FACTS: An action to compel specific performance of a K.
McQuade bought 70 shares of a corporation called National Exhibition Co. (NEC), popularly known as the “Giants” baseball team. As part of that transaction, he entered into an agreement w/co-stockholders Stoneham and McGraw providing that they would use their best efforts to continue each other as officers and directors of NEC. McGraw and McQuade bought about 3% each of NEC stock from Stoneham who, after the sale, owned approximately 46% of NEC stock. McGraw was elected vice-president, Stoneham president, and McQuade treasurer. On May 2, 1928, McQuade was voted out of office due to the failure of Stoneham and McGraw to vote. McQuade brought this suit for specific performance of their agreement to use their best efforts to continue him as treasurer. Trial court awarded McQuade damages but did not reinstate him.
ISSUE: May the stockholders of a corporation enter into an agreement that precludes their board of directors, at the risk of legal liability, from changing officers, salaries, or policies?
HOLDING: Stockholders may unite to elect directors, but this power is not extended to Ks that limit the director’s power to manage the corporation. It is urged by McQuade that the court should pay heed to the morals and manners of the marketplace to sustain this agreement. McQuade contends that an agreement among directors to continue a man in office should not be broken as long as that man is a loyal officer to the interest of the corporation. However, as loyal as McQuade was to the interests of the minority shareholders of NEC, his absence as treasurer does not injure the corporation. Stoneham and McGraw have no legal obligation to deal righteously w/ McQuade; their duty was to the corporation and its shareholders.
A K among stockholders is illegal and void if it precludes the board of directors, at the risk of incurring legal liability, from changing officers, salaries, or policies, except by consent of the contracting parties. Affirmed.