McQuade v. Stoneham

New York Court of Appeals · 1934 · Corporations

Corporationsclosely held corporationshareholder agreementdirector discretioncorporate officerssalariespublic policyindependent judgment

Facts

Stoneham owned a majority of the stock of National Exhibition Company and sold seventy shares each to McQuade and McGraw as part of a larger agreement dated May 21, 1919. The agreement provided that the parties would use their best endeavors to continue themselves as named directors and officers, including McQuade as treasurer at a stated salary, and that changes in salaries, capital, bylaws, or business policy required unanimous consent of the parties. Although McQuade served as treasurer for years, Stoneham controlled the additional directors and, in 1928, McQuade was replaced as treasurer and later dropped as a director. At the time the agreement was made and until after this action began, McQuade was a City Magistrate, while the treasurer's office carried regular executive duties and substantial compensation.

Issue

Is a shareholder agreement enforceable when it obligates the parties to use their best efforts to keep specified persons as corporate directors and officers at fixed salaries and to prevent changes in salaries or policy without unanimous consent? Also, may McQuade recover damages for losing the treasurer position when holding that office would have violated the statutory prohibition on a City Magistrate engaging in business?

Rule

Stockholders may combine to elect directors, but they may not, by agreement among themselves, control directors in the exercise of the judgment vested in them to elect officers, fix salaries, change policies, or retain particular individuals in office. Directors may not, by agreements entered into as stockholders, abrogate their independent judgment, and a party cannot recover damages for loss of an opportunity to perform services forbidden by law.

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

In Cleveland, Owen Pike owns 62% of the shares of Lakefront Arena Company. He signs an agreement with minority shareholders Nina Sethi and Victor Lane that all three will vote their shares together each year to elect a slate of five directors chosen in advance, but the agreement says nothing about officers, salaries, bylaws, or business policy.

If Owen later refuses to vote for the agreed slate, which is the strongest argument that the agreement is enforceable?

Explanation. The majority opinion distinguishes between permissible shareholder agreements to combine their voting power to elect directors and impermissible agreements that restrict directors' independent judgment. A voting pact limited to electing directors does not itself preclude the board from later exercising lawful discretion over officers, salaries, or policy, so it falls on the permissible side of the line. (Derived from McQuade v. Stoneham (1934).)