Essex Universal Corporation v. Yates
305 F.2d 572 (2d Cir. 1962)


PROCEDURE: Defendant appealed grant of summary judgment to United States Court of Appeals Second Circuit in claim of illegal sale of corporate stock.

FACTS: Yes. Yates (D) was president and chairman of Republic Pictures. Essex Universal Corp. (P) tried to purchase between 500,000 and 600,000 shares of Republic Pictures stock at $8 per share, $2 over the then-current market price. As a condition to closing, Yates (D) was to deliver the resignations of a majority of Republic's board and ensure that the resigning members were replaced with designates of Essex's (P) choosing. Yates (D) informed Essex (P) that he could deliver 566,223 shares, which amounted to 28.3 percent of the stock, and the parties scheduled the closing. Essex (P) brought bank drafts totaling more than $1 million to the closing. The drafts were payable to Essex's banker, who would endorse them to Yates (D). Yates (D) refused to close the deal, worrying that the change in directors would be held improper.

ISSUE:Would a contract be held invalid under N. Y. Law as against public policy solely because it includes a clause giving the purchaser an option to require a majority of the existing directors to replace themselves, by a process of seriatim resignation, with a majority designated by the purchaser in sale of 28.3% of corporate stock?

RULE: A provision in a contract for the sale of majority share control in a corporation that calls for the immediate transfer of control of a board of directors to the buyer is not illegal even if the buyer cannot convert that share control into operating control immediately.

HOLDING: The United States District Court for the Southern District of New York, Edward J. Dimock, J., rendered summary judgment for the defendant and the plaintiff appealed. The Court of Appeals held that contract for sale of 28.3 per cent of stock of publicly held corporation was not, under New Youk law, per se invalid as against public policy solely for inclusion of clause giving purchaser an option to require majority of existing directors to replace themselves, by process of seriatim resignation, with majority designated by purchaser, though legality of such provision would depend on factual considerations.