation of control by a contract between or among
the partners; corporation law renders a shareholders' agreement
insufficient, and demands a certificate-of-incorporation pro-
vision."1 In Sankin, two shareholders' agreements were misused
to continue a partnership, and, in Leeds, one shareholders' agree-
ment was impermissibly used to give rise to a partnership. In each
case, a statutory certificate-of-incorporation provision was evaded,
though no shareholders' agreement may be inconsistent with law,
nor may be such as will turn a corporation into some other kind
of
entity.
2 7
a
In reading statutes, the courts' function is to give effect to
legislative intent, which is to be found, if possible, in the words
of the statute.
2
8 If the statutory language is unambiguous, a
common law court must adhere to and follow the plain meaning
of the statutes, and no recourse may be had to the canons of con-
struction.
2
1 In an instance of ambiguity, a court may infer the
legislative intent. Nevertheless, whether a court reads the plain
language or resolves an ambiguity, the "great and controlling
principle"
30
or "only rule
' ' 3
a of judicial interpretation is the
intention of the legislature. A judge may neither ignore nor
modify the law; a court is not permitted to implement that
which it thinks the law ought to be.
Where the express words of a statute provide that any divergence
from the statutory one share - one vote rule, quorum, plurality
election of directors, or majority approval of shareholders' reso-
lutions, shall be accomplished by way of a certificate-of-incor-
poration provision, any variation from the statutory corporate
structure, other than by inclusion (whether originally or by
amendment) of a provision in the ccrtificate of incorporation,
is void.
2
One hundred twenty-one years ago, the Court of Appeals
had before it a case in which the plaintiff was the transferee of
shares of the defendant's stock. The plaintiff demanded that the
defendant enter the transaction in its record book. The defendant
refused on the ground that the transferor of the shares was indebted
to it, and one of the defendant's by-laws prohibited transfer of its
shares unless the transferor discharged all his indebtedness to the
defendant, or the defendant's board of directors consented to the
transfer.
The Court of Appeals held that the by-law was inconsistent
ANGLO-AMERICAN LA W REVIEW
with the banking law, which provided generally for unrestricted
transferability of bank shares. The right of alienation attached to
the shares under law, so the defendant was without authority to
make a by law to the contrary. The banking law did provide that
shares could be transferable on a bank's record book in the manner
provided by a bank's certificate of incorporation, as to which
statutory provision the court ruled:
The manner of the transfer, including ... any qualifications or restraint ...
is to be such as may be agreed upon, - not by a by-law, or by any act of
the directors, but in the [certificate of incorporation] . It was not neces-
sary to insert [into the statute] negative words to exclude any other
manner of performing the same thing; for, by the most common rules
of construction, where a matter is authorized to be done in a particular
way, every other different method of doing it is excluded.
3 3
Strained decisions and untoward results are the consequences
of judicial disregard of the law as written. In Leeds, the Supreme
Court ruled that the contractual phrase, "shall have an equal
number of votes ... notwithstanding the number of shares owned",
required the majority shareholder (Marcus) to vote a number of
shares as directed by the minority shareholder (Leeds), such that
the number of votes cast by Leeds, plus the number of votes cast
by Marcus at the direction of Leeds, equals the number of shares
cast by Marcus without restraint. That is to say, the difference
between Marcus' holding (104 shares) and Leeds' (78 shares)
is 26 shares; half of 26 is 13. If Leeds casts his 78 votes, and
controls the casting of 13 of Marcus' votes, Leeds casts, in effect,
91 votes. Marcus retains control of, and may cast without hin-
drance, 91 (i.e., 104 - 13) votes. Thereby, each shareholder would
control an equal number of votes, though the number of shares
owned by each shareholder, which is the number of votes each
had, remained unchanged. Unfortunately for the Supreme Court,
nothing in the record sustains its exegesis.
3 4
An equally-heroic judicial attempt to rehabilitate shareholders'
agreements is evident in Sankin. The District Court sought to
validate its re-writing of the Sankin-Garfield shareholders' agree-
ments by reference to the shareholders' agreement in Trefethen
v. Amazeen (93 N.H. 110, 36 A.2d 266 (1944)). In that New
Hampshire case, the share holdings in a certain corporation were
plaintiff, 50 shares; Chadwick, 50 shares; Holden, 270 shares;
and others, 26 shares. In order to increase capital, the plaintiff,
Chadwick, and Holden agreed that the plaintiff and Chadwick
would each purchase 52 additional shares, and that Holden would
refrain from voting 92 of his shares. The resultant holdings were
plaintiff, 102 shares, and Chadwick, 102 shares, for a combined
strength of 204 votes; and Holden, 270 shares (of which 92 could
not be voted), and others, 26 shares, for a combined strength of
204 votes.
Thereafter, the plaintiff bought Chadwick's 102 shares. Holden
transferred his 270 shares to a trustee. This trustee transferred
the shares to a successor trustee, the defendant, who sought to
vote all 268 shares (of the 270 shares) in her possession. The New
Hampshire court declared that "the defendant trustee acquired
the stock in question subject to and with full knowledge of the
agreement ... and has no greater rights with respect thereto than
Stanley
0. Holden".
3 5
Nothing in Trefethen supports the District Court. The plaintiff-
Chadwick-Holden shareholders' agreement arose from Holden's
express promise not to vote 92 of his shares. In Sankin, the
District Court, not the parties, made the purported shareholders'
agreements to refrain from voting. Further, the Sankin-Garfield
shareholders' agreements themselves imposed no contractual
responsibility on Benn. The shareholders' agreements supposedly
required the parties thereto to accept their arbitrary valuation of
their voting rights, or, as the District Court would have it, required
Garfield to abstain from voting. Either way, the purported con-
tractual obligations or obligation was personal, and could not be
imposed on a transferee or successor transferee.
3 6
Another prodigious judicial effort to give legal life to a mori-
bund shareholders' agreement was made in Shubin v. Surchin
(27 A.D.2d 452, 280 N.Y.S.2d 55 (1st Dep't, 1967)), wherein the
plaintiff and Hyman Surchin, one of the defendants, each owned
one-half of the shares of a corporation, the by-laws of which
called for four directors. The 1959 oral pre-incorporation agree-
ment (made prior to the enactment of the BCL) required the
plaintiff and Surchin to vote their shares for the election of both
shareholders as directors, and for the election of one nominee of
each to fill the third and fourth directorships.
In 1965, subsequent to the enactment of the BCL, the plaintiff
and Surchin agreed, in a written shareholders' agreement, that the
board of directors was to consist of two persons, namely the
plaintiff and Surchin, both of whom were necessary for a quorum
and to transact business; that, at shareholders' meetings, the
presence of both shareholders was necessary for a quorum and to
transact business;
3 7
and that no change was to be made in the
certificate of incorporation or in the by-laws without the consent
of both the plaintiff and Surchin. The certificate of incorporation
was not amended to include the provisions of the 1965 share-
holders' agreement.
The majority opinion in the Appellate Division sustained the
amended complaint, the gravamen of which was the defendants'
violations of the terms of the shareholders' agreement. The osten-
sible grounds for the ruling were that the 1965 writing was ambig-
uous; that the parties may have intended amendment of the
certificate of incorporation; and that the 1959 pre-incorporation
agreement could be enforceable, even if the 1965 shareholders'
agreement were not. The dissent made clear that the super-majority
provisions of the 1965 shareholders' agreements were invalid
because they did not appear in the certificate of incorporation;
that reduction of the shareholders' agreement to writing precluded
a finding of an intention to amend the certificate of incorporation;
and that the oral 1959 pre-incorporation agreement merged with
the 1965 writing, leaving no prior agreement to be enforced.
According to the minority, the amended complaint was insufficient
as a matter of law.
The Appellate Division majority was result-oriented. It dis-
covered non-existent issues, because "dismissal of the pleading
would doubtless relegate plaintiff to the sole relief of petitioning
for a dissolution of the corporation" (id., 27 A.D.2d at 456,
280 N.Y.S.2d at 59). The court's sympathy was misplaced;
3
8
the shareholders' agreement ought to have been declared illegal.
Inappropriate considerations were also important to the District
Court and to the Supreme Court. In Sankin, the District Court
stressed the parties' relationships, including the kithship of Sankin
and Garfield and their prior business dealings. The District Court
expressed its disapproval of the Janet Garfield-James Benn adul-
teries, and of the lovers' plans to divorce their respective spouses
and to marry one another. In Leeds, the Supreme Court ob-
served that Marcus acquiesced to the shareholders' agreement as
the price for the investment by the plaintiff and by the investing
partnership of several hundred thousand dollars of desperately-
needed capital. It was only after the infusion of funds proved
successful, and the corporation prospered, that the defendant,
regretting of his bargain with the plaintiff, acted upon newly-
discovered doubts of the legality of subs.(2). The Supreme Court's
dim view of Marcus' sense of gratitude apparently led it to decide
in favor of the plaintiff.
Manichaeism makes bad law. Neither the District Court nor the
Supreme Court was permitted to divine any defendant's character
or morality.
3 9
The issues were legal ones, and each court ought to
have found the shareholders' agreements or agreement before it
illegal.
A finding of illegality means that a shareholders' agreement is
unenforceable for that reason.
4 0
If the unlawful portion of an
otherwise-valid shareholders' agreement can be excised, then the
remainder-may be enforced.
4
A distinction is to be made between a shareholders' agreement
which is unenforceable because it is illegal and a would-be share-
holders' agreement which is unenforceable because it is not, as
a matter of law, a contract. A pooling agreement, for example, in
which the purpose or aim is not specified, and which does not set
forth a binding procedure for its determination, is an inchoate
agreement, in that only a further expression by the parties can
give rise to a contract between or among them. Absent an indi-
cation of the parties' intention, a court is without authority to
remedy the contract-law omission.
42
Similarly, a putative pooling
agreement which seeks unanimity as such, or mere conformity, is
unenforcible because it is an agreement to agree:
Before passing to a consideration of the fourth disputed by-law, we com-
ment here on a view expressed in the dissenting opinion herein. The dis-
senting judges conclude that, while the two by-laws first herein discussed
are invalid as such because violative of statutes, the courts should, never-
theless, enforce as against either stockholder the agreement made by both
of them and which finds expression in those by-laws. The substance of
that stockholders' agreement was, as the dissenting opinion says, that
neither stockholder would vote his stock in opposition to the stock of
the other. Each stockholder thus agreed that he would conform his opinion
to that of his associate on every occasion, or, absent such accord, that
neither would vote at all on any occasion. We are at a loss to understand
how any court could entertain a suit, or frame a judgment, to enforce
such a compact (see St. Regis Paper Co. v. Hubbs & Hastings P. Co.,
235 N.Y. 30, 36; Sun P. & P. Assn. v. Remington P. & P. Co., 235. N.Y.
338, 345, re "agreements to agree"). (Benintendi v. Kenton Hotel, Inc.,
supra, n.27a, 294 N.Y. at 120, 60 N.E.2d at 832).
There is no excuse for judicial failure to apply the law to the
facts before it, but, in Leeds, the Supreme Court stated that
where rights of third parties are not involved, and no public
olicy is violated, a court will give effect even to an illegal share-
olders' agreement, citing from In re American Fibre Chair Seat
Corp.
