Benintendi v. Kenton Hotel, Inc. , 294 N.Y. 112 ( 1945 )

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] Two men who owned, in inequal amounts, all the stock of a domestic business corporation, made an agreement to vote for, and later did vote for and adopt at a stockholders' meeting, by-laws of the corporation, providing as follows: 1. That no action should be taken by the stockholders except by unanimous vote of all of them; if, however, thirty days' notice of the meeting had been given, unanimous vote of the stockholders present in person or by proxy should be sufficient; 2. That the directors of the corporation should be the three persons receiving, at the annual stockholders' meeting, the unanimous vote of all the stockholders; 3. That no action should be taken by the directors except by unanimous vote of all of them; 4. That the by-laws should not be amended except by unanimous vote of all the stockholders. The minority stockholder brought this suit to have those by-laws adjudged valid and to enjoin the other stockholder from doing anything inconsistent therewith. Special Term and the Appellate Division held that the two by-laws first above described were invalid and the other two valid. Both sides have appealed to this Court.

In striking down the by-law (No. 2 above) which requires unanimous stock vote for election of directors, Special Term properly relied upon Matter of Boulevard Theatre Realty Co. (195 App. Div. 518, affd. 231 N.Y. 615). This Court wrote no opinion in that case. The Appellate Division had ruled, however, that a provision in the Boulevard Theatre's certificate of incorporation requiring unanimous vote of all stockholders to elect directors, violated section 55 of the Stock Corporation Law, which says that directors shall be chosen "by a plurality of the votes at such election". We think it unimportant that the condemned provision was found in the certificate of incorporation in the Boulevard Theatre case, and in a by-law in the present case, or that the attack on the provision is in this case made by a stockholder who agreed to vote for it and did vote for it. In 1897 a similar by-law was invalidated in Matter of Rapid TransitFerry Co. (15 App. Div. 530). The device is intrinsically unlawful because it contravenes an essential part of the State policy, as expressed in the Stock Corporation Law. An agreement by a stockholder to vote for certain persons as directors is not unlawful (Clark v. Dodge, 269 N.Y. 410, 415) since the directors are still, under such an agreement, elected by a plurality of votes, as the statute mandates. But a requirement, wherever found, that there shall be no election of directors at all unless every single vote be cast for the same nominees, is in direct opposition to the statutory rule — that the receipt of a plurality of the votes entitles a nominee to election.

Although not covered by the Boulevard Theatre case, or any other decision we have found, the by-law (No. 1 above) which requires unanimous action of stockholders to pass any resolution or take any action of any kind, is equally obnoxious to the statutory scheme of stock corporation management. The State, granting to individuals the privilege of limiting their individual liabilities for business debts by forming themselves into an entity separate and distinct from the persons who own it, demands in turn that the entity take a prescribed form and conduct itself, procedurally, according to fixed rules. As Special Term pointed out in this case, the Legislature, for reasons thought by it to be sufficient, has specified the various percentages of stock vote necessary to pass different kinds of resolutions. For instance, sections 36 and 37 of the Stock Corporation Law require an affirmative two-thirds vote for changing the capitalization, while section 102 of the General Corporation Law empowers the holders of a majority of the stock to force the directors to dissolve the corporation, and section 103 of that law gives the same power to holders of half the stock, if there be a deadlock on the question of dissolution. Any corporation may arrive at a condition where dissolution is the right and necessary course. The Legislature has decided that a vote of a majority of the shares, or half of them in case of a deadlock, is sufficient to force a dissolution. Yet under the by-laws of this corporation, the minority stockholder could prevent dissolution until such time as he should decide to vote for it. Those who own all 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 prejudicial 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 conformably 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, by-law or certificate of incorporation provision as to unanimous action, give the minority interest an absolute, permanent, all-inclusive power of veto. We do not hold that an arrangement would necessarily be invalid, which, for particular decisions, would require unanimous consent of all stockholders. (See for instance, Ripin v. U.S. WovenLabel Co., 205 N.Y. 442; Tompkins v. Hale, 284 N.Y. 675.) InTompkins v. Hale (supra) the stockholders of a "cooperative apartment house" had agreed in writing that such leases could be canceled and surrendered only if all the stockholder-tenants concurred. That is a far cry from a by-law which prohibits any nonunanimous determination on any corporate question.

