263 N.Y. 323, 189 N.E. 234 (1934)
In May 1919 defendant Stoneham, owner of 1,306 shares constituting a majority of the stock of National Exhibition Company, sold seventy shares each to plaintiff McQuade and defendant McGraw.1 McQuade paid Stoneham $50,338.10 for his shares.2 As part of the transaction the three men executed a written agreement dated May 21, 1919, under which they promised to use their best efforts to keep Stoneham as president, McGraw as vice-president, and McQuade as treasurer and director, with specified salaries, and to make no changes in salaries, capital, bylaws, or corporate policy without unanimous consent.3 The agreement was to remain in force so long as the parties continued to own their respective blocks of stock.4
Pursuant to the agreement Stoneham became president, McGraw vice-president, and McQuade treasurer of the corporation.5 In June 1925 McQuade’s salary was raised to $10,000 a year.6 The board of directors consisted of seven members; Stoneham selected the four outside directors and controlled their votes.7 On May 2, 1928, Stoneham and McGraw refrained from voting while McQuade voted for himself and the four outside directors elected Leo J. Bondy to replace him as treasurer.8 At the next stockholders’ meeting McQuade was also dropped as a director.9
McQuade and Stoneham had quarreled repeatedly.10 The trial court found that these disputes did not impair the orderly administration of the corporation’s business and that McQuade was removed solely because he had antagonized Stoneham by challenging his control over the corporate treasury.11 McQuade had been a city magistrate when the 1919 agreement was signed; he resigned that position on December 8, 1930, after this action was commenced.12
McQuade brought suit seeking specific performance of the agreement to restore him as treasurer and director.13 The trial court denied reinstatement but awarded damages for wrongful discharge measured at the treasurer’s salary rate of $10,000 per year from May 2, 1928, through the date of the decree, with leave to sue for future damages.14 The courts below affirmed the damages award.15 The Court of Appeals granted review and reversed the judgments below.16
Whether an agreement among majority and minority stockholders to elect and retain specific individuals as directors and officers at fixed salaries and to require unanimous consent for changes in corporate policy or bylaws is enforceable?17
Stockholders may combine to elect directors but may not by agreement among themselves control the directors in the exercise of the judgment vested in them by virtue of their office to elect officers and fix salaries.18
No. The agreement in the ESTABLISHED FACTS bound Stoneham, McGraw, and McQuade to use their best efforts to continue each other as president, vice-president, treasurer, and director at specified salaries and to obtain unanimous consent before altering salaries, capital, bylaws, or corporate policy.19 Directors manage the business of the corporation under Gen. Corp. Law § 27 and must exercise independent judgment when selecting officers and setting compensation.20 The contract divested the board of that discretion by precommitting the parties' votes and requiring mutual consent for any change, thereby violating the rule that directors may not abrogate their independent judgment through stockholder agreements.21
The agreement is not enforceable.22
Related opinions on this issue
Joined by Crouch
Lehman concurs in the result but rejects the majority's first ground for invalidity.23 He reasons that the agreement merely arranged how the parties would exercise their power as stockholders to elect directors and officers and to adhere to a predetermined policy. In his view, such an arrangement does not transfer directors' powers to stockholders or bind directors to disregard the interests of the corporation.24
It merely reflects the practical reality that majority stockholders influence the choice of directors who in turn select officers.25 No evidence showed any corrupt purpose or injury to the corporation or minority stockholders.26 Lehman concludes the agreement would be valid if it had not required McQuade to serve while still a city magistrate.27
Whether such an agreement is void as against public policy because it restricts the independent judgment of directors in managing corporate affairs?28
Directors are the exclusive executive representatives of the corporation charged with administration of its internal affairs. Any contract that compels a director to vote to keep any particular person in office and at a stated salary is illegal.29
Yes. The ESTABLISHED FACTS show that the 1919 agreement locked the parties into fixed offices and salaries and forbade any change in corporate policy without unanimous consent.30 The trial court found that McQuade was removed solely because he antagonized Stoneham, yet the four outside directors controlled by Stoneham voted to replace him.31 This arrangement prevented the board from exercising its statutory duty to select officers according to their best judgment at the time of election.32
Because the contract substituted prearranged stockholder control for independent director discretion, it is void as against public policy.33
The agreement is void as against public policy.34
Related opinions on this issue
Joined by Crouch
Lehman would not invalidate the agreement on this public-policy ground. He explains that the contract simply provided that the three stockholders would vote their shares to elect one another to designated offices and would maintain an established corporate policy.35 In his view, such an arrangement does not transfer directors' powers to stockholders or bind directors to disregard the interests of the corporation.
It merely reflects the practical reality that majority stockholders influence the choice of directors who in turn select officers. Lehman therefore finds the agreement consistent with prior statements in Manson v. Curtis that stockholders may unite upon the officers they will elect.36
Whether the agreement is unenforceable because it required the plaintiff, while serving as a city magistrate, to hold a corporate executive office with substantial duties and compensation in violation of the Inferior Criminal Courts Act?37
A city magistrate may not engage in any other business or profession and must devote his whole time and capacity to the duties of his office. A contract contemplating that a magistrate will hold an executive corporate office at a substantial salary therefore violates the statute and is unenforceable.38
Yes. When the agreement was made, McQuade was a sitting city magistrate.39 The contract obligated Stoneham and McGraw to use their best efforts to keep him as treasurer at a salary that reached $10,000 per year and imposed regular fiscal and other duties assigned by the board or president.40 The Inferior Criminal Courts Act prohibits a magistrate from engaging in any other business and requires devotion of whole time and capacity to judicial duties.41
Performance of the agreement therefore required McQuade to serve two masters for hire, rendering the contract illegal from its inception until McQuade resigned the magistracy in December 1930, after the breach had already occurred.42
The agreement is unenforceable because it violated the Inferior Criminal Courts Act.43
Related opinions on this issue
Joined by Crouch
Lehman concurs in the result on this ground. He notes that the contract contemplated McQuade holding an executive office at a stipulated salary while serving as magistrate.44 The Inferior Criminal Courts Act prohibits magistrates from engaging in other business and requires them to devote their whole time and capacity to judicial duties.45
Because performance would have required McQuade to engage in business forbidden by the statute until his resignation after the breach, Lehman agrees the agreement is unenforceable.46 He emphasizes that the illegality persisted for years and that removal of the legal obstacle came too late to permit recovery.47