10CommLWorldRev73(1)

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ANGLO-AMERICAN LAW RE VIEW

CORPORATE POOLING AGREEMENTS ANDRESTRICTION-OF-DIRECTORS AGREEMENTS*

By STEPHEN KRUGER**

A IntroductionRecurring problems arise in close corporations' from the use

of pooling agreements and of restriction-of-directors agreements.Each is a useful, but potentially dangerous, instrumentality. Anagreement intended by its draftsman to prevent majority oppressionor minority obstruction can be suborned, and brought to bear byone faction or the other in the internecine strife endemic to closecorporations. The legal battles are often savage, because they arefueled by personal or familial rivalries, grievances, or bitternesses.Rarely, however, are psychological factors considered in judicialdecisions.

The right of shareholders to enter into agreements inter se orinter sese is an aspect of the common law2 and constitutional3right to contract. The generic term for a contract between oramong shareholders in relation to corporate activity permitted tothem is "shareholders' agreement". 4 Among the usual kinds ofshareholders' agreements are pooling agreements, restriction-of-directors agreements, voting trust agreements, proxy agreements,and restriction-of-transfer agreements.

This article considers pooling agreements in Part B, below, andrestriction-of-directors agreements in Part C, below. The two areconceptually different. A pooling agreement relates to the votingof shares, and a restriction-of-directors agreement transfers partor all of the directors' authority to the shareholders. Nonetheless,both may be appropriate to a particular corporate circumstance.

B Pooling AgreementsPooling agreements found early judicial acceptance,' and were

established in case law by Manson v. Curtis (223 N.Y. 313,119 N.E. 559 (1918)). Therein, the plaintiff, the defendant, one

* 1981 Stephen Kruger** Member of the New York Bar. The support and assistance of Antje Kruger, Henri

Winter, and Sari Winter are acknowledged gratefully.

ANGLO-AMERICAN LAW REVIEW

Culver, and a number of others owned all the shares of a successfulcorporation. None of the shareholders owned the majority of theshares. The plaintiff and Culver, who between them owned themajority of the shares, agreed to act as a unit in the managementof the corporation, and agreed further that neither would disposeof his shares without giving the other the first option to purchasethem.

The defendant sought to purchase Culver's shares, and gainthereby for himself ownership of the majority of the shares.The plaintiff agreed to the sale, and entered into a shareholders'agreement with the defendant, which provided among other thingsthat the plaintiff would continue as general manager and policy-maker of the corporation for a period of one year, and thatthe president of the corporation would be only its nominal head.The plaintiff fulfilled his contractual obligations insofar as he wasable, but the defendant violated the agreement. The defendantran the corporation as he pleased; he ran it to the ground, andforced it into bankruptcy.

The plaintiff sued for the loss in the value of his shares, and forthe value of the corporation's liabilities to him. The defendantargued that the contract between the parties was an unlawfulrestriction-of-directors agreement, in that the contractual rightof the plaintiff to determine corporate policy gave rise to a passiveboard of directors. The Court of Appeals agreed that the Manson-Curtis shareholders' agreement was void for that reason, butnoted that pooling agreements are valid:

It is not illegal or against public policy for two or more stockholdersowning the majority of the shares of stock to unite upon a course ofcorporate policy or action, or upon the officers whom they will elect.An ordinary agreement, among a minority in number, but a majorityin shares, for the purpose of obtaining control of the corporation by theelection of particular persons as directors is not illegal. Shareholdershave the right to combine their interests and voting powers to secure suchcontrol of the corporation and the adoption of and adhesion by it to aspecific policy and course of business. Agreements upon a sufficientconsideration between them, of such intendment and effect, are validand binding, if they do not contravene any express charter or statutoryprovision or contemplate any fraud, oppression or wrong against otherstockholders or other illegal object. 6

The language of Manson v. Curtis was given statutory basis inBusiness Corporation Law ("BCL" herein) s.620(a), the pooling-agreements provision of New York law. 7 The form of BCL s.620(a)was suggested by but is a modification of North Carolina BusinessCorporation Act s.55-73(a) in effect during the drafting period ofthe New York statute (New York Joint Legislative Committee toStudy Revision of the Corporation Laws, Working Draft, s. 6.12(p.2 0 )). The North Carolina law read:


An otherwise [-1 valid contract between two or more shareholders that theshares held by them shall be voted as a unit for the election of directorsshall, if in writing and signed by the parties thereto, be valid and en-forcible as between the parties thereto ... 8

This section covered only one use (election of directors) ofpooling agreements. BCL s.620(a) is broader, in that it includesthe other permitted use (corporate control) as well. It provides:

An agreement between two or more shareholders, if in writing and signedby the parties thereto, may provide that in exercising any voting rights,the shares held by them shall be voted as therein provided, or as they mayagree, or as determined in accordance with a procedure agreed upon bythem. (Emphasis added.)

From the above history, it is seen that, under BCL s.620(a)and its kindred statutes, 9 a pooling agreement is a contract betweenor among shareholders to vote all their shares as a unit for aspecified objective.1 0

A pooling agreement is eo ipso contractual;1 1 the considerationis the mutual promises to vote according to its terms. 1 2 Thestatutory requirement that a pooling agreement be written is amodification of case law, under which an oral pooling agreementwas valid. 1 3 The writing requirement is analogous to a Statute ofFrauds, so an oral pooling agreement is unenforceable, not void.

1 4

The unit is the whole number of votes subject to the poolingagreement. This whole number of votes is the pool, from whichthis type of shareholders' agreement derives its name.1 s Theparties to a pooling agreement are joint tenants, in a manner ofspeaking, of all the votes in the pool, and each has an individualinterest in the casting of those votes for the specified objective.This interest may be enforced in equity by specific performance.(Samuelson v. Starr, 28 M.2d 479, 213 N.Y.S.2d 889 (Sup. Ct.1961); Puddephatt v. Leith, supra, n.5).

A pooling agreement must be voted "as therein provided,... or as determined in accordance with a procedure agreed uponby [the parties to it] ." (BCL s. 620(a)). That is, a pooling agreementmust specify its objective by setting torth its purpose (electionor control or both) and its immediate aim (who or what or both).Alternatively, the parties may formulate their purpose or aimby a binding procedure, such as arbitration or majority vote.' 6

Consider the written shareholders' agreement in Leeds v.Marcus: 17

It is hereby agreed . . . (1) we shall each vote all of our respective sharesof common stock of the [Leeds-Marcus] corporation in such manner as to


cause [the plaintiff] and [the defendant] to be [each] elected a directorof the corporation, and (2) in such manner so that [the plaintiff] and [thedefendant] shall have an equal number of votes with respect to all mattersinvolving the corporation requiring stockholder approval. notwithstanidingthe number of shares owned by [the plaintiff and by the defendant] .18

Subsection (1) is a pooling agreement. The writing is a contract,the consideration for which is the mutual promises to vote. Theunit consists of all the parties' shares of common stock. The pur-pose of subs. (1) is election of directors, and its immediate aim isthe election of the plaintiff and of the defendant. It is a poolingagreement for the mutual election of shareholders as directors, andis unquestionably valid. (Liberman v. Liberman, 23 A.D.2d 545,356 N.Y.S.2d 145 (1st Dep't, 1965), appeal dismissed, 16 N.Y.2d611, 209 N.E.2d 109, 261 N.Y.S.2d 64 (1965)).

Subsection (2), however, is not a pooling agreement, in that itdoes not specify a lawful corporate purpose (i.e., election of cor-porate directors or adoption of corporate policy). It operates onlyin relation to Leeds and Marcus, who purported to agree betweenthem how they will value the one vote attached by law to eachshare1 9 held by one or the other of them. In addition, subs. (2) isnot a pooling agreement because it does not create a pool of votes.On the contrary, it presupposes two blocs of votes, the plaintiff'sand the defendant's, the separateness of which is not undone bythe artificial and unlawful ascription of equal numbers of votes tounequal numbers of shares.

