Clark v. Dodge
199 N.E 641 (N.Y. 1936)


Facts:Clark (P) owned stock in and was employed by two pharmaceutical companies. Dodge (D) owned the remaining stock in the two companies. Dodge (D) and Clark (P) agreed that Clark (P) would remain in control of the business as long as he remained faithful and competent to manage the business. The agreement provided that Clark (P) would continue to be a director of both corporations, would be employed as the treasurer and manager of the corporations, and would receive one-quarter of the net income of the corporations, either as salary or as dividends. The agreement also provided that no other officer or employee would be paid an unreasonable salary, and that Clark (P) would disclose the formulae of the corporations' medicines to Dodge's (D) son and bequeath his stock to Dodge's (D) wife and children if Clark (P) had no surviving issue. Clark (P) brought suit and alleged a breach of contract by Dodge (D). Clark (P) alleged that Dodge (D) did not use his controlling interest in the company to continue Clark's (P) employment, and that Dodge (D) prevented Clark (P) from receiving his share of the profits by employing incompetent people at inflated salaries. The Appellate Division dismissed the complaint.

Issue:When the directors are the sole stockholders, and they agree amongst themselves to vote for certain people for office, can that agreement be enforced?

Rule: If the enforcement of a contract between directors that are the sole stockholders in a corporation damages no one, not even the public, it is not illegal.

Holding and Analysis:Judgment of Appellate Division reversed and order of Special Term affirmed. A written agreement existed between plaintiff and defendant shareholders in which both parties agreed to exercise voting rights in an effort to maintain benefits from the corporation's success. Litigation ensued in which plaintiff shareholder sued defendant for not exercising his voting power in keeping plaintiff in an officer role. As a result, plaintiff sought reinstatement. The trial court denied defendant's motion to dismiss, and the appellate court reversed the ruling claiming the voting agreement was invalid. Upon final determination, the Court of Appeals reversed, holding that the voting agreement did not sterilize the board of directors and that any subsequent damage to the shareholders was negligible. Enforcement of the agreement was thus required.