Faulds v. Yates

Supreme Court of Illinois · Corporations

CorporationsPartnershipShareholder voting agreementsPartnership propertyEquitymajority ruleshareholder agreementpublic policy

Facts

Faulds, Yates, and Bunn formed a partnership to operate coal mines under a lease approved by the Chicago Carbon and Coal Company, and they also owned more than half of the company's stock. Their agreement provided that they would act together in electing directors and determining officers and management of the company. Yates and Bunn contributed over $19,000 to the mining operations, while Faulds failed to contribute his share and later abandoned the enterprise. Faulds also acquired the Sanger tract, represented it as necessary to the business, induced Yates and Bunn to pay $6,000 for two-thirds of it, and the evidence showed the tract was purchased for partnership use though title remained with Faulds.

Issue

Was the parties' agreement void as against public policy because it united majority shareholders to control corporate elections and management, and could equity order conveyance of the Sanger tract as partnership property? Also, was the decree proper in requiring Faulds to refund the alleged excess paid on the land?

Rule

A combination among persons owning a majority of corporate stock to vote together, elect directors, and control management is not void as against public policy when it is for honest purposes, conforms to the corporation's governing law, and does not injure minority shareholders. In equity, real estate bought for partnership use and paid for with partnership funds is treated like partnership personalty, and the titleholder holds it in trust for the partners according to their interests. But where parties affirm a contract for conveyance on agreed terms, equity grants relief according to those terms and will not relieve them from the price agreed upon when the means of information were equally open to all.

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

Nina Patel, Owen Mercer, and Leah Kim own 58% of the shares of Riverbend Minerals Company, a fictional Illinois mining corporation operating near Peoria. They sign an agreement to vote their shares together to elect directors and choose officers, explaining that they want stable management while they invest additional money into a related extraction project; there is no showing of waste, illegality, or harm to minority shareholders.

If a minority shareholder argues that the agreement is void as against public policy solely because it lets the majority act as a bloc in director elections, how should a court most likely rule?

Explanation. The majority opinion approved a combination by holders of more than half the stock to vote together for directors and management where the arrangement was for honest purposes, violated no law of the corporation's creation, and did not injure minority shareholders. Mere bloc voting by the majority is not, by itself, against public policy. (Derived from Faulds v. Yates (n.d.).)