Without the combination of all the votes into a unit, there is nopooling agreement. In Stein v. Capital Outdoor Advertising, Inc.(273 N.C. 77, 159 S.E.2d 351 (1968)), Hannon and Hicks enteredinto two written contracts, one entitled "Agreement" and theother entitled "Stock Voting Proxy". The Agreement providedthat Hannon "transfers and assigns unto [Hicks] the right to voteall of his stock in the said corporation" (id., 273 N.C. at 79, 159S.E.2d at 353 (emphasis added)). The Stock Voting Proxy wasintended by Hannon and Hicks to effectuate the Agreement,"the parties seemingly being of the opinion that without the'Stock Voting Proxy' Hicks would have no authority to vote thestock then standing in the name of Hannon" (id., 273 N.C. at 81,159 S.E.2d at 354-55). Thereafter, Hannon sold 600 shares to theplaintiff. Also, Hannon advised Hicks in writing of Hannon'srevocation of the Agreement and of the Stock Voting Proxy.At the special shareholders' meeting subsequent to the sale and therevocation, Hicks, as president of the corporation, declared that hewas entitled to vote not only his shares, but, also, the shares re-tained by Hannon and the shares sold by Hannon to the plaintiff.

The court held that the Stock Voting Proxy had expired priorto the convening of the special shareholders' meeting, and, so, did


not affect the rights of any of the parties. 2 0 The court held fur-ther that the Agreement was not a pooling agreement under NorthCarolina Business Corporation Act s. 55-73(a):

This statute does not apply to the agreement in question. First, the agree-ment is not limited to the election of directors but applies to all corporatebusiness to be transacted at meetings of the stockholders. Second, theagreement does not provide that the shares standing in the name of Hicksshall be votes as a unit with the shares standing in the name of Hannon.There is nothing in this agreement which purports to restrict the right ofHicks to sell all or any part of his shares as he may from time see fit to do.There is nothing in the agreement which purports to restrict a transferee ofany shares originally issued to Hicks in the voting of such shares purchasedby the transferee from Hicks.

2 1

Not only is subs. (2) not a pooling agreement, it is not even anykind of valid shareholders' agreement. Its immediate aim is to re-allocate the statutorily-allocated voting strengths of the parties toit. Though Leeds was the minority shareholder and Marcus was themajority shareholder, they sought to establish by contract thateach "shall have an equal number of votes ... notwithstanding thenumber of shares owned" by each. This provision is in conflictwith the one share - one vote rule, because the inescapable effectof an equal-vote agreement in face of unequal share holdings isalteration of the parties' statutory voting strengths. In contrast, apooling agreement maintains the one share - one vote rule, in thatthe value of the vote attached to each share is unchanged by it.2 2

Contractual variation of voting strength is also contrary to thestatutory electoral norms: plurality election of directors andmajority approval of shareholders' resolutions.2 3 At a share-holders' meeting of the Leeds-Marcus corporation, at which bothshareholders are in attendance, the majority shareholder's candi-date for director ought to be elected, since he has a plurality (in-deed, the majority) of the votes. An equal-vote agreement, how-ever, purports to create a tie vote. Mutatis mutandis, the majorityshareholder's resolution ought to be approved, since it, too, hasthe majority of votes. An equal-vote agreement, however, purportsto create a tie vote in this context as well. Thus, ascription ofequal voting strengths to unequal numbers of votes is in contra-vention of the statutory electoral norms.

Neither electoral norm stands in the way of a pooling agree-ment. If a pool has an insufficient number of votes, it can be en-larged to the extent necessary by the addition to it of uncommit-ted votes. Alternatively, the shares which are not in the pool con-stitute the required plurality or majority. Either way, there is at alltimes a sufficient number of votes to elect a director or to approvea shareholders' resolution. It is otherwise with an equal-vote agree-ment, which makes the statutory plurality or majority impossible

ANGLO-AMERICAN LA W RE VIEW

of achievement.A case similar to Leeds v. Marcus is Sankin v. 5410 Conn. Ave.

Corp.,2 4 in which Sankin and Garfield entered into a partnershipfor the purchase and improvement of real property. The partner-ship agreement provided that Sankin and Garfield were to haveequal votes in all partnership decisions, though their interests inthe partnership were one-third and two-thirds, respectively.

Subsequently, Sankin and Garfield formed two corporations tosucceed the partnership. Sankin owned one-third of the shares ofeach corporation, and Garfield owned two-thirds of the shares ofeach. The two shareholders entered into identical shareholders'agreements with respect to each corporation. The terms of theshareholders' agreements were that

"each [shareholder] shall have an equal vote in the affairs of the corpor-ation", that is that neither "can have a larger or greater vote than the otherirrespective of the numerical amount of stock owned" by each. (Id., 281F. Supp. at 550 (emphasis added).)

Thereafter, Janet (Garfield's wife), her lover James Benn, andGarfield entered into a conspiracy to defraud Sankin of his inter-ests. The relevant machinations of the involved scheme were thatBenn, acting through 5410 Connecticut Avenue Corporation,would pose as a bona fide purchaser for value of Garfield's sharesin the corporations. By offering a price which Benn knew thatSankin could not meet, the conspirators would neutralize Sankin'sfirst option to buy Garfield's shares. After the purchase by 5410Connecticut Avenue Corporation of Garfield's shares in the twocorporations, Benn, the sole shareholder of the purchasing corpor-ation, was to assign the shares to Garfield. Benn made the pur-chases, gained control of the two Sankin-Garfield corporations,and notified Sankin that he (Benn) was not bound by the Sankin-Garfield shareholders' agreements. In the ensuing civil action,there arose the issue of the validity of the Sankin-Garfield share-holders' agreements.

The District Court found no binding precedent in the juris-diction. 2 ' It argued that ownership of shares imposes no legalduty to vote them, and that "[i] f Garfield, in accomplishing[Sankin's and his voting] objective, could have decided not tovote any of his stock, he surely could agree to vote only halfof his shares - which is exactly what he did." (id., 281 F. Supp.at 551 (emphasis and punctuation added)). The ex nihilo anderroneous conclusion of fact upon the extraneous conditionalstatements leaves one breathless. 2v

The differences between an equal-vote agreement (e.g., theSankin-Garfield shareholders' agreements) and a shareholders'agreement to refrain from voting (e.g., the District Court's version)are substantive. A shareholders' agreement to refrain from voting


is a lawful contract. An equal-vote agreement is not a lawfulcontract, but is private legislation designed to negate the oneshare - one vote rule. An equal-vote agreement does violence tocorporate structure, in that it is an all-disguised attempt to treata corporation (the statutory norm of which is one share - onevote) as a partnership (the statutory norm of which is equalmanagement rights). Variations from the norms may be effected,but only in the manner prescribed by statute. Partnership lawpermits allocation of control by a contract between or amongthe partners; corporation law renders a shareholders' agreementinsufficient, and demands a certificate-of-incorporation pro-vision."1 In Sankin, two shareholders' agreements were misusedto continue a partnership, and, in Leeds, one shareholders' agree-ment was impermissibly used to give rise to a partnership. In eachcase, a statutory certificate-of-incorporation provision was evaded,though no shareholders' agreement may be inconsistent with law,nor may be such as will turn a corporation into some other kindof entity.

2 7 a

In reading statutes, the courts' function is to give effect tolegislative intent, which is to be found, if possible, in the wordsof the statute. 2 8 If the statutory language is unambiguous, acommon law court must adhere to and follow the plain meaningof the statutes, and no recourse may be had to the canons of con-struction. 2 1 In an instance of ambiguity, a court may infer thelegislative intent. Nevertheless, whether a court reads the plainlanguage or resolves an ambiguity, the "great and controllingprinciple" 30 or "only rule ' '3 a of judicial interpretation is theintention of the legislature. A judge may neither ignore normodify the law; a court is not permitted to implement thatwhich it thinks the law ought to be.

