directors/officers are constantly elected and stay in power), is void and non-enforceable as a matter of public policy. Case Facts: Defendant Stoneham became the owner of 1,306 shares of National Exhibition Corporation and had majority control of the corporation. Plaintiff and defendant McGraw each purchased 70 shares of stock off of Stoneham for consideration in the amount of $50,338.10. As part of the purchase, an agreement was entered into that provided that defendants would use their best endeavors for the purpose of continuing as directors and officers thereof various people, one of whom was McQuade (Treasuer), that McQuade was to receive a guaranteed salary of $7,500 / year, and that Stoneham had the right to appoint additional directors as he saw fit. The agreement was to be in effect so long as Stoneham, McQuade, and McGraw each had 1,166 shares and 70 shares respectively. Ten years (1928) after the agreement was signed (1919), Leo J. Bondy was elected to succeed Stoneham, and defendants Stoneham and McGraw did not honor their agreement promises to McQuade. In other words, McQuade was removed as Treasurer and as a director. It should also be noted that at the time the agreement was signed up until 1928, McQuade was a city magistrate. Procedural History and Outcome: The courts below awarded damages to McQuade but refused to reinstate him. The court in this case reversed, holding that McQuade could not recover. Issue(s): Is an agreement between shareholders that calls for them to use their best efforts to make sure that certain directors/officers are constantly elected and stay in power contrary to public policy and therefore void? Holding: Such an agreement is contrary to public policy and is therefore void. Rationale: Directors are, according to New York Business Corporation Law and many other state corporate laws, the sole managers of the business of a corporation. Their independent judgment is necessary for the corporation to run smoothly and for shareholders to receive returns on their investments. Consequently, directors may not, by agreements entered into as shareholders (as in the case here), abrogate their independent judgment. Additionally, McQuade in this case is asking for relief as an individual. The other minority shareholders of the corporation do not support his cause of action. Courts will listen to and favor the corporation, represented by the minority shareholders, before they will listen to individual claims of wrong (Faulds v. Yates).
There is another reason why the agreement here is invalid: McQuade was a city magistrate and, by law, could not have held another position. Consequently, the agreement was illegal ab initio and thus void ab initio. Concurring Opinions: I concur only because McQuade here happened to be a city magistrate. It is undisputed that an ordinary agreement, among a minority in number but a majority in shares, to elect directors, is not illegal. It is also undisputed that any agreement that curtails a director’s power to act in the best interests of the corporation even in the face of shareholder objection is illegal. The agreement here is a middle ground between these two principles and is therefore
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