Benintendi v. Kenton Hotel

New York Court of Appeals · Corporations

CorporationsBylawsShareholder votingDirectorsCorporate governanceunanimous vote bylawsdirector electionplurality rule

Facts

Two men owned all the stock of a domestic business corporation in unequal amounts. They agreed to vote for, and did vote for, bylaws requiring unanimous stockholder action on all matters, unanimous stockholder vote to elect directors, unanimous director action on all matters, and unanimous stockholder consent to amend the bylaws. The minority stockholder then sought a judgment validating those bylaws and preventing the other stockholder from acting contrary to them. The dispute concerned whether those bylaws were consistent with New York's statutory scheme for stock corporations.

Issue

May all shareholders of a stock corporation validly adopt bylaws requiring unanimous stockholder action on all corporate matters, unanimous stockholder vote to elect directors, unanimous director action on all board matters, and unanimous stockholder consent to amend bylaws? Also, can such arrangements be enforced merely because all shareholders agreed to them?

Rule

A bylaw or equivalent corporate arrangement is invalid if it conflicts with the statutory scheme governing stock corporations by replacing representative governance and statutorily prescribed majority or plurality decision rules with an absolute, permanent, all-inclusive minority veto. Thus, a corporation may not require unanimous shareholder vote to elect directors where the statute requires election by plurality, may not require unanimous shareholder action on all corporate questions, and may not require unanimous vote of all directors for all board action where that is inconsistent with the quorum-and-majority framework of General Corporation Law sections 27 and 28. A bylaw requiring unanimous shareholder consent to amend bylaws is valid where no statute forbids it and it does not offend public policy.

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Lakeshore Fabrication, Inc., a New York business corporation based in Buffalo, has four shareholders. At the annual meeting, all four adopt a bylaw stating that no person is elected to the board unless every outstanding share votes for the same slate. A dispute later arises when one minority shareholder withholds approval from all nominees.

If the bylaw is challenged, how should a court rule?

Explanation. A bylaw requiring unanimous shareholder approval to elect directors is invalid because it directly opposes the statutory requirement that directors be chosen by plurality. The fact that all shareholders agreed to the bylaw does not save it. The majority opinion treated such a unanimity requirement as intrinsically unlawful because it contravenes the State’s prescribed corporate voting structure. (Derived from Benintendi v. Kenton Hotel (n.d.).)