Where the express words of a statute provide that any divergencefrom the statutory one share - one vote rule, quorum, pluralityelection of directors, or majority approval of shareholders' reso-lutions, shall be accomplished by way of a certificate-of-incor-poration provision, any variation from the statutory corporatestructure, other than by inclusion (whether originally or byamendment) of a provision in the ccrtificate of incorporation,is void. 2 One hundred twenty-one years ago, the Court of Appealshad before it a case in which the plaintiff was the transferee ofshares of the defendant's stock. The plaintiff demanded that thedefendant enter the transaction in its record book. The defendantrefused on the ground that the transferor of the shares was indebtedto it, and one of the defendant's by-laws prohibited transfer of itsshares unless the transferor discharged all his indebtedness to thedefendant, or the defendant's board of directors consented to thetransfer.

The Court of Appeals held that the by-law was inconsistent

ANGLO-AMERICAN LA W REVIEW

with the banking law, which provided generally for unrestrictedtransferability of bank shares. The right of alienation attached tothe shares under law, so the defendant was without authority tomake a by law to the contrary. The banking law did provide thatshares could be transferable on a bank's record book in the mannerprovided by a bank's certificate of incorporation, as to whichstatutory provision the court ruled:

The manner of the transfer, including ... any qualifications or restraint ...is to be such as may be agreed upon, - not by a by-law, or by any act ofthe directors, but in the [certificate of incorporation] . It was not neces-sary to insert [into the statute] negative words to exclude any othermanner of performing the same thing; for, by the most common rulesof construction, where a matter is authorized to be done in a particularway, every other different method of doing it is excluded.3 3

Strained decisions and untoward results are the consequencesof judicial disregard of the law as written. In Leeds, the SupremeCourt ruled that the contractual phrase, "shall have an equalnumber of votes ... notwithstanding the number of shares owned",required the majority shareholder (Marcus) to vote a number ofshares as directed by the minority shareholder (Leeds), such thatthe number of votes cast by Leeds, plus the number of votes castby Marcus at the direction of Leeds, equals the number of sharescast by Marcus without restraint. That is to say, the differencebetween Marcus' holding (104 shares) and Leeds' (78 shares)is 26 shares; half of 26 is 13. If Leeds casts his 78 votes, andcontrols the casting of 13 of Marcus' votes, Leeds casts, in effect,91 votes. Marcus retains control of, and may cast without hin-drance, 91 (i.e., 104 - 13) votes. Thereby, each shareholder wouldcontrol an equal number of votes, though the number of sharesowned by each shareholder, which is the number of votes eachhad, remained unchanged. Unfortunately for the Supreme Court,nothing in the record sustains its exegesis. 3 4

An equally-heroic judicial attempt to rehabilitate shareholders'agreements is evident in Sankin. The District Court sought tovalidate its re-writing of the Sankin-Garfield shareholders' agree-ments by reference to the shareholders' agreement in Trefethenv. Amazeen (93 N.H. 110, 36 A.2d 266 (1944)). In that NewHampshire case, the share holdings in a certain corporation wereplaintiff, 50 shares; Chadwick, 50 shares; Holden, 270 shares;and others, 26 shares. In order to increase capital, the plaintiff,Chadwick, and Holden agreed that the plaintiff and Chadwickwould each purchase 52 additional shares, and that Holden wouldrefrain from voting 92 of his shares. The resultant holdings wereplaintiff, 102 shares, and Chadwick, 102 shares, for a combinedstrength of 204 votes; and Holden, 270 shares (of which 92 couldnot be voted), and others, 26 shares, for a combined strength of


204 votes.Thereafter, the plaintiff bought Chadwick's 102 shares. Holden

transferred his 270 shares to a trustee. This trustee transferredthe shares to a successor trustee, the defendant, who sought tovote all 268 shares (of the 270 shares) in her possession. The NewHampshire court declared that "the defendant trustee acquiredthe stock in question subject to and with full knowledge of theagreement ... and has no greater rights with respect thereto thanStanley 0. Holden".

3 5

Nothing in Trefethen supports the District Court. The plaintiff-Chadwick-Holden shareholders' agreement arose from Holden'sexpress promise not to vote 92 of his shares. In Sankin, theDistrict Court, not the parties, made the purported shareholders'agreements to refrain from voting. Further, the Sankin-Garfieldshareholders' agreements themselves imposed no contractualresponsibility on Benn. The shareholders' agreements supposedlyrequired the parties thereto to accept their arbitrary valuation oftheir voting rights, or, as the District Court would have it, requiredGarfield to abstain from voting. Either way, the purported con-tractual obligations or obligation was personal, and could not beimposed on a transferee or successor transferee.3 6

Another prodigious judicial effort to give legal life to a mori-bund shareholders' agreement was made in Shubin v. Surchin(27 A.D.2d 452, 280 N.Y.S.2d 55 (1st Dep't, 1967)), wherein theplaintiff and Hyman Surchin, one of the defendants, each ownedone-half of the shares of a corporation, the by-laws of whichcalled for four directors. The 1959 oral pre-incorporation agree-ment (made prior to the enactment of the BCL) required theplaintiff and Surchin to vote their shares for the election of bothshareholders as directors, and for the election of one nominee ofeach to fill the third and fourth directorships.

In 1965, subsequent to the enactment of the BCL, the plaintiffand Surchin agreed, in a written shareholders' agreement, that theboard of directors was to consist of two persons, namely theplaintiff and Surchin, both of whom were necessary for a quorumand to transact business; that, at shareholders' meetings, thepresence of both shareholders was necessary for a quorum and totransact business;3 7 and that no change was to be made in thecertificate of incorporation or in the by-laws without the consentof both the plaintiff and Surchin. The certificate of incorporationwas not amended to include the provisions of the 1965 share-holders' agreement.

The majority opinion in the Appellate Division sustained theamended complaint, the gravamen of which was the defendants'violations of the terms of the shareholders' agreement. The osten-sible grounds for the ruling were that the 1965 writing was ambig-uous; that the parties may have intended amendment of the


certificate of incorporation; and that the 1959 pre-incorporationagreement could be enforceable, even if the 1965 shareholders'agreement were not. The dissent made clear that the super-majorityprovisions of the 1965 shareholders' agreements were invalidbecause they did not appear in the certificate of incorporation;that reduction of the shareholders' agreement to writing precludeda finding of an intention to amend the certificate of incorporation;and that the oral 1959 pre-incorporation agreement merged withthe 1965 writing, leaving no prior agreement to be enforced.According to the minority, the amended complaint was insufficientas a matter of law.

The Appellate Division majority was result-oriented. It dis-covered non-existent issues, because "dismissal of the pleadingwould doubtless relegate plaintiff to the sole relief of petitioningfor a dissolution of the corporation" (id., 27 A.D.2d at 456,280 N.Y.S.2d at 59). The court's sympathy was misplaced; 3 8the shareholders' agreement ought to have been declared illegal.

Inappropriate considerations were also important to the DistrictCourt and to the Supreme Court. In Sankin, the District Courtstressed the parties' relationships, including the kithship of Sankinand Garfield and their prior business dealings. The District Courtexpressed its disapproval of the Janet Garfield-James Benn adul-teries, and of the lovers' plans to divorce their respective spousesand to marry one another. In Leeds, the Supreme Court ob-served that Marcus acquiesced to the shareholders' agreement asthe price for the investment by the plaintiff and by the investingpartnership of several hundred thousand dollars of desperately-needed capital. It was only after the infusion of funds provedsuccessful, and the corporation prospered, that the defendant,regretting of his bargain with the plaintiff, acted upon newly-discovered doubts of the legality of subs.(2). The Supreme Court'sdim view of Marcus' sense of gratitude apparently led it to decidein favor of the plaintiff.

