Clark v. Dodge

New York Court of Appeals · 1936 · Corporations

CorporationsShareholder agreementsDirector authorityPublic policyclosely held corporationshareholder agreementdirector votingofficer retention

Facts

Clark owned 25% and Dodge owned 75% of the stock of two New Jersey corporations whose offices, factory, and assets were in New York, and Clark alone knew the secret formulas and manufacturing methods used in the business. Clark and Dodge, the sole stockholders of both corporations, made a written agreement under which Dodge would use his stock and director power to keep Clark as a director and general manager so long as Clark remained faithful, efficient, and competent, and Clark would receive one-fourth of the net income by salary or dividends while excessive salaries to others would be forbidden. In return, Clark agreed to disclose a formula and manufacturing methods to Dodge's son and to leave his stock to Dodge's wife and children if Clark died without issue. Clark alleged that he performed, but Dodge breached by failing to keep him in office and by reducing Clark's share of income through excessive salaries and other conduct.

Issue

Was the stockholder agreement illegal as against public policy because it constrained how corporate affairs would be managed, particularly with respect to director voting, officer retention, salaries, and profit distribution? More specifically, did McQuade v. Stoneham require invalidation of this agreement?

Rule

Although the statutory norm is that corporate business shall be managed by the board of directors, not every agreement that touches director discretion is void. Where all stockholders are parties, enforcement is proper if any invasion of board powers is slight or negligible and the agreement causes no damage or threatened damage to the corporation, creditors, minority stockholders, purchasers, or the public. Broad statements in McQuade are confined to the facts of that case.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Buffalo, Nora Kim and Daniel Voss are the only shareholders of Lakeside Tonic Labs, a closely held corporation. They sign a contract providing that Daniel will vote his shares to keep Nora on the board and, if elected, will vote as a director to retain her as operations manager so long as she remains honest, capable, and diligent; no creditors, minority owners, or public investors are involved.

If Daniel later refuses to support Nora's continued service and argues the agreement is void because directors must manage the corporation, how should a court most likely rule?

Explanation. The majority rule is that not every agreement touching director discretion is void. Where all stockholders are parties and any invasion of board power is slight or negligible, enforcement is proper if no damage is suffered or threatened to the corporation, creditors, minority stockholders, purchasers, or the public. A promise to vote stock for someone as director is plainly lawful, and a limited promise to retain an officer so long as she remains honest and competent is the sort of harmless restraint the court upheld.