42
a the following:
The objection to the validity of the by-law is purely technical ... Where
no rights of third parties are involved and no public policy of the state
violated, the Courts will give effect to the agreement of stockholders and
the corporate resolution (id., 265 N.Y. at 421-22, 194 N.E. at 255).
The Supreme Court's invocation of public policy shows that
"judges are more to be trusted as interpreters of the law than as
expounders of what is called public policy" (In re Mirams [1891]
1 Q.B. 594, 595), for the Supreme Court masked thereby its end
run around the statutory one share - one vote rule. The facts
of American Fibre do not support its citation for that purpose.
There the shareholders unanimously adopted two by-laws, one of
which approved of cumulative voting. The other required a unani-
mous directors' vote, or an 85 per cent vote of the shareholders,
to amend the by-laws or to remove an officer. In order to give
effect to the two shareholders' by-laws, a shareholders' resolution
(also passed unanimously) directed the president and the secretary
of the corporation to file an amendment to the certificate of
incorporation. The corporate officers failed to file the amendment.
The question before the Court of Appeals was whether "the
failure of the officers to obey the command of the corporate
stockholders precludes [the respondent] from exercising a right
of cumulative voting". (Id., n. 42A, 265 N.Y. at 421-22, 193
N.E. at 255). It was in response to this question that the Court
of Appeals held that the failure to amend the certificate of incor-
poration was a technicality, in that the remaining step (the actual
filing) was a ministerial one, which the corporate officers could
have been compelled to perform. American Fibre is not authority
for cavalier disregard of statutes. The case cannot be read as a
denigration of every statutory requirement as a "technicality",
or as carte blanche to disregard for reason of public policy the
clear command
of the law.
4 3
Reference by the Supreme Court in Leeds to the rights of
hypothetical third parties was likewise an improper avoidance
of a statutory requirement. The plain language of the BCL may
not be limited through statutory construction to cover only some
supposed legislative objective. To interpret a law thusly is to
turn
the rule in Heydon's Case (1584) 3 Co. Rep. 7a on its head. The Barons
of the Exchequer there resolved that, in construing an Act of Parliament,
you identify the "mischief" which the statute seeks to remedy (i.e., in
modern parlance, the statutory objective), and so construe the statute
that it advances the remedy and suppresses the mischief (i.e., in modem
parlance, in construing the statute you bear its objective in mind). It is,
in other words, a positive and not a negative canon of construction; it
enjoins aliberal,andnot arestrictive, approach. For a court of construction
to constrain statutory language which has a primary natural meaning
appropriate in its context so as to give it an artificial meaning which is
appropriate only to remedy the mischief which is conceived to have
occasioned the statutory provision is to proceed unsupported by principle,
inconsonant with authority and oblivious of the actual practice of par-
liamentary draftsmen (Maunsell v. Olins [1975] A.C. 373, 393).
Judicial consideration of policy and adherence to statutory law
are not incompatible. In Nickolopolous v. Sarantis, "' the plain-
tiff, the defendant, and two other men each owned twenty-
five per centum of the shares of a corporation. The four share-
holders entered into a written shareholders' agreement, one
provision of which was that Nickolopolous was to exercise 50
per cent of the shareholders' votes. The New Jersey Court of
Errors and Appeals found the shareholders' agreement void,
holding that "stockholders are powerless, except by the method
provided [in the statute], to alter the voting power of any share of
stock" (102 NJ. Eg. at 587, 141 Atl. at 793). The Court of Errors
and Appeals gave a policy reason (prevention of fraud, arising from
secret shareholders' agreements, on the corporation and on those
dealing with it) for the statutory certificate-of-incorporation
requirement, but the policy reason was in addition to and in
support of the statutory command. The Supreme Court, in con-
trast, gave its policy reason (no third-party involvement) in order
to vitiate the applicable law. The differing results on similar facts
are attributable to the failure of the Supreme Court to follow
the
statute.
4 4
A pooling-agreement provision may not be construed other-
wise, because pooling agreements "are valid and binding, if they
do not contravene any express charter or statutory provision".
4
The legislative prescription forecloses "unrestricted and uncritical
approval of all agreements between stockholders relating to voting
of their stock".
4
'A pooling agreement must be consistent with all
provisions of applicable law in order to be valid. In Yu v. Linton
(68 A.D.2d 856, 414 N.Y.S.2d 558 (1st Dep't, 1979)), the appel-
lants were disqualified from voting at a shareholders' meeting by
the chairman, on the ground that the appellants failed to pay
maintenance charges due to the corporation. A by-law of the cor-
poration allegedly provided that a default by a shareholder in a
payment due to the corporation effected the suspension of that
shareholder's right to vote. Special Term had adjudged, in part,
that the election from which the appellants were excluded from
voting was valid; the Appellate Division reversed:
Respondents do not contend that the certificate of incorporation contains
any provision relating to voting rights. Respondents do claim that under
subdivision (a) of section 620 of the Business Corporation Law, share-
holders are permitted to enter into agreements restricting or transferring
the right to vote and that the by-laws and subscription agreements in this
case operate as such agreement to disenfranchise a defaulting stockholder.
This contention is without merit. The by-laws are ineffective to deprive the
record shareholders of the right to vote provided by subdivision (a) of
section 612 of the Business Corporation Law. Nor can the subscription
agreements ... deprive said shareholders of such right. Subdivision (a) of
s.620 of the Business Corporation Law cannot be construed to provide
a means to deny the right to vote specified in subdivision (a) of s. 612 of
the Business Corporation Law. (Id., 58 A.D.2d at 856-57, 414 N.Y.S.2d
at 559 (citations omitted)).
No statutory right may be changed by a pooling agreement,
because "[p] arties cannot by agreement repeal acts of the legis-
lature. It might just as well be said that the usury laws could be
repealed by parties entering into an agreement that seven[!] per
cent should be paid upon a loan and that the debtor would not
plead usury."
4 7
The one may not be done, and neither may the
other.
C Restriction-of-Directors. Agreements
Under early law, restriction-of-directors agreements were not
favoured. Encroachment on a board of directors' responsibility
was thought of as its "sterilization" (its "usurpation", in English
and Commonwealth terminology), because the statutory duty of
management imposes on the members of the board a fiduciary
responsibility to the corporation and to its shareholders.
4
a This
concept was the subject of six major cases decided by the Court
of Appeals prior to the enactment of the BCL. In five of those
cases, the court was steadfast in its adherence to the principle
of directorial management. In one of them, a "slight" impinge-
ment on the directors' statutory authority was inexplicably per-
mitted.
In the first case, Manson v Curtis,
4 s
a the Court of Appeals
found the shareholders' agreement invalid as a whole, because its
sine qua non was the devolution of the board of directors' duty
of management to a shareholder.
4 9
The court wrote of the
statutory grant of authority:
In corporate bodies, the powers of the board of directors are, in a very
important sense, original and undelegated. The stockholders do not
confer nor can they revoke those powers. They are derivative only in the
sense of being received from the state in the act of incorporation.*** All
powers directly conferred by statute, or impliedly granted, of necessity,
must be exercised by the directors who are constituted by the law as the
agency for the doing of corporate acts. In the management of the affairs
of the corporation, they are dependent solely upon their own knowledge
of its business and their own judgment as to what its interests require
(Supra, n. 48A, 223 N.Y. at 322-23, 119 N.E. at 562 (citations omitted)).
The second case is Fells v. Katz (256 N.Y. 67, 175 N.E. 516
(1931)), in which the plaintiff was president, a director, and an
employee of a corporation, pursuant to a shareholders' agreement
which provided for directorships and employment for all its
signatories. A number of years thereafter, the plaintiff organized
his own corporation, which, though not a competing firm, took
his time from his duties as president of the first corporation.
The defendant directors caused the plaintiff to be ousted
from his position as president, and deposed him from his director-
ship, and terminated his employment. The plaintiff failed of his
suit to compel his reinstatement. The Court of Appeals rejected
the contention that the shareholders' agreement could bind the
directors:
An agreement among stockholders whereby the directors are bereft of
their power to discharge an unfaithful employee of the corporation is
illegal as against public policy. The agreement of the stockholders to con-
tinue a man in the directorate must be construed as an obligation to retain
him only so long as he keeps the agreement on his part faithfully to act
as a trustee for the stockholders. An agreement to continue a man as
president is dependent upon his continued loyalty to the interests of the
corporation. (Id., 256 N.Y. at 72-73, 175 N.E. at 517 (emphasis added)
(citations omitted).)
McQuade v. Stoneham (263 N.Y. 189 N.E. 234 (1934)), the
third case, was one in which a shareholders' agreement provided
that the parties were to use their best endeavours for the purpose
ot continuing three persons, one of whom was the plaintiff, as
directors; and for the purpose of continuing the tenure of three
officers, including that of the plaintiff as treasurer. Also, salaries,
capitalization, the number of shares, the by-laws, and general
policy were not to be changed without the unanimous consent of
the parties to the shareholders' agreement. Subsequently, the
defendents removed McQuade both as treasurer and as a director.
The Court of Appeals "assumed" that the defendants put the
plaintiff out when they might have retained him, merely in order
to get rid of him. The defendants argued the illegality of the share-
holders' agreement, based on their statutory responsibilities as
directors. Though the defendants, who were also shareholders, used
the illegality of the shareholders' agreement for their benefit,
the court held that the shareholders' agreement, which purported
to limit the directors, was void, in that a director may not, by
contract, limit ("fetter", in English and Commonwealth ter-
minology) his discretion."S
Apparently, the Court of Appeals felt some discomfort with
its adherence to statute, so it created a de minimus test of en-
croachment on a board of directors' authority. In Clark v. Dodge
(269 N.Y. 410, 199 N.E. 641 (1936)), the fourth case, Clark and
Dodge owned all the shares of a corporation; Clark was the min-
ority shareholder. The shareholders' agreement provided for
Dodge to vote for Clark as director and as a general manager,
and that Clark could remain as general manager as long as he
remained "faithful, efficient and competent to so manage and
control the said business" (id., 269 N.Y. at 413, 199 N.E. at
642). In return, Clark contracted to disclose a certain formula
known only to him. Clark performed his obligation under the
shareholders' agreement; Dodge breached the shareholders' agree-
ment by not casting his votes to continue Clark as a director and
as general manager.
The Court of Appeals made distinctions without differences
between this shareholders' agreement and the others.'
5
The de
minimus test was that a unanimous shareholders' agreement
would be enforceable, though unlawful, if the "invasion of the
powers of the directorate ... is so slight as to be negligible" (id.,
269 N.Y. at 417, 129 N.E. at 643). This holding was based on an
improper shift of the legal standard from the statutory command
to damage suffered or threatened to be suffered by shareholders
or the public (id., 269 N.Y. at 415, 199 N.E. at 642).