Manichaeism makes bad law. Neither the District Court nor theSupreme Court was permitted to divine any defendant's characteror morality.3 9 The issues were legal ones, and each court ought tohave found the shareholders' agreements or agreement before itillegal.

A finding of illegality means that a shareholders' agreement isunenforceable for that reason. 4 0 If the unlawful portion of anotherwise-valid shareholders' agreement can be excised, then theremainder-may be enforced.4

A distinction is to be made between a shareholders' agreementwhich is unenforceable because it is illegal and a would-be share-holders' agreement which is unenforceable because it is not, asa matter of law, a contract. A pooling agreement, for example, in


which the purpose or aim is not specified, and which does not setforth a binding procedure for its determination, is an inchoateagreement, in that only a further expression by the parties cangive rise to a contract between or among them. Absent an indi-cation of the parties' intention, a court is without authority toremedy the contract-law omission. 42 Similarly, a putative poolingagreement which seeks unanimity as such, or mere conformity, isunenforcible because it is an agreement to agree:

Before passing to a consideration of the fourth disputed by-law, we com-ment here on a view expressed in the dissenting opinion herein. The dis-senting judges conclude that, while the two by-laws first herein discussedare invalid as such because violative of statutes, the courts should, never-theless, enforce as against either stockholder the agreement made by bothof them and which finds expression in those by-laws. The substance ofthat stockholders' agreement was, as the dissenting opinion says, thatneither stockholder would vote his stock in opposition to the stock ofthe other. Each stockholder thus agreed that he would conform his opinionto that of his associate on every occasion, or, absent such accord, thatneither would vote at all on any occasion. We are at a loss to understandhow any court could entertain a suit, or frame a judgment, to enforcesuch a compact (see St. Regis Paper Co. v. Hubbs & Hastings P. Co.,235 N.Y. 30, 36; Sun P. & P. Assn. v. Remington P. & P. Co., 235. N.Y.338, 345, re "agreements to agree"). (Benintendi v. Kenton Hotel, Inc.,supra, n.27a, 294 N.Y. at 120, 60 N.E.2d at 832).

There is no excuse for judicial failure to apply the law to thefacts before it, but, in Leeds, the Supreme Court stated thatwhere rights of third parties are not involved, and no public

olicy is violated, a court will give effect even to an illegal share-olders' agreement, citing from In re American Fibre Chair Seat

Corp. 42 a the following:

The objection to the validity of the by-law is purely technical ... Whereno rights of third parties are involved and no public policy of the stateviolated, the Courts will give effect to the agreement of stockholders andthe corporate resolution (id., 265 N.Y. at 421-22, 194 N.E. at 255).

The Supreme Court's invocation of public policy shows that"judges are more to be trusted as interpreters of the law than asexpounders of what is called public policy" (In re Mirams [1891]1 Q.B. 594, 595), for the Supreme Court masked thereby its endrun around the statutory one share - one vote rule. The factsof American Fibre do not support its citation for that purpose.There the shareholders unanimously adopted two by-laws, one ofwhich approved of cumulative voting. The other required a unani-mous directors' vote, or an 85 per cent vote of the shareholders,to amend the by-laws or to remove an officer. In order to giveeffect to the two shareholders' by-laws, a shareholders' resolution


(also passed unanimously) directed the president and the secretaryof the corporation to file an amendment to the certificate ofincorporation. The corporate officers failed to file the amendment.

The question before the Court of Appeals was whether "thefailure of the officers to obey the command of the corporatestockholders precludes [the respondent] from exercising a rightof cumulative voting". (Id., n. 42A, 265 N.Y. at 421-22, 193N.E. at 255). It was in response to this question that the Courtof Appeals held that the failure to amend the certificate of incor-poration was a technicality, in that the remaining step (the actualfiling) was a ministerial one, which the corporate officers couldhave been compelled to perform. American Fibre is not authorityfor cavalier disregard of statutes. The case cannot be read as adenigration of every statutory requirement as a "technicality",or as carte blanche to disregard for reason of public policy theclear command of the law.

4 3

Reference by the Supreme Court in Leeds to the rights ofhypothetical third parties was likewise an improper avoidanceof a statutory requirement. The plain language of the BCL maynot be limited through statutory construction to cover only somesupposed legislative objective. To interpret a law thusly is toturn

the rule in Heydon's Case (1584) 3 Co. Rep. 7a on its head. The Baronsof the Exchequer there resolved that, in construing an Act of Parliament,you identify the "mischief" which the statute seeks to remedy (i.e., inmodern parlance, the statutory objective), and so construe the statutethat it advances the remedy and suppresses the mischief (i.e., in modemparlance, in construing the statute you bear its objective in mind). It is,in other words, a positive and not a negative canon of construction; itenjoins aliberal,andnot arestrictive, approach. For a court of constructionto constrain statutory language which has a primary natural meaningappropriate in its context so as to give it an artificial meaning which isappropriate only to remedy the mischief which is conceived to haveoccasioned the statutory provision is to proceed unsupported by principle,inconsonant with authority and oblivious of the actual practice of par-liamentary draftsmen (Maunsell v. Olins [1975] A.C. 373, 393).

Judicial consideration of policy and adherence to statutory laware not incompatible. In Nickolopolous v. Sarantis, "' the plain-tiff, the defendant, and two other men each owned twenty-five per centum of the shares of a corporation. The four share-holders entered into a written shareholders' agreement, oneprovision of which was that Nickolopolous was to exercise 50per cent of the shareholders' votes. The New Jersey Court ofErrors and Appeals found the shareholders' agreement void,holding that "stockholders are powerless, except by the methodprovided [in the statute], to alter the voting power of any share of


stock" (102 NJ. Eg. at 587, 141 Atl. at 793). The Court of Errorsand Appeals gave a policy reason (prevention of fraud, arising fromsecret shareholders' agreements, on the corporation and on thosedealing with it) for the statutory certificate-of-incorporationrequirement, but the policy reason was in addition to and insupport of the statutory command. The Supreme Court, in con-trast, gave its policy reason (no third-party involvement) in orderto vitiate the applicable law. The differing results on similar factsare attributable to the failure of the Supreme Court to followthe statute. 4

4

A pooling-agreement provision may not be construed other-wise, because pooling agreements "are valid and binding, if theydo not contravene any express charter or statutory provision". 4The legislative prescription forecloses "unrestricted and uncriticalapproval of all agreements between stockholders relating to votingof their stock". 4 'A pooling agreement must be consistent with allprovisions of applicable law in order to be valid. In Yu v. Linton(68 A.D.2d 856, 414 N.Y.S.2d 558 (1st Dep't, 1979)), the appel-lants were disqualified from voting at a shareholders' meeting bythe chairman, on the ground that the appellants failed to paymaintenance charges due to the corporation. A by-law of the cor-poration allegedly provided that a default by a shareholder in apayment due to the corporation effected the suspension of thatshareholder's right to vote. Special Term had adjudged, in part,that the election from which the appellants were excluded fromvoting was valid; the Appellate Division reversed:

Respondents do not contend that the certificate of incorporation containsany provision relating to voting rights. Respondents do claim that undersubdivision (a) of section 620 of the Business Corporation Law, share-holders are permitted to enter into agreements restricting or transferringthe right to vote and that the by-laws and subscription agreements in thiscase operate as such agreement to disenfranchise a defaulting stockholder.This contention is without merit. The by-laws are ineffective to deprive therecord shareholders of the right to vote provided by subdivision (a) ofsection 612 of the Business Corporation Law. Nor can the subscriptionagreements ... deprive said shareholders of such right. Subdivision (a) ofs.620 of the Business Corporation Law cannot be construed to providea means to deny the right to vote specified in subdivision (a) of s. 612 ofthe Business Corporation Law. (Id., 58 A.D.2d at 856-57, 414 N.Y.S.2dat 559 (citations omitted)).

