Zion v. Kurtz

New York Court of Appeals · 1980 · Corporations

50 N.Y.2d 92 (1980)

Updated August 1, 2026

Corporationsshareholder agreementsDelaware lawinternal affairsshareholders' agreementclose corporationminority vetoboard authority

Facts

Group, a Delaware corporation formed to acquire Lombard, was owned initially by Kurtz and then by Kurtz and Zion, with Zion holding class A stock. In a shareholders' agreement, the parties provided that without the consent of the class A stockholders, Group could not engage in any business or activities of any kind, directly or indirectly, except as specifically stated. Despite that provision, Group and Lombard later entered into an interest agreement and an escrow agreement securing Group's note, over Zion's objection. Zion also later signed letters consenting to formation of two wholly owned subsidiaries, with Lombard agreeing to execute an amendment to an escrow agreement so the subsidiaries' shares would be held under the same escrow arrangement, but no such amendment was ever executed.

Issue

Whether, under Delaware law, a unanimous shareholders' agreement giving a minority stockholder veto power over corporate business or activities is enforceable between the original parties even though the corporation did not take all statutory steps to place the restriction in its charter. Also, whether the interest and escrow agreements and the formation of the subsidiaries violated that consent provision, whether defendants were entitled to reformation, and whether the consent provision had terminated.

Rule

Under Delaware law, when all stockholders of a corporation assent to an agreement restricting corporate business or activities absent the consent of a minority stockholder, and the agreement requires nothing forbidden by statute and no intervening third-party rights are involved, the restriction is enforceable as between the original parties even if the corporation failed to complete the formal charter steps contemplated by statute. Contract language barring a corporation from engaging in "any business or activities of any kind, directly or indirectly" is comprehensive and will be enforced according to its terms; reformation requires more than conclusory allegations of mutual mistake; and language phrased as a promise rather than a condition will not make consent contingent on later performance absent clear conditional language.

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Blue Mesa Holdings, Inc. is a Delaware corporation formed in Phoenix to acquire a consulting firm. At formation, its only shareholders, Nora Patel and Evan Cross, signed a written agreement stating that the corporation could not undertake any business activity without Nora's consent, and Evan also promised to file any documents needed to implement that arrangement, but he never amended the charter. Months later, the board approved an equipment-financing deal over Nora's objection, and no third-party rights have intervened.

As between Nora and Evan, is the consent restriction most likely enforceable?

Explanation. The majority held that, under Delaware law, a unanimous shareholder agreement restricting corporate action is enforceable as between the original parties when it requires nothing forbidden by statute and no intervening third-party rights are involved, even if the contemplated charter steps were never completed. The shareholder who agreed to implement the arrangement may be compelled to do so or estopped from denying it.