The rationale was merely a judicial stratagem to avoid the
legislative standards. The first question (at least in a court of law)
is, "What does the applicable statute provide?". The law's un-
mistakable expression of the norms of corporate government
excludes absolutely the formulation or implementation by a
court of any other concept of how corporations should be gover-
ned. Nor does it matter that the majority, or even the entirety, of
the shareholders desire that their corporation change its spots:
[E] ven a resolution of a numerical majority at a general meeting of the
company cannot impose its will upon the directors when the articles
have confided to them the control of the company's affairs. The directors
are not servants to obey directions given by the shareholders as individuals;
they are not agents appointed by and bound to serve the shareholders as
their principals. They are persons who may by regulations be entrusted
with the control of the business, and if so entrusted they can be dispos-
sessed from that control only by the statutory majority which can alter
the articles. Directors are not, I think, bound to comply with the directions
even of all the corporators acting as individuals. Of course the corporators
have it in their power by proper resolutions, which would generally be
special resolutions, to remove directors who do not act as they desire,
but this in no way answers the question here to be considered, which is
whether the corporators are engaged in carrying on the business of the
corporation. In my opinion they are not. To say that they are involves a
complete confusion of ideas. (Gramophone & Typewriter, Ltd., v. Stanley)
[1908] 2 K.B. 89, 105-6 (C.A.)
The myth of the untrammelled power of shareholders was put
to rest in Benintendi v. Kenton Hotel, Inc. (294 N.Y. 112, 60
N.E.2d 829 (1945), the fifth case, in which two shareholders
owned unequally all the shares of a corporation. The two share-
holders agreed to vote for, and, at a shareholders' meeting adopted,
four by-laws. The first by-law purported to require a unanimous
shareholders' vote to approve a shareholders' resolution. The
second by-law purported to require a unanimous shareholders'
votc to elect a director. The third by-law purported to require
that directors' resolutions be adopted unaminously. The fourth
by-law mandated a unanimous shareholders' vote to amend
the corporation's by-laws. No creditor was affected by any of the
by-laws.
The Court of Appeals struck down the first three by-laws. The
first and second by-laws were held contrary to the statutory
scheme of corporate government. The third by-law was held
contrary to the principle of majority control within the board.
The fourth by-law was approved by the court.
5
2
The Court of Appeals found the unanimity wherewith the
by-laws were adopted to be of no significance. The court denom-
inated distinctions among the means to evade the statute (such as
between a by-law and a shareholders' resolution) "unimportant",
and held the three by-laws to be "intrinsically invalid" because
they contravened the law.
5 3
The Court of Appeals ruled:
Those who own all of the stock of a corporation may, so long as they
conduct the corporate affairs in accordance with the statutory rules,
deal as they will with the corporation's property (always assuming nothing
is done prejudical to creditors' rights). They may, individually, bind
themselves in advance to vote in a certain way or for certain persons.
But this state has decreed that every stock corporation chartered by
it must have a representative government, with voting conducted con-
formably to the statutes, and the power of decision lodged in certain
fractions, always more than half, of the stock. That whole concept is
destroyed when the stockholders, by agreement [or] by-law ... as to
unanimous action, give the minority interest an absolute, permanent,
all inclusive
power
of veto.S
3a
LastlV, in Long Park, Inc. v. Trenton-New Brunswick Theatres
Co. (297 N.Y. 174, 77 N.E.2d 633 (1948)), the sixth case, the
shareholders agreed that the manager was "given full authority
and power to supervise and direct the operation and management
of all such theatres"; that the manager was to have specified other
authority related to theatre management; and that the manager
was to carry out "such policies or projects as the board of directors
of the tenant or its subsidiaries may approve". Management of
the theatres was vested in one of the shareholders, and the
directors could not change the manager (id., 297 N.Y at 177-8,
77 N.E.2d at 634).
The impropriety of the shareholders' agreement was clear, so
the court did not find it significant that all the shareholders had
entered into it; nor did the court look to see whether any third
party was injured thereby. The court held that the shareholders'
agreement sterilized the board of directors, and was in violation of
the statutory requirement of corporate management by directors
(id., 297 N.Y. at 179, 77 N.E.2d at 635).
With the rise of close corporations, statute law recognized that
shareholders are the actual manipulators of the smallest corporate
marionettes. This recognition is conditioned on substantive
requirements (e.g., close-corporation status; unlisted shares, a
certificate-o f-incorporation provision) which vary from jurisdiction
to jurisdiction.
5 4
Among the statutes designed to meet the needs
of close corporations is BCL s. 620(b) - (g),S I which permits
the shareholders of certain corporations, under certain conditions,
to enter into restriction-of-directors agreements. The unambiguous
detail of the statute imposes on the judiciary the obligation to
"enforce it according to the letter, the responsibility for the
result being upon the Legislature, not upon the courts".,
6
It was in the seventeenth year subsequent to the effective date
of the BCL that the Court of Appeals decided the next case on a
restriction-of-directors agreement. In Zion v. Kurtz (50 N.Y.2d
92, 405 N.E.2d 681, 428 N.Y.2d 199 (1980)), the defendants
sought to acquire Lombard-Wall Corporation ("L-W" herein) a
Delaware corporation, which was owned by Equimark Corporation.
In order to make the acquisition, the defendant organized another
Delaware corporation, the amended name of which was Lombard-
Wall Group, Inc. ("Group" herein). The defendant intended that
Group would be the holding company, and would acquire and
own all the outstanding shares of L-W. In turn, L-W would be
the operating company.
The acquisition was financed by a loan of $4,000,000 from
L-W to Group on the strength of a no-interest note, and Group
used the money to pay Equimark for L-W. Since Group had no
asset other than L-W, and no income other than that which L-W
generated, the note of Group was an empty promise. Additionally,
the exchange of L-W's assets for the note reduced L-W's net worth
to zero. For these reasons, the defendant sought the assistance of
the plaintiff in order to guarantee the note. The plaintiff did so
by pledging land owned by his Half Moon Land Corporation. This
guarantee gave transactional value to the note, and maintained the
net worth of L-W. In consideration for the encumbrance of
Half Moon's real property, the defendant gave 19.9 per cent
of his shares in Group to the plaintiff.' 7
The transactions involved various inter-corporate agreements.
In addition, when the plaintiff (the minority shareholder) and the
defendant (the majority shareholder) were still the sole share-
holders of Group, they entered into a shareholders' agreement,
to which Group was also a party.
5
8 The restriction-of-directors
agreement was Section 3.01 thereof, which provided in relevant
part:
Article 111. Operation of [Group] and L-W During Loan Period and
Related Matters. During the Loan Period ... unless otherwise consented to
by the holders of a majority of the original Class A stock then outstanding
3.01 [Group]. Anything in its Certificate of Incorporation or By-laws
to the contrary notwithstanding, [Group] shall not:
(a) Engage in any business or activities of any kind, directly or indirec-
tly, whether through any Subsidiary, or by way of a loan, guarantee or
otherwise,
... 9
Approximately eight months after the shareholders' agreement
was made, Group's accountants advised the defendant that the note
from Group to L-W could not be properly valued at $4,000,000
ANGLO-AMERICAN LA W RE VIEW
unless the note bore interest. The defendant asked the plaintiff
to give his consent to an interest agreement, which would have
cured the deficiencies which the accountants stated existed. The
plaintiff refused.
6
0
The defendant caused Group to execute the interest agreement,
and a related escrow agreement, over the protest of the plaintiff.
The action for declaratory judgment which followed sought, inter
alia, a declaration that the transaction whereunder the note was
made to bear interest was a business or activity' proscribed by
Section 3.01. The shareholders' agreement provided that it was
to be governed by Delaware law, and both Group and L-W were
Delaware corporations, so the Court of Appeals abided by the
shareholders' choice of law. The court held, in supposed accord
with Delaware law, that the Zion-Kurtz restriction-of-directors
agreement was valid, and was enforceable by the original parties
to it, though Group was not a close corporation, and though
Group's certificate of incorporation was not amended.
6
1
The error of the Court of Appeals was its substitution of a
generality of public policy for statute law. One can say, as did
the court, that Delaware public policy "does not proscribe a
rovision such as that contained in the shareholders' agreement
ere at issue, even though it takes all management functions away
from the directors".
6
2 However, Delaware law qualifies the general
statement. Delaware statute law provides expressly, "The business
and affairs of every corporation ... shall be managed by or under
the direction of a board of directors ... " (Del. Gen. Corp. L.
s. 141(a)), and Delaware case law limits the power of the board
to delegate matters central to its statutory authority.
6
3 Further,
though Delaware statute law does permit variation from the norms
of corporate government, the variances are expressly conditioned
by statute on the qualification of the corporation as a close
corporation ;6 4 and the prerequisite to lawful restriction or transfer
of a board's authority by a close corporation, both under statute
law and under case law, is a certificate-of-incorporation pro-
vision.6 s Thus, the statement about Delaware public policy does
not support the conclusion of the Court of Appeals that the Zion-
Kurtz restriction-of-directors agreement is valid under Delaware law.
The defendant's obligation, under Section 8.05(b) of the
shareholders' agreement, to execute and deliver "further . . .
instruments as may reasonably be required . .. [to] give effect to
the provisions and the intent and purposes of this Agreement",
6
6
was the weak peg which the court burdened with an unsupportable
conclusion:
Since there are no intervening rights of third persons, the agreement
requires nothing that is not permitted by [Delaware] statute, and all
of the stockholders of the corporation [having] assented to [the share-
holders' agreement], the certificate of incorporation may be ordered
reformed, by requiring [the defendant] to file the appropriate amend-
ents, or more directly he may be held estopped to rely upon the absence
of those amendments
from the corporate charter.
6 7
The sweep of this sentence boggles one's brains. The concern
for the unasserted rights of hypothetical third parties was a straw
man.
6 8
That the shareholders' agreement, arguendo, "requires
nothing that is not permitted by statute" does not yield the
conclusion that the parties agreed to everything which the law
permits, nor was the Court authorized to read into the share-
holders' agreement any contractual obligation whatever. A court
of law is not a deus ex machina, and may neither ignore nor
manufacture the contents of documents in order to achieve that
which, in the judicial view, is the just result.
6
The unanimous agreement of the shareholders does not deter-
mine the law, and nothing in the shareholders' agreement can be
construed as an obligation that either party thereto vote in a
certain way.
7 0
Yet, the court would force the defendant, as
majority shareholder, to vote for an amendment to the certificate
of incorporation which would make Group a close corporation
under Delaware law.
7
1 Nor could the defendant be "estopped";
there was no basis for the court to order the defendant not to rely
on his statutorily-approved position.
New York public policy does not validate the Court of Appeals'
faulted understanding of Delaware law. The court asserted that
''no New York public policy stands in the way of our application
of the Delaware statute and decisional law above referred to"
7 2
citing from a legislative study the following:
Paragraph (b) [of BCL s. 620] expands the ruling in Clark v. Dodge,
and, to the extent therein provided, overrules Long Park, Inc. v. Trenton-
New Brunswick Theatres Co., Manson v. Curtis, and McQuade v. Stoneham.
(1d.)
The quotation was misleadingly selective. The full text from
which the above sentence was taken shows that, in New York,
the necessary element of the statutory permission to transfer
a board of directors' authority is a certificate-of-incorporation
provision:
The provision authorized by paragraph (b) [of BCL s.620] can be con-
tained only in the certificate of incorporation. Because of the limitations
that it must have unanimous consent of all shareholders, whether or not
entitled to vote, and that the shares of the corporation must not be
publicly listed or quoted either at the time of the agreement or there-
after, this provision can be practicably used only in close corporations.