No statutory right may be changed by a pooling agreement,because "[p] arties cannot by agreement repeal acts of the legis-lature. It might just as well be said that the usury laws could berepealed by parties entering into an agreement that seven[!] percent should be paid upon a loan and that the debtor would notplead usury." 4 7 The one may not be done, and neither may the


other.

C Restriction-of-Directors. AgreementsUnder early law, restriction-of-directors agreements were not

favoured. Encroachment on a board of directors' responsibilitywas thought of as its "sterilization" (its "usurpation", in Englishand Commonwealth terminology), because the statutory duty ofmanagement imposes on the members of the board a fiduciaryresponsibility to the corporation and to its shareholders. 4 a Thisconcept was the subject of six major cases decided by the Courtof Appeals prior to the enactment of the BCL. In five of thosecases, the court was steadfast in its adherence to the principleof directorial management. In one of them, a "slight" impinge-ment on the directors' statutory authority was inexplicably per-mitted.

In the first case, Manson v Curtis,4 s a the Court of Appealsfound the shareholders' agreement invalid as a whole, because itssine qua non was the devolution of the board of directors' dutyof management to a shareholder. 4 9 The court wrote of thestatutory grant of authority:

In corporate bodies, the powers of the board of directors are, in a veryimportant sense, original and undelegated. The stockholders do notconfer nor can they revoke those powers. They are derivative only in thesense of being received from the state in the act of incorporation.*** Allpowers directly conferred by statute, or impliedly granted, of necessity,must be exercised by the directors who are constituted by the law as theagency for the doing of corporate acts. In the management of the affairsof the corporation, they are dependent solely upon their own knowledgeof its business and their own judgment as to what its interests require(Supra, n. 48A, 223 N.Y. at 322-23, 119 N.E. at 562 (citations omitted)).

The second case is Fells v. Katz (256 N.Y. 67, 175 N.E. 516(1931)), in which the plaintiff was president, a director, and anemployee of a corporation, pursuant to a shareholders' agreementwhich provided for directorships and employment for all itssignatories. A number of years thereafter, the plaintiff organizedhis own corporation, which, though not a competing firm, tookhis time from his duties as president of the first corporation.

The defendant directors caused the plaintiff to be oustedfrom his position as president, and deposed him from his director-ship, and terminated his employment. The plaintiff failed of hissuit to compel his reinstatement. The Court of Appeals rejectedthe contention that the shareholders' agreement could bind thedirectors:

An agreement among stockholders whereby the directors are bereft oftheir power to discharge an unfaithful employee of the corporation isillegal as against public policy. The agreement of the stockholders to con-


tinue a man in the directorate must be construed as an obligation to retainhim only so long as he keeps the agreement on his part faithfully to actas a trustee for the stockholders. An agreement to continue a man aspresident is dependent upon his continued loyalty to the interests of thecorporation. (Id., 256 N.Y. at 72-73, 175 N.E. at 517 (emphasis added)(citations omitted).)

McQuade v. Stoneham (263 N.Y. 189 N.E. 234 (1934)), thethird case, was one in which a shareholders' agreement providedthat the parties were to use their best endeavours for the purposeot continuing three persons, one of whom was the plaintiff, asdirectors; and for the purpose of continuing the tenure of threeofficers, including that of the plaintiff as treasurer. Also, salaries,capitalization, the number of shares, the by-laws, and generalpolicy were not to be changed without the unanimous consent ofthe parties to the shareholders' agreement. Subsequently, thedefendents removed McQuade both as treasurer and as a director.

The Court of Appeals "assumed" that the defendants put theplaintiff out when they might have retained him, merely in orderto get rid of him. The defendants argued the illegality of the share-holders' agreement, based on their statutory responsibilities asdirectors. Though the defendants, who were also shareholders, usedthe illegality of the shareholders' agreement for their benefit,the court held that the shareholders' agreement, which purportedto limit the directors, was void, in that a director may not, bycontract, limit ("fetter", in English and Commonwealth ter-minology) his discretion."S

Apparently, the Court of Appeals felt some discomfort withits adherence to statute, so it created a de minimus test of en-croachment on a board of directors' authority. In Clark v. Dodge(269 N.Y. 410, 199 N.E. 641 (1936)), the fourth case, Clark andDodge owned all the shares of a corporation; Clark was the min-ority shareholder. The shareholders' agreement provided forDodge to vote for Clark as director and as a general manager,and that Clark could remain as general manager as long as heremained "faithful, efficient and competent to so manage andcontrol the said business" (id., 269 N.Y. at 413, 199 N.E. at642). In return, Clark contracted to disclose a certain formulaknown only to him. Clark performed his obligation under theshareholders' agreement; Dodge breached the shareholders' agree-ment by not casting his votes to continue Clark as a director andas general manager.

The Court of Appeals made distinctions without differencesbetween this shareholders' agreement and the others.'5 The deminimus test was that a unanimous shareholders' agreementwould be enforceable, though unlawful, if the "invasion of thepowers of the directorate ... is so slight as to be negligible" (id.,269 N.Y. at 417, 129 N.E. at 643). This holding was based on an


improper shift of the legal standard from the statutory commandto damage suffered or threatened to be suffered by shareholdersor the public (id., 269 N.Y. at 415, 199 N.E. at 642).

The rationale was merely a judicial stratagem to avoid thelegislative standards. The first question (at least in a court of law)is, "What does the applicable statute provide?". The law's un-mistakable expression of the norms of corporate governmentexcludes absolutely the formulation or implementation by acourt of any other concept of how corporations should be gover-ned. Nor does it matter that the majority, or even the entirety, ofthe shareholders desire that their corporation change its spots:

[E] ven a resolution of a numerical majority at a general meeting of thecompany cannot impose its will upon the directors when the articleshave confided to them the control of the company's affairs. The directorsare not servants to obey directions given by the shareholders as individuals;they are not agents appointed by and bound to serve the shareholders astheir principals. They are persons who may by regulations be entrustedwith the control of the business, and if so entrusted they can be dispos-sessed from that control only by the statutory majority which can alterthe articles. Directors are not, I think, bound to comply with the directionseven of all the corporators acting as individuals. Of course the corporatorshave it in their power by proper resolutions, which would generally bespecial resolutions, to remove directors who do not act as they desire,but this in no way answers the question here to be considered, which iswhether the corporators are engaged in carrying on the business of thecorporation. In my opinion they are not. To say that they are involves acomplete confusion of ideas. (Gramophone & Typewriter, Ltd., v. Stanley)[1908] 2 K.B. 89, 105-6 (C.A.)The myth of the untrammelled power of shareholders was put

to rest in Benintendi v. Kenton Hotel, Inc. (294 N.Y. 112, 60N.E.2d 829 (1945), the fifth case, in which two shareholdersowned unequally all the shares of a corporation. The two share-holders agreed to vote for, and, at a shareholders' meeting adopted,four by-laws. The first by-law purported to require a unanimousshareholders' vote to approve a shareholders' resolution. Thesecond by-law purported to require a unanimous shareholders'votc to elect a director. The third by-law purported to requirethat directors' resolutions be adopted unaminously. The fourthby-law mandated a unanimous shareholders' vote to amendthe corporation's by-laws. No creditor was affected by any of theby-laws.

