Bean and Graves were stockholders in American Tool Works. At a board meeting considering sale of all corporate assets, Bean objected because the sale would wipe out his interest; at a later meeting Graves told the directors he had satisfied Bean and that Bean would make no further objection. Letters and affidavit evidence showed Graves had made a settlement with Bean under which Graves would divide proceeds he received as a creditor and hold part in trust for Bean, but other stockholders were not parties to or aware of the agreement. Bean never received any payment under the agreement and sought to enforce it against Graves's estate.
Issue
Was the agreement enforceable where a stockholder was promised a personal share of another stockholder-creditor's recovery in exchange for withdrawing opposition to a sale of all corporate assets, when the other stockholders neither knew of nor assented to the arrangement?
Rule
A contract is void as against public policy when a stockholder receives or is promised personal consideration for his action or inaction on a corporate matter affecting the rights and interests of all stockholders, if the arrangement is unknown to and unassented to by the other stockholders. Such an agreement is treated as a fraud on the other stockholders and will not be enforced.
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One of 10 multiple-choice questions for this case. Pick an answer to see why.
Lakefront Fabrication, Inc., a closely held Illinois corporation based in Chicago, is considering selling all of its operating assets to a rival. Nina Patel, a stockholder, has been openly objecting because the sale price will leave nothing for equity holders. Another stockholder, Owen Kerr, privately promises Nina that he will share part of the payout on his personal loan claim against the corporation if she stops objecting; the remaining stockholders are unaware of the deal.
If Nina later sues to enforce Owen's promise, what is the most likely result?
Explanation. The majority rule is that a stockholder may not receive personal consideration for action or inaction on a corporate matter affecting the rights and interests of all stockholders when the arrangement is unknown to and unassented to by the others. Such a bargain is treated as a fraud on the other stockholders and is unenforceable. The fact that Nina is only a stockholder, not a director, does not save the agreement. (Derived from Brady v. Bean (n.d.).)