Paragraph (b) expands the ruling in Clark v. Dodge, and, to the extent
therein provided, overrules Long Park, Inc. v. Trenton-New Brunswick
Theatres Co., Manson v. Curtis, and McQuade v. Stoneham. Notice of
the existence of a provision authorized by this section must be stated on
the certificates for shares. Paragraph (e) provides a simple method of
striking out a provision authorized by paragraph (b) if it has ceased to be
valid under this section.
The powers given to the shareholders by this section vary the usual
statutory norm of board management as expressed in s. 701; accordingly
that section explicitly makes exception for arrangements valid under this
section.
7 3
Thus, it is evident that New York, like Delaware, conditions
its public-policy acceptance of deviations from the norms of
corporate government on adherence to the statutory conditions
precedent to such changes. The public-policy rationale advanced
by the Court of Appeals simply has no basis.
74
The decision also destabilized, rather that resolved, the precar-
ious imbalance among BCL s. 620 (b) - (g), Clark v. Dodge, and
the five other cases on restriction-of-directors agreements. Zion
v. Kurtz resuscitated the discredited misapplication of public
policy and of harm to third parties, in face of the statutory
conditions precedent. Further, the procedural requirements of
BCL s. 620 (b) - (g) are a significant modification of Clark v.
Dodge, but the court ignored the effect of the statute on its
case law. Even if Clark v. Dodge were good law, the case is limited,
both by itself and by the five other cases, to minimal intrusions,
by way of shareholders' agreements, on directors' authority.
Regardless of the number of shareholders, and no matter whether
the majority or all of them undertook to insulate themselves
from the law's purview, all six cases make clear that a contract
between or among shareholders cannot effect a transfer of the
directors' authority to a third person. It was error for the Court
of Appeals to hold that Section 3.01 permits the lodging of an
"absolute, permanent, all-inclusive power of veto"
7' T
in the
minority shareholder (Zion).
Adherence to law is beneficial beyond avoidance of error, or
the maintenance of the proper roles of the legislature and of the
judiciary. The command of the law must guide judicial decisions
because there is a need in corporate law for certainty. Investment
becomes gambling, and risk becomes unacceptable, when relation-
ships between or among shareholders are uncertain. Permissible
and prohibited corporate actions must be determinable prior to
their being undertaken. "I am a firm believer in a system by which
citizens and their advisers can have as much certainty as possible
in the ordering of their affairs. Litigation is an activity that does
not markedly contribute to the happiness of mankind, though it
is sometimes
unavoidable."
7 6
Giving force and, thereby, credence to corporation law fulfils
also the state's role as incorporator of incorporations, the most
important corollary of which is the duty of a corporation to
adhere to the law of its domicile. Judicial tinkering with statutory
provisions undermines the law, and weakens public control of
corporate activity. If a particular statutory requirement can be
circumvented by a shareholders' agreement, then any statutory
limitation on a corporation may in like manner be negatived. A
relativist view of an absolute requirement is ineffectual, because
that view's focus is not on the authority of the law but on third
parties, public policy, and the classification of transgressions as
technicalities. Judicial legislation would permit a corporation
with no creditor, or a corporation with quiescent creditors, to be
run as the shareholders please, whether as an entity other than a
corporation or as the alter ego of the shareholders. Were this so,
any corporation, large or small, public or close, could be run in
accordance with the applicable shareholders' agreement - a
private corporation law - allowing with good grace or ill statutory
control not inconsistent with the shareholders' agreement.
There will be cases in which adherence to the law will result in
a judgement materially adverse to the interest of a litigant. Never-
theless, courts must exercise constant and effortful vigilance to
enforce the law as written. "Courts cannot correct what they
may deem either excesses or omissions in legislation, nor relieve
against the occasionally [-] harsh operation of statutory provisions,
without the danger of doing vastly more mischief than good."
' 7 7
The great mischief in corporate law is the loosening of state control
over corporations.
END NOTES
1. A corporation is an artificial person, created and in existence by virtue of law, and
distinct from the natural persons who own or direct it. A close corporation is
characterized by a limited number of shareholders and a virtual identity of
shareholders, officers, and directors.
2. Printing and Numerical Registering Co. v. Sampson, [18751 L.R. 19 Eq. 462,
465.
3. Doherty v. McAuliffe, 7 F. Supp. 49, 53 (D. Mass. 1934), vacated on other
grounds, 74 F.2d 800 (1st Cir.), cert. denied, 294 U.S. 730 (1935).
4. Blount v. Taft, 29 N.C. App. 626, 630, 225 S.E.2d 583, 586 (1976), aff'd,
295 N.C. 472, 246 S.E.2d 763 (1978).
5. See Venner v. Chicago City Ry. Co., 258 Ill. 523, 539, 101 N.E. 949, 953
(1913); White v. Snell, 35 Utah 434, 439, 100 Pac. 927, 929 (1909);Chapman v.
Bates, 61 NJ. Eq. 658, 667, 47 Atl. 638, 641 (Ct. Err. & App. 1900); Smith
v. San Francisco & N.P.R. Co., 115 Cal. 584, 602, 47 Pac. 582, 586 (1897);
Puddephatt v. Leith, [1916] 1 Ch. 200; Greenwell v. Porter, [19021 1 Ch. 530.
6. Manson v. Curtis, 223 N.Y. 313, 319-20, 119 N.E. 559, 561 (1918) (emphasis
added). See Blount v. Taft, supra, n.4, 29 N.C. App. at 630, 225 S.E.2d at 586;
Henderson v. Joplin, 191 Neb. 827, 832, 217 N.W.2d 920, 923-24 (1974);
Irwin v. Prestressed Structures, Inc., 420 S.W.2d 491, 494 (Tex. Ct. Civ. App.
1967); Weil v. Beresth, 154 Conn. 12, 16, 220 A.2d 456, 459 (1966); Galler v.
Galler, 32 I11.2d 16, 30, 203 N.E.2d 577, 585 (1964); Royster v. Baker, 365
S.W.2d 496, 500 (Mo. Sup. Ct. 1963); Tschirgi v. Merchants Nat Bank of Cedar
ANGLO-AMERICAN LAW REVIEW 95
Rapids, 253 Iowa 682, 692-93, 113 N.W.2d 226, 232 (1962); Sensabaugh v.
Poison Plywood Co., 135 Mont. 562, 566-67, 342 P.2d 1064, 1067 (1959);
Wolf v. Arant, 88 Gal. App. 568, 573-74, 77 S.E.2d 116, 120-21 (1953);
Ringling Bros-Barnum & Bailey Combined Shows, Inc. v. Ringling, 29 Del.
Ch. 610, 621-22, 53 A.2d 441,447 (Sup. Ct. 1947);Baran v. Baran, 39 Luzerne
Leg. Reg. Rep. 283, 285, 59 D. & C. 556, 558 (Pa. C.P., Luzerne Cty., 1947);
Ringuet v. Bergeron, (1960) 24 D.L.R.2d 449, 458-59 (Canada Sup. Ct.).
7. New York Joint Legislative Committee to Study Revision of the Corporation
Laws, 7th Interim Report, [19631 Leg. Doc. No. 29, p. 130. The BCL came into
effect on September 1, 1963. BCL s.620(a) has no counterpart in any prior
business-corporation law of New York.
8. N.C. Session Laws, 1955, c.1371, s.1 (at s.55-73[a] ) (emphasis added). Section
55-73(a) was amended by N.C. Session Laws, 1973, c.469, s.29, to parallel BCL
s.620(a) in relevant part.
9. Cal. Corp. Code s.706(a); Del. Gen. Corp. L. s.218(c); Fla. Gen. Corp. Act s.607.
107(1): Ga. Gen. Bus. Code s.22-611(a); Maine Bus. Cor. Act s.617(1); Mich.
Gen.Corp. Act s.450.1461; NJ.Bus. Corp. Act s.14A: 5-21(1); N.C. Bus. Corp.
Act s.55-
7
3(a); and S.C. Bus. Corp. Code s.33-11-150, in which the language of
BCL s.620(a) was adopted verbatim, or nearly so. See Canada Business Corpor-
ations Act ("CBCA" herein) s.140(1); Man. Corporations Act s.140(1); Sask.
Business Corporations Act, 1977 s.140(1). CBCA s.140(1) was based on BCL
s.620(a). Letter from John L. Howard (Assistant Deputy Minister,
Corporate Affairs, Canada; joint author [with Professor Leon Getz and the late
Robert W.V. Dickerson], Proposals for a New Business Corporation Law for
Canada, which is largely reflected in the CBCA) to Stephen KrUger (November 7,
1978). The Manitoba Corporations Act and the Saskatchwan Business Corpor-
ations Act, 1977 were based on the CBCA; other provinces propose to amend
their statutes to parallel it. Id.
10. See Wilson v. McLenny, 262 N.C. 121, 128, 136 S.E.2d 569, 575 (1964); Smith
v. Biggs Boiler Works Co., 32 Del. Ch. 147, 155, 82 A.2d 372, 376 (1951); W.
Wang, "Pooling Agreements Under The New California General Corporation
aw". 23 UCLA L. Rev. 1171, 1171 (1976); Note, "The Validity of Stock-
holders' Voting Agreements in Illinois". 3 Univ. Chi. L. Rev. 640, 641 (1936).
A pooling agreement is distinguished from a voting trust agreement, in that the
parties to the former retain full ownership of their shares; and it differs from a
proxy agreement, in that no shareholder who is a party to it is the agent of any
other shareholder. Manson v. Curtis, supra, n.6, 223 N.Y. at 319, 119 N.E. at 561.
11. Calumet Industries, Inc. v. MacLure, 464 F. Supp. 19, 27 (N.D. Ill. 1978).
The court illustrated the point with a comparison:
However, the fundamental difference between the consent procedure [under
Del. Corp. L. s.2281 and the voting agreement described in [Del. Corp. L.1
s.218 [(c), the pooling-agreements provision] is that the voting agreement
is a contract whereby the shareholders exchange promises, each in consideration
of the other. The consents are given gratuitously, and thus are not part of
an enforceable voting agreement.
Id. (citation omitted).
12. Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Ringling, supra, n.6,
29 Del. Ch. at'623, 53 A.2d at 447. Mutual promises are legal consideration.
Valuable consideration may be neither offered nor accepted because the exercise
of purchased voting rights is prohibited. Chew v. Inverness Management Corp.,
352 A.2d 426, 430 (Del. Ch. 1976); Macht v. Merchants Mort. & Credit Co.,
22 Del. Ch. 74, 80, 194 At. 19, 22 (1937).
13. Storer v. Ripley, 1 M.2d 235, 242, 125 N.Y.S.2d 831, 837 (Sup. Ct.), aff'd, 282
App. Div. 950, 125 N.Y.S.2d 939 (2nd Dep't, 1953), leave to appeal denied,
282 App' Div. 1061, 121 N.Y.S.2d 888, 306 N.Y. 985 (1954).
14. See Matter of Exeter Mfg. Co. v. Marrus, 254 App. Div. 496, 497, 5 N.Y.S.2d
438, 439-40 (1st Dep't, 1938); Leroux v. Brown, [1852] 12 C.B. 801, 138
Eng. Rep. 1119 (C.P.).
