428 N.Y.S.2d 199 (1980)
Defendant Lombard-Wall Incorporated was owned by Equimark Corporation.1 Wishing to acquire Lombard, defendant Kurtz caused a corporation originally known as H-K Entreprises, Inc., the name of which was later changed to Lombard-Wall Group, Inc. (Group), to be formed under Delaware law.2 Kurtz was the sole stockholder of Group.3
It was in fact acquired with a short-term loan from a Swiss bank, shortly thereafter repaid from Lombard's cash, loaned by Lombard to Group on Group's noninterest bearing note.4 Since Group had no assets other than Lombard's stock, the note to Lombard was secured by a nonrecourse guarantee from Half Moon Land Corporation, of which plaintiff Zion is the principal shareholder, collateralized by California lands owned by Half Moon.5
At the time the note, loan agreement and guarantee were entered into Zion, Kurtz and Group entered into a stockholders' agreement.6 Zion and Kurtz were the sole stockholders of Group at that time, Zion holding class A stock and Kurtz class B stock.7 Section 3.01(a) of the agreement expressly provided that without the consent of the holders of class A stock the corporation shall not engage in any business or activities of any kind other than the acquisition and ownership of the stock of L-W as contemplated by the agreement.8
Group and Lombard some eight months thereafter entered into an agreement which made the previously noninterest bearing loan from Lombard to Group bear interest provided interest could be paid out of earnings, and an escrow agreement with Chase Manhattan Bank pursuant to which Group deposited $580,000 in bonds to secure payment of the note.9 The two agreements were authorized by Group's board over Zion's objection.10
On October 15, 1976, Zion signed on behalf of Half Moon and the class A stockholders letters consenting to the formation by Group of two wholly owned subsidiaries, Lombard-Wall Services, Inc., and Lombard-Wall Management Corporation.11 The two corporations were formed on December 9, 1976, following a resolution of Group's directors adopted unanimously at a meeting attended by Zion which ratified formation of the subsidiaries subject to the amendment to the shareholders' agreement and subject to the approval of the majority of the Class A stockholders.12
Plaintiffs thereafter began this action for declaratory and injunctive relief asking in their first cause of action that the interest and escrow agreements executed without Zion's consent be declared in violation of the stockholders' agreement and annulled and in the second cause of action that the formation of the subsidiaries be declared in violation of the agreement and that they be dissolved.13 Defendants' answer in addition to affirmative defenses stated a counterclaim for reformation.14 Plaintiffs moved for severance of and summary judgment on their first cause of action and for summary judgment dismissing the counterclaim.15 Defendants cross-moved for summary judgment dismissing the second cause of action.16 Special Term denied both motions.17 The Appellate Division reversed granting summary judgment to plaintiffs on the first cause of action and to defendants on the second cause of action.18 Just prior to the Appellate Division decision Group made the final payment on the note and caused the escrow agreement with Chase Manhattan to be released.19
Whether a stockholders' agreement providing that, except as specified, no business or activities of the corporation shall be conducted without the consent of a minority stockholder is enforceable as between the original parties even though all formal steps required by statute have not been taken?20
Under Delaware law, a stockholders' agreement restricting corporate action without minority consent is enforceable between the original parties even if not incorporated in the certificate of incorporation when all stockholders have assented and no third-party rights have intervened. The corporation may be ordered to amend its certificate or the assenting parties are estopped from denying the agreement.21
Yes. At the time Group was formed Kurtz was its sole stockholder and director.22 He executed a consent authorizing all actions necessary to implement the stockholders' agreement.23 Zion and Kurtz as the only stockholders both assented to the agreement's terms.24 No third parties acquired rights in the interim.25 These circumstances permit enforcement of the consent restriction under Delaware law even without formal charter amendment.26
The stockholders' agreement is enforceable as between the original parties even though the formal steps required by statute were not taken.27
Related opinions on this issue
Judge Gabrielli dissents on the ground that the agreement is void as against public policy because it sterilizes the board of directors by shifting all management authority to a minority stockholder without fiduciary duties.28 He maintains that the Delaware and New York close-corporation statutes require restrictions on board power to be placed in the certificate of incorporation with notice to the public precisely to prevent harm before it occurs.29 Because the statutory prerequisites were not met, Gabrielli concludes the agreement is unenforceable regardless of assent among the original parties or the absence of actual third-party injury.30
Whether the stockholders' agreement was violated when the corporation entered into an interest agreement and an escrow agreement without the minority stockholder's consent?31
A stockholders' agreement that prohibits the corporation from engaging in any business or activities of any kind without minority consent is violated by execution of interest-bearing loan and escrow agreements that were not among the expressly excepted transactions.32
Yes. The established facts demonstrate that Group and Lombard entered into the interest and escrow agreements without Zion's consent and that the board authorized them over his objection.33 The agreement's comprehensive prohibition against any business or activities of any kind, with only two narrow exceptions for acquiring Lombard stock and key-person insurance, encompasses these later agreements.34 The purpose of protecting the note's value does not create an implied exception because the loan agreement already specified the steps Group and Lombard would take if accountants required additional documentation.35
The stockholders' agreement was violated when the corporation entered into the interest agreement and the escrow agreement without the minority stockholder's consent.36
Whether the stockholders' agreement was violated by the formation of two subsidiaries?37
A stockholders' agreement requiring minority consent for corporate action is not violated by formation of subsidiaries when the minority stockholder has given express written consent to that formation.38
No. The established facts show that on October 15, 1976, Zion signed letters on behalf of Half Moon and the class A stockholders consenting to the formation of the two subsidiaries.39 The corporations were then formed following a unanimous board resolution that Zion attended.40 Although disagreement later arose over escrow deposit of the subsidiary shares, the consent to formation itself was unconditional and therefore satisfied the agreement.41
The stockholders' agreement was not violated by the formation of two subsidiaries.42
Whether the consent provision in the stockholders' agreement continues in existence after payment of the note?43
A stockholders' agreement that expressly states the consent restrictions remain applicable even after the loan period has expired continues in force after the note is paid.44
Yes. The established facts show that Group paid the note and caused release of the Chase escrow. Yet article IV of the agreement provides that the provisions of section 3.01 remain applicable with stated exceptions after the loan period expires.45 Payment of the note therefore did not terminate the consent requirement.46
The consent provision in the stockholders' agreement continues in existence after payment of the note.47