189 N.E 234 (N.Y. 1934)
Synopsis: The defendants appealed from the judgment of the Appellate Division of the Supreme Court in the First Judicial Department (New York), which affirmed a ruling in favor of the plaintiff to reinstate him as treasurer of a corporation.
-Stoneham (D) owned the majority of stock in the National Exhibition Company.
-McQuad (P), a city magistrate, purchased some stock in the company.
-As a part of the stock purchase, Stoneham (D) and McQuade (P) entered into an agreement that provided that the parties would elect Stoneham (D) and dcQuade (P) to the board of directors and to employ McQuade (P) as the corporation's treasurer.
-After several years, McQuade was replaced as treasurer and voted off the board of directors. -Stoneham (D) acquiesced in McQuadc3's (P) removal and did not try to ensure that McQuade (P) continued on the board or was employed as treasurer.
-McQuade (P) was not removed for any misfeasance or malfeasance, but because he antagonized Stoneham (D).
-McQuade (P) sought specific performance of the agreement to employ him as treasurer.
-The lower court denied McQuade's (P) request but awarded him damages for wrongful discharge.
ISSUE: May stockholders, by agreement amongst themselves, abrogate their independent judgment as directors? May a contract which precludes the board of directors from changing officers, salaries, or policies or retaining individuals in office, except by consent of the contracting parties be binding on the parties?
RULE: Shareholders can not form an agreement to control the decisions traditionally vested in the judgment of the directors of a company.
-The Court held that the shareholder contract to keep the parties in their positions within NEC was invalid as a matter of public policy.
-Shareholders should not be able to usurp the decision-making normally left to the directors, and directors should be beholden to the corporation and not to the shareholders.
- Although the evidence indicated that Stoneham may have exercised bad faith in that Plaintiff was competent in his position and was ousted over personal disagreements, the director’s intentions are irrelevant here because the court does not want to put directors in a position wherein they would have to defend future decisions.
-Plaintiff was also ineligible for employment with NEC because he was a City Magistrate.
- Agreed that the reinstatement should be denied, but only because Plaintiff was a City Magistrate.
-The contract, however, was valid because Stoneham as a majority owner could elect the directors who elect the treasurer and was not therefore taking away any powers from the directors that he already really had.
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