Both CBCA s.140(l) and Sask. Business Corporation Act, 1977 s.140(l) provide:
A written agreement between two or more shareholders may provide that in
exercising voting rights the shares held by them shall be voted as therein
provided.
The differences between these subsections and Man. Corporations Act s.140(l)
are that the Manitoba law utilizes "pooling agreement" in place of "agreement",
and, significantly, that the adjective "written" does not qualify "pooling agree-
ment." Thus, an oral pooling agreement is enforceable in Manitoba, but is not
enforceable in Saskatchewan or under the CBCA. See Martin v. Haubner, (1896)
26 Sup. Ct. Rep. 142,147 (Canada).
15. "[11n order to constitute a 'pool' there must be an 'aggregation of interest or
property' or a throwing of revenue or property into one common fund or a
sharing of interest in that fund by all on an equal or previously [-] agreed basis."
Canadian Fur Auction Sales Co. (Quebec) Ltd. v. Neely, (1954) 11 W.W.R. (N.S.)
254, 265 (Man. Ct. App.). As a matter of law, the property of a pooling agree-
ment is the votes attached to the shares owned by the participating shareholders;
the aggregation of votes (4e., the pool) constitutes its common fund; and the
previously-agreed basis is its objective, or its procedure for determination of the
objective.
16. What is meant by the omitted phrase, "or as they may agree"? The phrase, which
was never adjudicated in any jurisdiction, hints darkly at agreements to agree.
Das geht nicht! Whatever the revisers intended thereby, an agreement to agree is
not a contract, and is not enforceable. City of Los Angeles v. Superior Court, 51
Cal.2d 423, 433, 333 P.2d 745, 756 (1959); May Metropolitan Corp. v. May Oil
Burner Corp., 290 N.Y. 260, 264, 49 N.E.2d 13, 15 (1943); De Vecchi v. De
Vecch4 34 A.D.2d 790, 311 N.Y.S.2d 530 (2nd Dep't, 1979) (shareholders'
agreement); Green v. Ainsmore ConsoL Mines Ltd., [19511 3 D.L.R. 632 (B.C.
Sup. Ct.); Foley v. Classique Coach, Ltd., [19341 2 K.B.1 (C.A.); King's Motors
(Oxford) Ltd. v. Lax, [19691 3 All Eng. Rep. 665 (Cty. Palatine of Lancaster
Ch. Ct.).
17. Sup. Ct., Rockland Cty., 1977 (unreported decision), aff'd, 59 A.D.2d 734,
398 N.Y.S.2d 848 (2nd Dep't, 1977), leave to appeal denied, 43 N.Y.2d 646
(1978). In Leeds, the defendant owned all the shares of a corporation. The plain-
tiff, and an investing partnership organized by the plaintiff, invested large sums of
money in the corporation. The Leeds-Marcus shareholders' agreement was one
element of a complex financing arrrangements, which included the acquisition of
shares by the plaintiff and the holding of shares as security by the investing
partnership. After the investing partnership's loan was repaid, and the shares held
by it were reacquired by the corporation, the plaintiff owned 78 shares (42.86%
of the 182 outstanding shares), and the defendant owned 104 shares (57.14%
of the outstanding shares).
18. Subsection (1) refers to election of directors, and subs. (2) refers to shareholder
approval. "Election" and " approval" are words of art, and are not synonomous:
Directors are elected and shareholders' resolutions are approved. Election of
directors is set apart because the right to elect directors is the basic right of
share ownership, without which right the purchase of shares would be little
more than investment in a blind trust. Lord v. Equitable Life Assur. Soc'y, 194
N.Y. 212, 228-29, 87 N.E. 443, 448-49 (1909).
19. The one share - one vote rule is the statutory norm. Cal. Corp. Code s.700(a);
Del. Gen. Corp. L. s.212(a); Fla. Gen. Corp. Act s.607.097(l); Ga. Gen. Bus.
Code s.22-608(a); Maine Bus. Corp. Act s.612(1); Mich. Gen. Corp. Act s.450.
1441(1); N.J. Bus. Corp. Act s.14A: 5-10; BCL s.612(a); N.C. Bus. Corp. Act
s.55-67(a); S.C. Bus. Corp. Code, s.
3 3
-11-110(a): CBCA s.134(1); Sask. Bus-
iness Corporations Act, 1977 s.134(l); U.K. Companies Act 1948, s.134(e), but
see Sch. I, Table A, Part I, art. 62. Cf. Man. Corporations Act, s.135(1). The
common law rule was one person - one vote. In re Rochester Dist. Tel. Co.,
40 Hun. (N.Y.) 172, 174 (Gen. T., 5th Dep't, 1886);In re Horbury Bridge Coal,
Iron, & Waggon Co., [18791 11 Ch. 109 (C.A.). See D. Ratner, "The Govern-
ment ot Business Corporations: Critical Reflections on the Rule of 'One Share,
One Vote' ". 56 Cornel L. Rev. 1,3-11 (1970).
20. 273 N.C. at 81, 159 S.E.2d at 355. Under applicable law, a proxy was valid
for 11 months. The special shareholders' meeting was held more than 11 months
after the Stock Voting Proxy had been executed.
21. 273 N.C. at 82, 159 S.E.2d at 355 (emphasis added). The last two sentences of
the quotation apply two rules: (1) A pooling agreement is distinct from a restric-
tion-of-transfer agreement. (2) A pooling agreement does not, of itself, bind a
ANGLO-AMERICAN
LAW REVIEW 97
transferee of a party to the pooling agreement.
22. The formula for determination of the extent of change in voting strength is:
s]
D - - 100
D = The deviation in voting strength of a party's holding from the one share -
one vote rule, expressed as a per centum of his holding.
T = The number of outstanding shares.
S = The number of shares held by a party.
Subsection (2) augmented Leeds' voting strength by 16.66%, and impaired
Marcus's voting strength by 12.5%.
The value of the vote attached to each share is magnified by cumulative voting.
For this reason, a cumulative-voting provision, unlike a pooling agreement, must
be included in the certificate of incorporation. Del. Gen. Corp. L s.214; Fla. Gen.
Corp. Act s.607.097(4); Ga. Gen. Bus. Code s.22-608(d); Maine Bus. Corp. Act
s.622; Mich. Gen. Corp. Act s.450.1451; NJ. Bus. Corp. Act s.14A: 5-24(2);
BCL s.618. Cf. Cal. Corp. Code s.708 and S.C. Bus. Corp. Code 33-11-200
(statutory cumulative voting; notice requirement). But see N.C. Bus. Corp. Act
s.55-67(c) (optional cumulative voting; notice requirement).
Fractional voting is permitted if the fractional vote is proportional to the frac-
tional value of the fractional share. This proportionality maintains the consistency
of the fractional vote with the one share - one vote rule. Since the value of the
vote is unchanged, a certificate-of-incorporation provision is not prerequisite to
the issuance and voting of fractional shares. Cal. Corp. Code s.407 ; Del. Gen. Corp.
L s.155; Fla. Gen. Corp. Act s.607.071(4); Ga. Gen. Bus. Code s.22-509(a);
Maine Bus. Corp. Act s.512(1); Mich. Gen. Corp. Act s.450.1338(l): NJ. Bus.
Corp. Act s.14A; 7-13; BCL s.509(a); N.C. Bus. Corp. Act s.55-58; S.C. Bus.
Corp. Code s.33-9-120(a).
A pooling agreement may be utilized with either cumulative voting or fractional
voting. Under cumulative voting, the number of votes in the pool equals the
product of the number of directors to be elected and the number of shares.
Under fractional voting, the number of votes in the pool equals the product of
the reciprocal of the common fraction and the number of shares.
23. Plurality election of directors: Cal. Corp. Code s.708(c); Maine Bus. Corp. Act
s.611(1) (B); Mich. Gen. Corp. Act s.450.1441(2); NJ. Bus. Corp. Act s.14A:
5-24(3); BCL s.614(a); N.C. Bus. Corp. Act s.55-67(c); S.C. Bus. Corp. Code
s.33-11-100(a) (2).
A pluralitv is a number greater than any related other number. Oxford English
Dictionary (1933) ed.), vol. VI, 58 at 59.
Majority approval of shareholders'resolutions: Cal. Corp. Code ss. 152 & 153;
Fla. Gen. Corp. Act s.607.094(2); Ga. Gen. Bus. Code s.22-607(b); Maine Bus.
Corp. Act s.611(l)(A); Mich. Gen. Corp. Act s.450.1441(2); NJ. Bus. Corp.
Act s.14A:5-11(l); BCL s.614(b); N.C. Bus. Corp. Act s.55-66 a); S.C. Bus.
Corn. Code s.33-11-I00(a)l 1.
The majority is more than half the total number. Oxford English Dictionary
(1933 ed.), vol. VII, 1026.
In Delaware, the vote necessary for the transaction of business is to be set
forth in the certificate of incorporation or in the by-laws. Del. Corp. L. s.216.
In Florida and Georgia, directors are elected by majority vote. Fla. Gen. Corp.
Act s.607.094(2);Ga. Gen. Bus. Code s.22-607(b).
24. 281 F. Supp. 524 (D.D.C. 1968), aff'd sub nom. Benn v. Sankin, 410 F.2d 1060
(D.C. Cir. 1969). cert. denied. 396 U.S. 1041 (1970).
25. Id., 281 F. Supp. at 551. There was not (and is not) any District of Columbia
law concerning pooling agreements, nor was there (and, except for Sankin, is
there) any case on point. However, the District of Columbia Business Corporation
Act did (and does) mandate the one share - one vote rule. D.C. Bus. Corp. Act
s.29-91 (a).
26. The District Court's reasoning from the conditional is evocative of the tran-
scendent expression of subjunctive-mood thought: "Had my grandmother had
wheels, she would have been a wagon.".
98 ANGLO-AMERICAN LAW RE VIEW
Whatever Sankin and Garfield could have done, it was incumbent upon the
District Court to decide with reference to that which they did. Courts do not
make contracts for litigants. Reliable Consr. & Realty Co. v. Waterproofing Serv.,
Inc. 34 A.2d 124, 126 (D.C. Mun. Ct. App. 1943). The unambiguous language
of the Sankin-Garfield shareholders' agreements was controlling, Vogel v. Tenneco
Oil Co., 465 F.2d 563, 565 (D.C. Cir. 1972), and the District Court ought not
have re-written its terms, Columbia Hosp. for Women v. United States Fid. &
Guar. Co., 188 F.2d 654, 659 (D.C. Cir.), cert. denied, 342 U.S. 817 (1951).
Though a court may interpret a contract to avoid a violation of law, a contract
may be interpreted thusly only if it is ambiguous. Retail Clerks v. NLRB, 510
F.2d 802, 806 at n.15 (D.C. Cir. 1975). Therefore, the District Court's revision
of the shareholders' agreements was unauthorized.
The District Court sought to explain away the parties' contractual abrogation
of the statutory one share - one vote rule by stating ingenuously that the validity
of contracts is to be determined by the effects of their provisions. Id., 281 F.
Supp. at 551. Though ends justify the means in the corporate jungle, unprincipled
utilitarianism has no root in the vineyard of the law. Manson v. Curtis, supra, n. 6,
223 N.Y. at pp.32
4
-25, 119 N.E. at 562.
