Essex Universal Corporation v. Yates

United States Court of Appeals for the Second Circuit · 1962 · Corporations

Corporationssale of corporate controldirector resignationspublic policyseparabilitycorporate controlboard controldirector resignation

Facts

Yates agreed to sell or cause to be sold to Essex 566,223 shares of Republic Pictures stock, amounting to 28.3% of the outstanding common stock, at a premium over market price. The contract also provided, at Essex's option and as a condition to closing, that Yates would deliver resignations of a majority of Republic's directors and cause Essex's nominees to be elected in their place through seriatim resignation, a procedure permissible under Republic's charter and bylaws. Essex timely requested that transfer of board control and tendered the amount due at closing, but Yates refused to close after counsel advised that the tender was unsatisfactory. The summary judgment motion was decided solely on the theory that the board-transfer provision rendered the entire contract illegal.

Issue

Under New York law, is a contract for the sale of 28.3% of a corporation's stock invalid as against public policy solely because it includes a clause permitting the buyer to require a majority of the existing directors to replace themselves, by seriatim resignation, with the buyer's nominees? If not, what further inquiry is necessary concerning the legality of that clause?

Rule

A contractual provision requiring immediate replacement of a majority of directors as a condition of a stock sale does not by itself render the contract illegal on its face under New York law. However, because such a provision is inseparable from the sale when made a condition of closing, its legality must be assessed as part of the whole transaction; under the lead opinion, the provision is proper if the purchaser is acquiring majority stock control or the practical equivalent of majority voting control, but unlawful if it amounts merely to a sale of office detached from sufficient shareholder control.

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

In Chicago, Nora Patel agreed to sell 58% of the voting shares of Lakefront Studio Holdings to Evan Cross. The written contract made closing conditional on Nora obtaining resignations from five of nine directors and having Evan's nominees elected immediately through board-authorized vacancy filling permitted by the corporation's charter and bylaws.

If Evan sues after Nora refuses to close, which is the strongest argument against dismissing the contract as illegal on its face?

Explanation. The lead opinion states that a stock-sale contract is not facially illegal merely because it includes a clause for immediate replacement of a majority of directors. When the buyer is acquiring majority stock control, immediate board replacement may be treated as an acceleration of control the buyer would soon obtain through shareholder voting. The opinion rejects per se invalidity and also rejects treating such a closing condition as severable.