The Court of Appeals struck down the first three by-laws. Thefirst and second by-laws were held contrary to the statutoryscheme of corporate government. The third by-law was heldcontrary to the principle of majority control within the board.The fourth by-law was approved by the court.5 2


The Court of Appeals found the unanimity wherewith theby-laws were adopted to be of no significance. The court denom-inated distinctions among the means to evade the statute (such asbetween a by-law and a shareholders' resolution) "unimportant",and held the three by-laws to be "intrinsically invalid" becausethey contravened the law.5 3 The Court of Appeals ruled:

Those who own all of the stock of a corporation may, so long as theyconduct the corporate affairs in accordance with the statutory rules,deal as they will with the corporation's property (always assuming nothingis done prejudical to creditors' rights). They may, individually, bindthemselves in advance to vote in a certain way or for certain persons.But this state has decreed that every stock corporation chartered byit must have a representative government, with voting conducted con-formably to the statutes, and the power of decision lodged in certainfractions, always more than half, of the stock. That whole concept isdestroyed when the stockholders, by agreement [or] by-law ... as tounanimous action, give the minority interest an absolute, permanent,all inclusive power of veto.S 3a

LastlV, in Long Park, Inc. v. Trenton-New Brunswick TheatresCo. (297 N.Y. 174, 77 N.E.2d 633 (1948)), the sixth case, theshareholders agreed that the manager was "given full authorityand power to supervise and direct the operation and managementof all such theatres"; that the manager was to have specified otherauthority related to theatre management; and that the managerwas to carry out "such policies or projects as the board of directorsof the tenant or its subsidiaries may approve". Management ofthe theatres was vested in one of the shareholders, and thedirectors could not change the manager (id., 297 N.Y at 177-8,77 N.E.2d at 634).

The impropriety of the shareholders' agreement was clear, sothe court did not find it significant that all the shareholders hadentered into it; nor did the court look to see whether any thirdparty was injured thereby. The court held that the shareholders'agreement sterilized the board of directors, and was in violation ofthe statutory requirement of corporate management by directors(id., 297 N.Y. at 179, 77 N.E.2d at 635).

With the rise of close corporations, statute law recognized thatshareholders are the actual manipulators of the smallest corporatemarionettes. This recognition is conditioned on substantiverequirements (e.g., close-corporation status; unlisted shares, acertificate-o f-incorporation provision) which vary from jurisdictionto jurisdiction. 5 4 Among the statutes designed to meet the needsof close corporations is BCL s. 620(b) - (g),S I which permitsthe shareholders of certain corporations, under certain conditions,to enter into restriction-of-directors agreements. The unambiguousdetail of the statute imposes on the judiciary the obligation to


"enforce it according to the letter, the responsibility for theresult being upon the Legislature, not upon the courts"., 6

It was in the seventeenth year subsequent to the effective dateof the BCL that the Court of Appeals decided the next case on arestriction-of-directors agreement. In Zion v. Kurtz (50 N.Y.2d92, 405 N.E.2d 681, 428 N.Y.2d 199 (1980)), the defendantssought to acquire Lombard-Wall Corporation ("L-W" herein) aDelaware corporation, which was owned by Equimark Corporation.In order to make the acquisition, the defendant organized anotherDelaware corporation, the amended name of which was Lombard-Wall Group, Inc. ("Group" herein). The defendant intended thatGroup would be the holding company, and would acquire andown all the outstanding shares of L-W. In turn, L-W would bethe operating company.

The acquisition was financed by a loan of $4,000,000 fromL-W to Group on the strength of a no-interest note, and Groupused the money to pay Equimark for L-W. Since Group had noasset other than L-W, and no income other than that which L-Wgenerated, the note of Group was an empty promise. Additionally,the exchange of L-W's assets for the note reduced L-W's net worthto zero. For these reasons, the defendant sought the assistance ofthe plaintiff in order to guarantee the note. The plaintiff did soby pledging land owned by his Half Moon Land Corporation. Thisguarantee gave transactional value to the note, and maintained thenet worth of L-W. In consideration for the encumbrance ofHalf Moon's real property, the defendant gave 19.9 per centof his shares in Group to the plaintiff.' 7

The transactions involved various inter-corporate agreements.In addition, when the plaintiff (the minority shareholder) and thedefendant (the majority shareholder) were still the sole share-holders of Group, they entered into a shareholders' agreement,to which Group was also a party.5 8 The restriction-of-directorsagreement was Section 3.01 thereof, which provided in relevantpart:

Article 111. Operation of [Group] and L-W During Loan Period andRelated Matters. During the Loan Period ... unless otherwise consented toby the holders of a majority of the original Class A stock then outstanding

3.01 [Group]. Anything in its Certificate of Incorporation or By-lawsto the contrary notwithstanding, [Group] shall not:

(a) Engage in any business or activities of any kind, directly or indirec-tly, whether through any Subsidiary, or by way of a loan, guarantee orotherwise, ... 9

Approximately eight months after the shareholders' agreementwas made, Group's accountants advised the defendant that the notefrom Group to L-W could not be properly valued at $4,000,000

ANGLO-AMERICAN LA W RE VIEW

unless the note bore interest. The defendant asked the plaintiffto give his consent to an interest agreement, which would havecured the deficiencies which the accountants stated existed. Theplaintiff refused.6 0

The defendant caused Group to execute the interest agreement,and a related escrow agreement, over the protest of the plaintiff.The action for declaratory judgment which followed sought, interalia, a declaration that the transaction whereunder the note wasmade to bear interest was a business or activity' proscribed bySection 3.01. The shareholders' agreement provided that it wasto be governed by Delaware law, and both Group and L-W wereDelaware corporations, so the Court of Appeals abided by theshareholders' choice of law. The court held, in supposed accordwith Delaware law, that the Zion-Kurtz restriction-of-directorsagreement was valid, and was enforceable by the original partiesto it, though Group was not a close corporation, and thoughGroup's certificate of incorporation was not amended.6 1

The error of the Court of Appeals was its substitution of agenerality of public policy for statute law. One can say, as didthe court, that Delaware public policy "does not proscribe a

rovision such as that contained in the shareholders' agreementere at issue, even though it takes all management functions away

from the directors". 6 2 However, Delaware law qualifies the generalstatement. Delaware statute law provides expressly, "The businessand affairs of every corporation ... shall be managed by or underthe direction of a board of directors ... " (Del. Gen. Corp. L.s. 141(a)), and Delaware case law limits the power of the boardto delegate matters central to its statutory authority.6 3 Further,though Delaware statute law does permit variation from the normsof corporate government, the variances are expressly conditionedby statute on the qualification of the corporation as a closecorporation ;6 4 and the prerequisite to lawful restriction or transferof a board's authority by a close corporation, both under statutelaw and under case law, is a certificate-of-incorporation pro-vision.6 s Thus, the statement about Delaware public policy doesnot support the conclusion of the Court of Appeals that the Zion-Kurtz restriction-of-directors agreement is valid under Delaware law.

The defendant's obligation, under Section 8.05(b) of theshareholders' agreement, to execute and deliver "further . . .instruments as may reasonably be required . .. [to] give effect tothe provisions and the intent and purposes of this Agreement",

6 6

was the weak peg which the court burdened with an unsupportableconclusion:

Since there are no intervening rights of third persons, the agreementrequires nothing that is not permitted by [Delaware] statute, and allof the stockholders of the corporation [having] assented to [the share-holders' agreement], the certificate of incorporation may be ordered


reformed, by requiring [the defendant] to file the appropriate amend-ents, or more directly he may be held estopped to rely upon the absenceof those amendments from the corporate charter.

6 7

The sweep of this sentence boggles one's brains. The concernfor the unasserted rights of hypothetical third parties was a strawman. 6 8 That the shareholders' agreement, arguendo, "requiresnothing that is not permitted by statute" does not yield theconclusion that the parties agreed to everything which the lawpermits, nor was the Court authorized to read into the share-holders' agreement any contractual obligation whatever. A courtof law is not a deus ex machina, and may neither ignore normanufacture the contents of documents in order to achieve thatwhich, in the judicial view, is the just result.6

The unanimous agreement of the shareholders does not deter-mine the law, and nothing in the shareholders' agreement can beconstrued as an obligation that either party thereto vote in acertain way. 7 0 Yet, the court would force the defendant, asmajority shareholder, to vote for an amendment to the certificateof incorporation which would make Group a close corporationunder Delaware law. 7 1 Nor could the defendant be "estopped";there was no basis for the court to order the defendant not to relyon his statutorily-approved position.