The by-law numbered 3 in our list above makes it impossible for the directors to act on any matter except by unanimous vote of all of them. Such a by-law, like the others already discussed herein, is, almost as a matter of law, unworkable and unenforcible for the reason given by the Court of King's Bench inDr. Hascard v. Dr. Somany, 1 Freeman 503, in 1693: "primafacie in all acts done by a corporation, the major number must bind the lesser, or else differences could never be determined". The directors of a corporation are a select body, chosen by the stockholders. By section 27 of the General Corporation Law, the board as such, is given the power of management of the corporation. At common law only a majority thereof were needed for a quorum and a majority of that quorum could transact business. (Ex parte Willcocks, 7 Cow. 401.) Section 27 modifies that common-law rule only to the extent of permitting a corporation to enact a by-law fixing "the number of directors necessary to constitute a quorum at a number less than a majority of the board, but not less than one-third of its number." Every corporation is thus given the privilege of enacting a by-law fixing its own quorum requirement at any fraction not less than one-third, nor more than a majority, of its directors. But the very idea of a "quorum" is that, when that required number of persons goes into session as a body, the votes of a majority thereof are sufficient for binding action. (See for example,Harroun v. Brush Electric Light Co., 152 N.Y. 212, as to a quorum of the Appellate Division.) Thus, while by-law No. 3 is not in explicit terms forbidden by section 27 (supra) it seems to flout the plain purpose of the Legislature in passing that statute. We have not overlooked section 28 of the General Corporation Law, the first sentence of which is as follows: "Whenever, under the provisions of any corporate law a corporation is authorized to take any action by its directors, action may be taken by the directors, regularly convened as a board, and acting by a majority of a quorum, except when otherwise expressly required by law or the by-laws and any such action shall be executed in behalf of the corporation by such officers as shall be designated by the board." Reading together sections 27 and 28 and examining their legislative history (see L. 1890, ch. 563; L. 1892, ch. 687; L. 1904, ch. 737), we conclude that there never was a legislative intent so to change the common-law rule as to quorums as to authorize a by-law like the one under scrutiny in this paragraph. A by-law requiring for every action of the board not only a unanimous vote of a quorum of the directors, but of all the directors, sets up a scheme of management utterly inconsistent with sections 27 and 28.

Before passing to a consideration of the fourth disputed by-law, we comment here on a view expressed in the dissenting opinion herein. The dissenting Judges conclude that, while the two by-laws first herein discussed are invalid as such because violative of statutes, the courts, should, nevertheless, 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").

The fourth by-law here in dispute, requiring unanimity of action of all stockholders to amend the by-laws, is not, so far as we can find, specifically or impliedly authorized or forbidden by any statute of this State. Nor do we think it involves any public policy or interest. Every corporation is empowered to make by-laws (General Corporation Law, § 14, subd. 5), and by-laws of some sort or other are usually considered to be essential to the organization of a corporation. But a corporation need not provide any machinery at all for amending its by-laws — and for such an omission it could not be accused of an attempt to escape from the regulatory framework set up by law. A corporation, to function as such, must have stockholders and directors, and action and decision by both are required for the conduct of corporate business. The State has an interest in seeing to it that such "private laws" or by-laws as the corporation adopts are not inconsistent with the public law and not such as will turn the corporation into some other kind of entity. But, once proper by-laws have been adopted, the matter of amending them is, we think, no concern of the State. We, therefore, see no invalidity in by-law numbered 4 above.

The judgment should be modified in accordance with this opinion, and, as so modified, affirmed without costs.