27. Cf., e.g., D.C. Unif. Part. Act s.41-317(e) and D.C. Bus. Corp. Act s.29-911(a);
N.Y. Part L. s.40(5) and BCL s.612(a).
27a. Benintendi v. Kenton Hotel, Inc., 294 N.Y. 112, 121, 60 N.E.2d 829,832 (1945).
28. Greyhound Corp. v. Mount Hood Stages, Inc., 437 U.S. 322, 330 (1978); Great
Lakes Properties, Inc. v. City of El Segundo, 19 Cal.3d 152, 155, 561 P.2d 244,
246, 137 Cal. Reptr. 154, 156 (1977); Patrolmen's Ben. Ass'n v. City of New
York, 41 N.Y.2d 205, 208, 359 N.E.2d 1338, 1340, 391 N.Y.S.2d 544, 546
(1976); National Industrial Cred. Corp. (Rhodesia) Ltd. v. Gumede, [1964(4)]
S. Afr. L. Rep. 258, 261 (S. Rhod. High Ct.).
29. Caminetti v. United States, 242 U.S. 470, 485 (1917); People ex rel. Younger
v. Superior Court. 16 Cal.3d 30. 40. 544 P.2d 1322. 1330. 127 Cal. Reptr. 122.
130 (1976); Patrolmen's Ben. Assn v. City of New York, supra, n.28, 41 N.Y.2d
At 208 359 N.E.2d at 1340, 391 N.Y.S.2d at 546; Tait v. Ghana Airways Corp.,
[1970(3)] Afr. L. Rep. Comm. 249, 256-57 (Ghana Sup. Ct.); Elson-Vernon
Knitters, Ltd. v. Sino-Indo-American Spinners, Ltd., [19721 H.K.L.R. 468, 476;
Prasad v. Kapurchand, [19761 AIR (Madhya Pradesh) 136, 141 (M.P. High Ct.);
Duigan v. R. F. Fry (Associates) Ltd., [19711 I.R. 176, 190-1 (Ireland Sup.
Ct.); Cooper v. Republic, 19 Lib. L. Rep. 269, 280 (1969); Kuala Lumpur,
Klang & Port Swettenham Omnibus Co., BHD v. Transport Workers' Union,
[1971] 1 Malaysia L.J. 102, 105 (Fed. Ct.); Parsand v. Permanent Secretary
Ministry of Labour & Social Security. (19641 Mauritius Rep. 141. 145: R. v.
Wildsmith, (1974), 8 N.S.R.2d 58, 62 (Sup. Ct., App. Div.); Rupani v. State,
[19601 12 PLD (Karachi Bench) 15, 18 (W. Pak. High Ct.);Mobitel v. Dun &
Bradstreet, (1977) 17 S.A.S.R. 140, 143; Sussex Peerage Case, [18441 11 Cl.
& F. 85, 143, 8 Eng. Rep. 1034, 1057 (H.L.);Higgon v. O'Dea, [19621 W.A.R.
140, 141; Sinkamba v. Doyle, [1974] Zambia L. Rep. 1, 4 (Ct. App.); 1 W.
Blackstone, Commentaries *59.
30. Matter of Albano v. Kirby, 36 N.Y.2d 526, 529-30, 330 N.E.2d 615, 618, 369
N.Y.S.2d 655, 658 (1975).
30a. Sussex Peerage case, supra, n.29.
31. Scripps Howard Radio v. FCC, 316 U.S. 4, 11 (1942); Chemehueri Tribe of
Indians v. FPC, 489 F.2d 1207, 1234 (D.C. Cir. 1973), vacated on other grounds,
420 U.S. 395 (1975); People v. Olah, 300 N.Y. 96, 102, 89 N.E.2d 329, 332
(1909); Magor & St. Mellons Rural Dist. Council v. Newport Corp., [1952] A.C.
189, 191; B. Cardozo, The Nature of the Judicial Process 141 (1921).
The obligation of the judiciary to follow the enacted law arises from the
distinction between the legislative function and the judicial function. "[I]t
is to be borne in mind that the office of the Judges is not to legislate, but to
declare the expressed intention of the Legislature, even if that intention appears
to the court injudicious." River Wear Corm'rs v. Adamson. (18771 2 Ap. Cas.
743, 764; accord. Osborn v. Bank of the United States, 22 U.S. (9 Wheat.) 1, 190
(1824). This ancient rule, see e.g., Harrison v. Burwell, [1670] 2 Vent. 9, 10,
86 Eng. Rep. 278, 278 (K.B.), which is encompassed in the concept of separation
of powers, Marbury v. Madison, 5 U.S. (I Cranch) 137, 177 (1803);Dash v. Van
Kleeck, 7 Johns. (N.Y.) 477, 508-9 (Sup. Ct. of Judicature, 1811), is a fun-
ANGLO-AMERICAN LAW REVIEW 99
damental principle of common law jurisdictions. Marbury v. Madison, supra;
Bodinson Mfg. Co. v. California Emp. Comm'n, 17 Cal.2d 321, 326, 109 P.2d
935, 939 (1941); Dash v. Van Kleeck, supra; City of Lethbridge v. Northern
Trusts Co., [1925] 4 D.L.R. 422, 424 (Alb. Sup. Ct., App. Div.);Amalgamated
Soc. of Engineers v. Adelaide Steamship Co., Ltd., (1920) 28"C.L.R. 129, 148-49;
The King v. Du Bois, [1935] 3 D.L.R. 209, 209-10 (Canada Sup. Ct.);Michael
v. Antoniou, [1969] 1 Cyprus L. Rep. 547, 553; Enmore-Hope Village Dist.
Council v. Shaw, (1974) 21 West Indian Rep. 275, 280 (Guyana Ct. App.);
R. v. Miles, [1842] Jebb. & B. 219, 327 (Ireland Q.B.); Tarshish v. Shoenlicht,
(1974(1]) 28 P.D. 572, 575 (Israel Sup. Ct.);Jury v. Brasting, [1976] 1 N.Z.L.R.
231, 235; Rural Municipality of Brass Lakes v. Hudson's Bay Co., (1918) 11 Sask.
357, 362 (Sup. Ct.), aff'd, 12 Sask. 28 (Ct. App.).
32. Beresowski v. Warszawski, 28 N.Y.2d 419, 423, 217 N.E.2d 520, 522, 322
N.Y.S.2d 673, 675 (1971); Mode Roland & Co. v. Indusirial Acoustics, Inc.,
16 N.Y.2d 703, 209 N.E.2d 553, 261 N.Y.S.2d 896 (1965); Mook v. Berger,
6 N.Y.2d 833, 159 N.E.2d 702, 188 N.Y.S.2d 219 (1959);In re William Faehn-
drich, Inc., 2 N.Y.2d 468, 141 N.E.2d 597, 161 N.Y.S.2d 99 (1957). These cases
are instances of the general rule that corporate action may not be in conflict with
any law. See, e.g., Loew's Theatres, Inc. v. Commercial Credit Co., 243 A.2d 78,
81 (Del. Ch. 1968); Olincy v. Merle Norman Cosmetics, Inc., 200 Cal. App.2d
260, 266-67, 19 Cal. Reptr. 387, 390-91 (Dist. Ct. App. 1962); Booker v. First
Fed. S. & L. Ass'n, 215 Ga. 277, 280, 110 S.E.2d 360, 362 (1959); Webb v.
Moorehead, 251 N.C. 394, 398, 111 S.E.2d 586, 589 (1959);Penn-Texas Corp.
v. Niles-Bement-Pond Co., 34 NJ. Sup. 373, 378, 112 A.2d 302, 305 (1955);
Benintendi v. Kenton Hotel, Inc., supra, n. 27A, 294 N.Y. at 118, 60 N.E.2d
at 831.
33. Bank of Attica v. Maufacturers' and Traders' Bank, 20 N.Y. 510, 505 (1859).
The court's reference is the rule of expressio unius est exclusio alterius: The
express mention of one act, mode, or thing raises the irrefutable inference that
every other act, mode, or thing is excluded thereby. Botany Mills v. United
States, 278 U.S. 282, 289 (1929);Patrolmen's Ben. Ass'n v. City of New York,
supra, n. 28, 41 N.Y.2d at 208-9, 359 N.E.2d at 1341, 391 N.Y.S.2d at 546.
34. The Supreme Court's interpretation of subs.(2) was both contrary to law and
divorced from corporate reality. The Supreme Court manufactured a counterfeit
voting trust agreement, under which Marcus retained full ownership, of his
shares, but was a trustee obligated to act at Leeds' direction. Alternatively, the
Supreme Court had in mind an impossible species of proxy agreement, where-
under Marcus was agent for Leeds with respect to property (Marius' voting
rights) which Leeds did now own.
Either way, the Supreme Court would have had Marcus undertake to vote
certain of his shares, not only in a different way from the remainder of them
(itself a ludicrous negation of one's voting power), but, also, against his own
interests. The convention against colorful language in law review articles fore-
stalls accurate description of such a shareholders' agreement, and of the com-
petence of a shareholder who enters into it.
35. Id., 93 N.H. at 113, 36 A.2d at 268. The statement by the court that the trustee
took "subject to" the plaintiff-Chadwick-Holden shareholders' agreement, and
that the trustee consequently had "no greater rights with respect thereto" than
Holden, is incorrect. The principle that no third party is bound to a contract
unless he .assents to it, Division of Labor Law Enf. v. Transpacific Trans. Co.,
69 Cal. App.3d 268, 137 Cal. Reptr. 855 (Ct. App. 1977); Tanenbaum Textile
Co. v. Schlanger, 287 N.Y. 400, 40 N.E.2d 255 (1942), applies to all shareholders'
agreements with respect to voting. Stein v. Capital Outdoor Advertsing, Inc.,
273 N.C. at 82,159 S.E.2dat 355, discussed in the text at pp.76-77. and see n.21,
supra, Greenhalgh v. Mallard, [19431 2 All Eng. Rep. 234 (C.A.) (shareholders'
agreement).
36. An exception to the personal nature of contractual obligations is a first-purchase
option agreement, which a transferee with knowledge must honor. Allen v. Bilt-
more Tissue Corp., 2 N.Y.2d 534, 141 N.E.2d 812, 161 N.Y.S.2d 418 (1957).
The District Court sought to apply this exception by reference to Doss v. Yingling,
95 Ind. App. 494, 172 N.E. 801 (1930) and Baumohl v. Goldstein, 95 NJ. Eq.
597, 124 Atl. 118 (1924), two first-purchase option agreement cases. The court's
analogy was that a transferee (Benn, the principal of his corporate alter ego) with
knowledge of his transferor's (Garfield's) agreement (the Sankin-Garfield share-
holders' agreements) with a third party (Sankin) concerning the transferred shares
100 ANGLO-AMERICAN LA W RE VIEW
is bound by the transferor's agreement.