New York public policy does not validate the Court of Appeals'faulted understanding of Delaware law. The court asserted that''no New York public policy stands in the way of our applicationof the Delaware statute and decisional law above referred to" 7 2

citing from a legislative study the following:

Paragraph (b) [of BCL s. 620] expands the ruling in Clark v. Dodge,and, to the extent therein provided, overrules Long Park, Inc. v. Trenton-New Brunswick Theatres Co., Manson v. Curtis, and McQuade v. Stoneham.(1d.)

The quotation was misleadingly selective. The full text fromwhich the above sentence was taken shows that, in New York,the necessary element of the statutory permission to transfera board of directors' authority is a certificate-of-incorporationprovision:

The provision authorized by paragraph (b) [of BCL s.620] can be con-tained only in the certificate of incorporation. Because of the limitationsthat it must have unanimous consent of all shareholders, whether or notentitled to vote, and that the shares of the corporation must not bepublicly listed or quoted either at the time of the agreement or there-after, this provision can be practicably used only in close corporations.Paragraph (b) expands the ruling in Clark v. Dodge, and, to the extenttherein provided, overrules Long Park, Inc. v. Trenton-New Brunswick


Theatres Co., Manson v. Curtis, and McQuade v. Stoneham. Notice ofthe existence of a provision authorized by this section must be stated onthe certificates for shares. Paragraph (e) provides a simple method ofstriking out a provision authorized by paragraph (b) if it has ceased to bevalid under this section.

The powers given to the shareholders by this section vary the usualstatutory norm of board management as expressed in s. 701; accordinglythat section explicitly makes exception for arrangements valid under thissection.

7 3

Thus, it is evident that New York, like Delaware, conditionsits public-policy acceptance of deviations from the norms ofcorporate government on adherence to the statutory conditionsprecedent to such changes. The public-policy rationale advancedby the Court of Appeals simply has no basis. 7

4

The decision also destabilized, rather that resolved, the precar-ious imbalance among BCL s. 620 (b) - (g), Clark v. Dodge, andthe five other cases on restriction-of-directors agreements. Zionv. Kurtz resuscitated the discredited misapplication of publicpolicy and of harm to third parties, in face of the statutoryconditions precedent. Further, the procedural requirements ofBCL s. 620 (b) - (g) are a significant modification of Clark v.Dodge, but the court ignored the effect of the statute on itscase law. Even if Clark v. Dodge were good law, the case is limited,both by itself and by the five other cases, to minimal intrusions,by way of shareholders' agreements, on directors' authority.Regardless of the number of shareholders, and no matter whetherthe majority or all of them undertook to insulate themselvesfrom the law's purview, all six cases make clear that a contractbetween or among shareholders cannot effect a transfer of thedirectors' authority to a third person. It was error for the Courtof Appeals to hold that Section 3.01 permits the lodging of an"absolute, permanent, all-inclusive power of veto"7'T in theminority shareholder (Zion).

Adherence to law is beneficial beyond avoidance of error, orthe maintenance of the proper roles of the legislature and of thejudiciary. The command of the law must guide judicial decisionsbecause there is a need in corporate law for certainty. Investmentbecomes gambling, and risk becomes unacceptable, when relation-ships between or among shareholders are uncertain. Permissibleand prohibited corporate actions must be determinable prior totheir being undertaken. "I am a firm believer in a system by whichcitizens and their advisers can have as much certainty as possiblein the ordering of their affairs. Litigation is an activity that doesnot markedly contribute to the happiness of mankind, though itis sometimes unavoidable." 7 6

Giving force and, thereby, credence to corporation law fulfils


also the state's role as incorporator of incorporations, the mostimportant corollary of which is the duty of a corporation toadhere to the law of its domicile. Judicial tinkering with statutoryprovisions undermines the law, and weakens public control ofcorporate activity. If a particular statutory requirement can becircumvented by a shareholders' agreement, then any statutorylimitation on a corporation may in like manner be negatived. Arelativist view of an absolute requirement is ineffectual, becausethat view's focus is not on the authority of the law but on thirdparties, public policy, and the classification of transgressions astechnicalities. Judicial legislation would permit a corporationwith no creditor, or a corporation with quiescent creditors, to berun as the shareholders please, whether as an entity other than acorporation or as the alter ego of the shareholders. Were this so,any corporation, large or small, public or close, could be run inaccordance with the applicable shareholders' agreement - aprivate corporation law - allowing with good grace or ill statutorycontrol not inconsistent with the shareholders' agreement.

There will be cases in which adherence to the law will result ina judgement materially adverse to the interest of a litigant. Never-theless, courts must exercise constant and effortful vigilance toenforce the law as written. "Courts cannot correct what theymay deem either excesses or omissions in legislation, nor relieveagainst the occasionally [-] harsh operation of statutory provisions,without the danger of doing vastly more mischief than good."' 7 7The great mischief in corporate law is the loosening of state controlover corporations.

END NOTES

1. A corporation is an artificial person, created and in existence by virtue of law, anddistinct from the natural persons who own or direct it. A close corporation ischaracterized by a limited number of shareholders and a virtual identity ofshareholders, officers, and directors.

2. Printing and Numerical Registering Co. v. Sampson, [18751 L.R. 19 Eq. 462,465.

3. Doherty v. McAuliffe, 7 F. Supp. 49, 53 (D. Mass. 1934), vacated on othergrounds, 74 F.2d 800 (1st Cir.), cert. denied, 294 U.S. 730 (1935).

4. Blount v. Taft, 29 N.C. App. 626, 630, 225 S.E.2d 583, 586 (1976), aff'd,295 N.C. 472, 246 S.E.2d 763 (1978).

5. See Venner v. Chicago City Ry. Co., 258 Ill. 523, 539, 101 N.E. 949, 953(1913); White v. Snell, 35 Utah 434, 439, 100 Pac. 927, 929 (1909);Chapman v.Bates, 61 NJ. Eq. 658, 667, 47 Atl. 638, 641 (Ct. Err. & App. 1900); Smithv. San Francisco & N.P.R. Co., 115 Cal. 584, 602, 47 Pac. 582, 586 (1897);Puddephatt v. Leith, [1916] 1 Ch. 200; Greenwell v. Porter, [19021 1 Ch. 530.

6. Manson v. Curtis, 223 N.Y. 313, 319-20, 119 N.E. 559, 561 (1918) (emphasisadded). See Blount v. Taft, supra, n.4, 29 N.C. App. at 630, 225 S.E.2d at 586;Henderson v. Joplin, 191 Neb. 827, 832, 217 N.W.2d 920, 923-24 (1974);Irwin v. Prestressed Structures, Inc., 420 S.W.2d 491, 494 (Tex. Ct. Civ. App.1967); Weil v. Beresth, 154 Conn. 12, 16, 220 A.2d 456, 459 (1966); Galler v.Galler, 32 I11.2d 16, 30, 203 N.E.2d 577, 585 (1964); Royster v. Baker, 365S.W.2d 496, 500 (Mo. Sup. Ct. 1963); Tschirgi v. Merchants Nat Bank of Cedar

ANGLO-AMERICAN LAW REVIEW 95

Rapids, 253 Iowa 682, 692-93, 113 N.W.2d 226, 232 (1962); Sensabaugh v.Poison Plywood Co., 135 Mont. 562, 566-67, 342 P.2d 1064, 1067 (1959);Wolf v. Arant, 88 Gal. App. 568, 573-74, 77 S.E.2d 116, 120-21 (1953);Ringling Bros-Barnum & Bailey Combined Shows, Inc. v. Ringling, 29 Del.Ch. 610, 621-22, 53 A.2d 441,447 (Sup. Ct. 1947);Baran v. Baran, 39 LuzerneLeg. Reg. Rep. 283, 285, 59 D. & C. 556, 558 (Pa. C.P., Luzerne Cty., 1947);Ringuet v. Bergeron, (1960) 24 D.L.R.2d 449, 458-59 (Canada Sup. Ct.).