The analogy fails because the exception was not applicable to the case before
the District Court. If, as interpreted by the District Court, the Sankin-Garfield
shareholders' agreements required Garfield to refrain from voting half his shares,
the supposed agreements to refrain from voting were not first-purchase option
agreements, so Benn's actual knowledge of the Sankin-Garfield shareholders'
agreements was of no legal consequence. Thus, Doss and Baumohl do not sustain
the District Court's conclusion of law. A failure of authority would result also
under U.C.C. s. 8-204, both under the original version of the section and under
the 1977 version, because no shareholders' agreement with respect to voting is a
restriction on transfer. Stein v. Capital Outdoor Advertising, Inc. supra, n. 35, and
see n. 21, supra; Greenhalgh v. Mallard, supra, n. 35.
The District Court's analogy fails in another respect: Garfield's position differs
from that of the second trustee in Trefethen. Since the intended Garfield - 5410
Connecticut Avenue Corporation - Garfield transaction was a sham, Garfield was
never lawfully Benn's successor-in-interest. Garfield's obligations, if any, under
the Sankin-Garfield shareholders' agreements remained those of a party to them.
The Sankin-Garfield shareholders' agreements did not impose any obligations
on Garfield because they were equal vote agreements, and, therefore, unforceable
on the ground of illegality. See n. 40, infra, and text thereat.
37. BCL s.608(a) sets the majority of the shares entitled to vote as the quorum at
shareholders' meetings. BCL s. 608(b) permits, pursuant to BCL s. 616, a provision
in the certificate of incorporation for a greater quorum. Accord, Cal. Corp. Code
s.602(a); Fla. Gen. Corp. Act s.607.094(1); Ga. Gen. Bus. Code s.22-607(a);
Maine Bus. Corp. Act s. 608(1); Mich. Gen. Corp. Act s. 450.1415(1); NJ. Bus.
Corp. Act s. 14A:5-9(l); N.C. Bus. Corp. Act s. 55-65(a); S.C. Bus. Corp. Code
s. 33-11-80(a). But see Del. Gen. Corp. L. s. 216 (no statutory quorum).
38. First Nat'l Stores, Inc. v. Yellowstone Shopping Centre, Inc., 21 N.Y.2d 630,
638, 237 N.E.2d 868, 871, 290 N.Y.S.2d 721, 725 (1968);In re William Faehn-
drich, Inc., supra, n.32, 2 N.Y.2d at 472, 141 N.E.2d at 599-600, 161 N.Y.S.2d
at 103.
39. Capital Investors Co. v. Executors of Estate of Morrison, 584. F.2d 652, 661 and
n. 12 thereat (4th Cir. 1978) (dissenting opinion) (reference to Benn), cert.
denied sub nom. Frost v. Executors of Estate of Morrison, 440 U.S. 981 (1979).
An artificial means (be it sympathy or character evaluation or erroneous law) is
unnecessary to a result which is both just and consistent with statute, because,
contrary to the misrepresentation perpetuated by court house statuary, Justice is
not blind. Jones v. National Coal Board, [1957] 2 Q.B. 55, 64 (C.A.).Justice has
the capacity to discern the wrongdoer, to whom the doors of law and the gates of
equity are closed. Bank of the United States v. Owens, 27 U.S. (2 Pet.) 527,
538-39 (1829);Stone v. Freeman, 298 N.Y. 268, 82 N.E.2d 571 (1948).
40. Gibbs & Sterrett Mfg. Co. v. Bruckner, 111 U.S. 597, 601 (1884);Schermerhorn
v. Talman, 14 N.Y. 93, 141 (1856). Lord Mansfield wrote:
The objection, that a contract is immoral or illegal as between plaintiff and
defendant, sounds at all times very ill in the mouth of the defendant. It is
not for his sake, however, that the objection is ever allowed; but is founded
in general principles of policy, which the defendant has the advantage of,
contrary to the real justice, as between him and the plaintiff, by accident, if
I may say so. The principle of public policy is this; ex dolo malo non oritur
actio. No Court will lend its aid to a man who founds his cause of action
upon an immoral or an illegal act. If, from the plaintiff's own stating or
otherwise, the cause of action appears to arise ex turpi causa, or the trans-
gression of positive law of this country, there the Court says he has no right to
be assisted. It is upon that ground the Court goes; not for the sake of the
defendant, but because they will not lend their aid to such a plaintiff. So if
the plaintiff and defendant were to change sides, and the defendant was to
bring his action against the plaintiff, the latter would then have the advantage
of it; for where both are equally in fault, potior est conditio defendentis.
Holman v. Johnson, [17751 1 Cowp. 341, 343, 98 Eng. Rep. 1120, 1121 (K.B.).
The classic, possibly legendary, case of refusal of a court to enforce an illegal
contract is Everet v. Williams (Ex. 1725), noted in 9 Law Quarterly Rev. 197
(1893), cited in McMullen v. Hoffman, 174 U.S. 639, 654 (1899). In the High-
ANGLO-AMERICAN LAW RE VIEW 101
wayman's Case, as it is called, one highwayman brought a bill in equity against
another highwayman, in which the plaintiff alleged a breach of a partnership
agreement between his fellow blackguard and himself, and sought discovery,
an accounting, and general relief. The Court dismissed the bill as scandalous and
impertinent, fined the plaintiff's solicitors 50 each, and required the plaintiff's
counsel to pay full costs.
Illegal contracts are not enforced because courts refuse to aid, and thereby
encourage, conduct contrary to law. Oscanyan v. Arms Co., 103 U.S. 261, 277
(1880);Palm Springs Paint Co. v. Arenas, 242 C.A.2d 682, 688-89, 51 Cal. Reptr.
747, 752 (Dist. Ct. App. 1966). Judicial enforcement of illegal contracts would
be detrimental to society, Stanton v. Allen, 5 Denio (N.Y.) 434, 441 (Sup. Ct.
1848), and would bring reproach to the administration of justice, Weidman v.
Tomaselli, 81 M.2d 328 338 365 N.Y.S.2d 681, 691 (Cty. Ct.), aff'd, 84 M.2d
782, 386 N.Y.S.2d 276 (Sup. Ct., App. T., 2nd Dep't, 1975).
Nonetheless, lawless persons hasten to invoke rules of law and principles of
equity, and to cite applicable statutes, when it is in their interests to do so. This
phenomenon, a peculiarity of the benighted planet on which we live, is evident
in the cases discussed in the text, and in the reports generally.
41. Mailand v. Burckle, 20 Cal.3d 367, 384, 572 P.2d 1142, 1152, 143 Cal. Reptr. 1,
11 (1978); Triggs v. Triggs, 46 N.Y.2d 305, 385 N.E.2d 1254, 413 N.Y.S.2d 325
(1978) (shareholders' agreement);Karpinskiv. Ingrasc4 28 N.Y.2d 45, 51-52, 268
N.E.2d 751, 754-55, 320 N.Y.S.2d 1, 6 (1971); Bennett v. Bennett, [19511 1
K.B. 249 (C.A.).
42. Kleinheider v. Phillips Pipe Line Co., 528 F.2d 837, 841 (8th Cir. 1975);Brause
v. Goldman, 10 A.D.2d 328, 334, 199 N.Y.S.3d 606, 612 (1st Dep't, 1960),
aff'd, 9 N.Y.2d 620, 172 N.E.2d 78, 210 N.Y.S.2d 225 (1961).
42a. 265 N.Y. 416, 193 N.E. 253 (1934).
43. The extreme departure by the Supreme Court from the holding in American
Fibre underscores the observation of Justice Burrough:
I, for one, protest, as my Lord has done, against arguing too strongly upon
public policy; - it is a very unruly horse, and when once you get astride it you
never know where it will carry you. It may lead you from the sound law.
It is never argued at all but when other points fail.
Richardson v. Mellish, [1824] 2 Bing. 229, 252, 130 Eng. Rep. 294, 303
(C.P.).
43a. 102 NJ. Eq. 585, 141 At. 792 (1928).
44. In a lighter vein, a Chief Judge of the New York Court of Appeals explained
differing results on similar facts thusly:
No two cases are exactly alike. A young attorney found two opinions in
the New York Reports where the facts seemed identical although the law was
in conflict, but an older and more experienced attorney pointed out to him
that the names of the parties were different.
C. Pound, "American Law Institute Speech of Judge Pound". 5 New York
State Bar Ass'n Bull. 265, 267 (1933).
45. Manson v. Curtis, supra n. 6, 223 N.Y. at 320, 119 N.E. at 561 (emphasis added),
quoted also in the text at p. .
46. Abercrombie v. Davis, 36 Del. Ch. 371, 385. 130 A.2d 338. 346 (Sup. Ct. 1957).
47. In re Germicide Co., 65 Hun. 606, 609, 20 N.Y. Supp. 495, 496 (Gen. T., 1st
Dep't 1892).
48. Mueller v. MacBan, 62 Ca.App.3d 258, 274, 132 Cal. Reptr. 222, 229 (Ct. App.
1976); Billings v. Shaw, 209 N.Y. 265, 103 N.E. 142 (1913); Zwicker v. Stanbury,
[19541 1 D.L.R. 257 (Canada Sup. Ct.); Roxborough Gardens of Hamilton v.
Davis, (1920) 52 D.L.R. 572, 586-87 (Ont. Sup Ct., App. Div.); Regal (Hastings)
Ltd. v. Gulliver, [19671 2 A.C. 134; Alexander v. Automatic Te. Co., [1900
2 Ch. 56, 72 (C.A.).
48a Supra, n.6, 223 N.Y. 313, 119 N.E. 559 (1918); discussed also in text, at p.74.
49. Manson v. Curtis, supra, n.48a, 223 N.Y. at 320-22, 119 N.E. at 561-61. The Court
of Appeals found the shareholders' agreement contrary to Gen. Corp. L. s.34
(later renumbered s.27), which provided for management of a corporation by its
board of directors. The General Corporation Law was repealed, effective Septem-
ber 1, 1964. The provision was continued in BCL s. 701, which was amended in
1977 to provide for management of a corporation "under the direction of",
rather than "by", its board of directors. Corporate management by or under the
direction of a board of directors is the statutory norm. Cal. Corp. Code s.300(a);
Del. Gen. Corp. L s. 141(a); Fla. Gen. Corp. Act s. 607.111(1); Ga. Gen. Bus.
Code s. 22-701(a); Maine Bus. Corp. Act s. 701(a); Mich. Gen. Corp. Act s.
450.1501; NJ. Bus. Corp. Act s. 14A:6-1;BCL s. 701, supra;N.C. Bus, Corp. Act
s. 55-24(a); S.C. Bus. Corp. Code s. 33-13-10; CBCA s. 97(1); Man. Corporations
Act s. 97(1); Sask. Business Corporations Act, 1977 s. 97(1); U.K. Companies
Act 1948. Sch. I. Table A. Part I. art. 80.
50. 263 N.Y. at 328-9, 189 N.E. at 236; Coronation Syndicate, Ltd., v. Lilienfeld,
[1903] TS 489, 496-97 (Transvaal sup. Ct.).
51. The Court of Appeals recognized, but did not convincingly answer, the discrep-
ancies between this case and the prior ones. McQuade v. Stoneham condemned
limiations on directors of the kind found in Clark v. Dodge, but the Court made
no significant analysis of the terms of the Clark - Dodge shareholders' agreement.
Fells v. Katz involved a shareholders' agreement which all the shareholders signed,
but the Court made clear there that unanimity does not make for legality. Manson
v. Curtis was an irrefutable basis for finding the entirety of the Clark - Dodge
shareholders' agreement unlawful, yet the Court validated it completely. The
neglect of controlling precedent suggests a result-oriented decision.
52. The fourth by-law would be unlawful under BCL s. 614(b), which provides
that any corporate action other than election of directors is to be taken by the
majority of votes cast, except as provided in the certificate of incorporation or
as required by statute. BCL s. 614(b) prohibits a supe-majority vote for adoption,
amendment, or repeal of by-laws except if the requirement is included in the
certificate of incorporation. In re William Faehndrich, Inc., supra n. 32, 2 N.Y.2d
at 473, 141 N.E.2d at 600, 161 N.Y.S.2d at 103.
53. 294 N.Y. at 117, 60 N.E.2d at 831. Case law insistence on the subordination of
the acts of shareholders to corporation law is supported by statute. New York
law has required continuously that by-laws be consistent with it. BCL s. 614(c);
Gen. Corp. L. s. 14(5); Matter of David Jones Co., 67 Hun. (N.Y.) 360, 363, 22
N.Y. Supp. 318, 320 (Gen. T., 1st Dep't, 1893) (antecedent of Gen. Corp. L
s. 1415] pre-dates the Revised Statutes).
53a. Id., 294 N.Y. at 118.60 N.E.2d at 831 (emphasis added).
54. Cal. Corp Code s.300(b) - (e); Del Gen. Corp. L. ss.341-351; Fla. Gen. Corp.
Act s. 607.107(2) - (4); Ga. Gen. Bus. Code s. 22-61 l(b) - (e); Maine Bus. Corp.
Act s. 618; Mich. Gen. Corp. Act s. 450.1463; N.J. Bus. Corp. Act s. 14A:5-21(2)
- (6); BCL s. 620(b) - (g);N.C. Bus. Corp. Act s.55-73(b) - (c); S.C. Bus. Corp.
Code s. 33-11-220. But see CBCA 140(2) - (4); Man. Corporations Act s. 140(2)
- (5); and Sask. Business Corporations Act, 1977 s. 140(2) - (5). Each grants
unconditionally to the shareholders of any corporation the right to enter into a
written unanimous shareholders' agreement which restricts, partially or entirely
any power or duty of the board of directors. Contra, Scott v. Scott, [1943]
1 All Eng. Rep. 582, 585.
55. BCL s. 620(b) - (g), as amended, provides:
(b) A provision in the certificate of incorporation otherwise prohibited by law
because it improperly restricts the board in its management of the business
of the corporation, or improperly transfers to one of more shareholders or to
one or more persons or corporations to be selected by him or them, all or any
part of such management otherwise within the authority of the board under
this chapter, shall nevertheless be valid: (1) If all the incorporators or holders
of record of all outstanding shares, whether or not having voting power, have
authorized such provision in the certificate of incorporation or an amendment
thereof; and (2) If, subsequent to the adoption of such provision, shares are
transferred or issued only to persons who had knowledge or notice thereof or
consented in writing to such provision.
(c) A provision authorized by paragraph (b) shall be valid only so long as no
shares of the corporation are listed on a national securities exchange or regu-
larly quoted in an over-the-counter market by one or more members of a
national or affiliated securities association.
(d) Except as provide in paragraph (e), an amendment to strike out a provision
authorized by paragraph (b) shall be authorized at a meeting of shareholders
by vote of the holders of two-thirds of all outstanding shares entitled to vote
thereon or by the holders of such greater proportion of shares as may be'
required by the certificate of incorporation for that purpose.
(e) Alternatively, if a provision authorized by paragraph (b) shall have ceased
to be valid under this section, the board may authorize a certificate of amend-
ment under s. 805 (Certificate of amendment; contents) striking out such
provision. Such certificate shall set forth the event by ieason of which the
provision ceased to be valid.
(f) The effect of any such provision authorized by paragraph (b) shall be to
relieve the directors and impose upon the shareholders authorizing the same
or consenting thereto the liability for managerial acts or omission that is
imposed on directors by this chapter to the extent that and so long as the
discretion or powers of the board in its management of corporate affairs is
controlled by any such provision.
(g) If the certificate of incorporation of any corporation contains a provision
authorized by paragraph (b), the existence of such provision shall be noted
conspicuously on the face or back of every certificate for shares issued by
such corporation.
56. Matter of Carr v. New York State Board of Elections, 40 N.Y.2d 556, 559, 356
N.E.2d 713, 715, 388 N.Y.S.2d 87, 89 (1976) (citations omitted); Sutters v.
Briggs, [1922] 1 A.C. 1, 8.
57. The plaintiff's 19.9% shareholding in Group consitituted the entirety of Class A
shares. The defendant's 80.1% shareholding in Group constituted the entirety
of Class B shares. Subsequent transfers increased the number of shareholders,
but the interests of the Class A shareholders were those of the plaintiff, and the
interests of the Class B shareholders were those of the defendant. Group owned
all the outstanding shares of L-W.
58. Group's signature added nothing to the restriction-of-directors agreement. The
corporation was not a shareholder (indeed, no corporation may be a shareholder
of its own shares), so its "adherence" to the shareholders' agreement is not of
legal significance.
59. 50 N.Y.2d at 97-98, 405 N.E.2d at 682-83, 428 N.Y.S.2d at 201.
60. The plaintiff contended that the interest agreement was illusory, and was a decep-
tion of the creditors of L-W. The position of the plaintiff was that the obligation
to pay interest on the note was conditioned on there being sufficient consolidated
earnings to pay the interest. Since Group's only asset was the shares of L-W,
interest would have been paid only if L-W, the subsidiary, generated sufficient
profit to enable its parent (Group) to pay the interest. The plaintiff: maintained
that the obligation to pay interest was a fiction, in that the creditor (L-W) could
be paid only if the creditor earned enough money for the debtor (Group), and
thereby provided the debtor with the funds to pay the interest.
61. 50 N.Y.2d. at 99-103, 405 N.E.2d at 684-86,428 N Y.S.2d at 202-4.
ine decision was taken solely under Delaware iaw. ,here nas not been, to
this writing, any Court of Appeals decision pursuant to BCL s. 620(b) - (g).
The implication of Zion v. Kurtz, however, is that New York Law, as the Court
of Appeals would interpret it, is akin to Delaware law, as the Court perceived it.
62. Id., 50 N.Y.2d at 101, 405 N.E.2d at 684,428 N.Y.S.2d at 208 (punctuation
added).
63. Clark Mem. College v. Monaphan Land Co.. 235 A.2d 234 (Del. Ch. 1969);Adams
v. Clearance Corp. 35 Del. Ch. 459, 121 A.2d 302 (Sup. Ct. 1956); Field v.
Carlisle Corp., 31 DeL Ch. 227, 68 A.2d 817 (1949).
64. Del. Gen. Corp. L. s.342. A corporation loses its status as a close corporation (but
not its corporate existence) if one of the conditions precedent to close-corporation
status is breached, and not repaired. Del. Gen. Corp. L. ss.345(2) and 348.
The shareholders of a close corporation may enter into a written restriction-of-
directors agreement (Del. Gen. Corp. L. s.350); may manage the corporation (Del.
Gen. Corp. L. s.351); and, pursuant to a written agreement, may operate the
corporation as if it were a partnership (Del. Gen. Corp. L. s.354).
65. Del. Gen. Corp. L. ss.342-344; Lehrman v. Cohen, 43 Del. Ch. 222, 222 A.2d 800
(Sup. Ct. 1966); Campbell v. Loew's, Inc., 36 Del. Ch. 563, 134 A.2d 852 (Del.
Ch. 1957); Empire Southern Gas Co. v. Gray, 29 Del. Ch. 95, 46 A.2d 741 (Del.
Ch. 1940).
66. 50 N.Y.2d at 101,405 N.E.2d at 685, 428 N.Y.S.2d at 203.
67. Id., 50 N.Y.2d at 102, 405 N.E.2d at 685, 428 N.Y.S.2d at 203-4 (citations
and footnote omitted). As to the omitted court footnote, see n.69, infra.
68. None of the Court of Appeals cases discussed herein involves transferees of shares
subject to shareholders' agreements. The infrequency of such suits may be due to
the relatively-few transfers of close-corporation shares to outsiders.
69. The majority opinion expressed concern in its footnote 3 (50 N.Y.2d at 102,
405 N.E.2d at 685, 428 N.Y.S.2d at 204) that, but for its revision of the share-
holders' agreement, the defendant would wield the shield of corporate law as a
sword. The concern was inappropriate to the facts. Both the plaintiff and the
defendant were experienced (if not shrewd) businessmen, both were well-
represented by counsel, and both entered voluntarily into a shareholders' agree-
ment which their attorneys and they read with practiced eyes. Upon the finding
of an illegality therein, it was incumbent on the court to leave the parties as it
found them, subject only to a declaration whether the illegal s.301 of the share:
holders' agreement was severable from the remainder. See nn.40 and 41, supra,
and text thereat.
70. See n.34, supra, and text thereat.
71. Delaware law requires a corporation which qualifies as a close corporation to elect
close-corporation status. Del. Gen. Corp. L. ss.341(a) & 344. There was no basis
for the court to order Group's majority shareholder to vote in a particular way on
a deliberative corporate decision. Cf, In re American Fibre Chair Seat Corp.,
supra, n.43a 265 N.Y. 416, 193 N.E. 253 (1934) and text thereat.
72. 50 N.Y.2d at 103, 405 N.E.2d at 686, 428 N.Y.S.2d at 204 (citations omitted).
73. New York joint Legislative Committee to Study Revision of the Corporation
Laws, 7th Interim Report, [1963] Leg. Doc. No. 29, supra, n.7, p. 130 (italics
added) (citations omitted).
74. The minority opinion perceived the fallacy of the majority opinion's public-
policy rationale, and viewed the certificate-of-incorporation requirement as
enforceable, regardless whether any third party was or was not damaged as a
consequence of a failure to follow the statutory mandate. The minority opinion
saw as the practical result of its position a prevention of fraud (i.e., the sale to
unsuspecting third parties of shares secretly subject to a restriction-of-directors
agreement):
The obvious purpose of such a requirement is to prevent harm to the pub-
lic before it occurs. If, as the majority's holding suggests this requirement of
notice to the public through the certificate of incorporation is without legal
effect unless and until a third party's interests have actually been impaired,
then the prophylactic purposes of the statutes governing "close corporations"
would effectively be defeated. It is this aspect of the majority's ruling that I
find most difficult to accept.
50 N.Y.2d at 112, 405 N.E.2d at 691, 428 N.Y.S.2d at,210 (dissenting opinion)
(italics in original).!
75. See Benintendi v. Kenton Hotel, Inc., supra, n. 27a, 294 N.Y. at 118, 60 N.E.2d
at 831, quoted also in the text at p.88.
76. Gallie v. Lee [1969] 2 Ch. 17, 41 (C.A.), aff'd sub nom. Saunders v. Anglia Bldg.
Soc'y. [1971] A.C. 1004.
77. Waller v. Harris, 20 Wend. (N.Y.) 555, 562 (Ct. Corr. of Errors. 1838).

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