7. New York Joint Legislative Committee to Study Revision of the CorporationLaws, 7th Interim Report, [19631 Leg. Doc. No. 29, p. 130. The BCL came intoeffect on September 1, 1963. BCL s.620(a) has no counterpart in any priorbusiness-corporation law of New York.

8. N.C. Session Laws, 1955, c.1371, s.1 (at s.55-73[a] ) (emphasis added). Section55-73(a) was amended by N.C. Session Laws, 1973, c.469, s.29, to parallel BCLs.620(a) in relevant part.

9. Cal. Corp. Code s.706(a); Del. Gen. Corp. L. s.218(c); Fla. Gen. Corp. Act s.607.107(1): Ga. Gen. Bus. Code s.22-611(a); Maine Bus. Cor. Act s.617(1); Mich.Gen.Corp. Act s.450.1461; NJ.Bus. Corp. Act s.14A: 5-21(1); N.C. Bus. Corp.Act s.55- 7 3(a); and S.C. Bus. Corp. Code s.33-11-150, in which the language ofBCL s.620(a) was adopted verbatim, or nearly so. See Canada Business Corpor-ations Act ("CBCA" herein) s.140(1); Man. Corporations Act s.140(1); Sask.Business Corporations Act, 1977 s.140(1). CBCA s.140(1) was based on BCLs.620(a). Letter from John L. Howard (Assistant Deputy Minister,Corporate Affairs, Canada; joint author [with Professor Leon Getz and the lateRobert W.V. Dickerson], Proposals for a New Business Corporation Law forCanada, which is largely reflected in the CBCA) to Stephen KrUger (November 7,1978). The Manitoba Corporations Act and the Saskatchwan Business Corpor-ations Act, 1977 were based on the CBCA; other provinces propose to amendtheir statutes to parallel it. Id.

10. See Wilson v. McLenny, 262 N.C. 121, 128, 136 S.E.2d 569, 575 (1964); Smithv. Biggs Boiler Works Co., 32 Del. Ch. 147, 155, 82 A.2d 372, 376 (1951); W.Wang, "Pooling Agreements Under The New California General Corporation

aw". 23 UCLA L. Rev. 1171, 1171 (1976); Note, "The Validity of Stock-holders' Voting Agreements in Illinois". 3 Univ. Chi. L. Rev. 640, 641 (1936).A pooling agreement is distinguished from a voting trust agreement, in that theparties to the former retain full ownership of their shares; and it differs from aproxy agreement, in that no shareholder who is a party to it is the agent of anyother shareholder. Manson v. Curtis, supra, n.6, 223 N.Y. at 319, 119 N.E. at 561.

11. Calumet Industries, Inc. v. MacLure, 464 F. Supp. 19, 27 (N.D. Ill. 1978).The court illustrated the point with a comparison:

However, the fundamental difference between the consent procedure [underDel. Corp. L. s.2281 and the voting agreement described in [Del. Corp. L.1s.218 [(c), the pooling-agreements provision] is that the voting agreementis a contract whereby the shareholders exchange promises, each in considerationof the other. The consents are given gratuitously, and thus are not part ofan enforceable voting agreement.

Id. (citation omitted).12. Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Ringling, supra, n.6,

29 Del. Ch. at'623, 53 A.2d at 447. Mutual promises are legal consideration.Valuable consideration may be neither offered nor accepted because the exerciseof purchased voting rights is prohibited. Chew v. Inverness Management Corp.,352 A.2d 426, 430 (Del. Ch. 1976); Macht v. Merchants Mort. & Credit Co.,22 Del. Ch. 74, 80, 194 At. 19, 22 (1937).

13. Storer v. Ripley, 1 M.2d 235, 242, 125 N.Y.S.2d 831, 837 (Sup. Ct.), aff'd, 282App. Div. 950, 125 N.Y.S.2d 939 (2nd Dep't, 1953), leave to appeal denied,282 App' Div. 1061, 121 N.Y.S.2d 888, 306 N.Y. 985 (1954).

14. See Matter of Exeter Mfg. Co. v. Marrus, 254 App. Div. 496, 497, 5 N.Y.S.2d438, 439-40 (1st Dep't, 1938); Leroux v. Brown, [1852] 12 C.B. 801, 138Eng. Rep. 1119 (C.P.).Both CBCA s.140(l) and Sask. Business Corporation Act, 1977 s.140(l) provide:

A written agreement between two or more shareholders may provide that inexercising voting rights the shares held by them shall be voted as therein


provided.

The differences between these subsections and Man. Corporations Act s.140(l)are that the Manitoba law utilizes "pooling agreement" in place of "agreement",and, significantly, that the adjective "written" does not qualify "pooling agree-ment." Thus, an oral pooling agreement is enforceable in Manitoba, but is notenforceable in Saskatchewan or under the CBCA. See Martin v. Haubner, (1896)26 Sup. Ct. Rep. 142,147 (Canada).

15. "[11n order to constitute a 'pool' there must be an 'aggregation of interest orproperty' or a throwing of revenue or property into one common fund or asharing of interest in that fund by all on an equal or previously [-] agreed basis."Canadian Fur Auction Sales Co. (Quebec) Ltd. v. Neely, (1954) 11 W.W.R. (N.S.)254, 265 (Man. Ct. App.). As a matter of law, the property of a pooling agree-ment is the votes attached to the shares owned by the participating shareholders;the aggregation of votes (4e., the pool) constitutes its common fund; and thepreviously-agreed basis is its objective, or its procedure for determination of theobjective.

16. What is meant by the omitted phrase, "or as they may agree"? The phrase, whichwas never adjudicated in any jurisdiction, hints darkly at agreements to agree.Das geht nicht! Whatever the revisers intended thereby, an agreement to agree isnot a contract, and is not enforceable. City of Los Angeles v. Superior Court, 51Cal.2d 423, 433, 333 P.2d 745, 756 (1959); May Metropolitan Corp. v. May OilBurner Corp., 290 N.Y. 260, 264, 49 N.E.2d 13, 15 (1943); De Vecchi v. DeVecch4 34 A.D.2d 790, 311 N.Y.S.2d 530 (2nd Dep't, 1979) (shareholders'agreement); Green v. Ainsmore ConsoL Mines Ltd., [19511 3 D.L.R. 632 (B.C.Sup. Ct.); Foley v. Classique Coach, Ltd., [19341 2 K.B.1 (C.A.); King's Motors(Oxford) Ltd. v. Lax, [19691 3 All Eng. Rep. 665 (Cty. Palatine of LancasterCh. Ct.).

17. Sup. Ct., Rockland Cty., 1977 (unreported decision), aff'd, 59 A.D.2d 734,398 N.Y.S.2d 848 (2nd Dep't, 1977), leave to appeal denied, 43 N.Y.2d 646(1978). In Leeds, the defendant owned all the shares of a corporation. The plain-tiff, and an investing partnership organized by the plaintiff, invested large sums ofmoney in the corporation. The Leeds-Marcus shareholders' agreement was oneelement of a complex financing arrrangements, which included the acquisition ofshares by the plaintiff and the holding of shares as security by the investingpartnership. After the investing partnership's loan was repaid, and the shares heldby it were reacquired by the corporation, the plaintiff owned 78 shares (42.86%of the 182 outstanding shares), and the defendant owned 104 shares (57.14%of the outstanding shares).

18. Subsection (1) refers to election of directors, and subs. (2) refers to shareholderapproval. "Election" and " approval" are words of art, and are not synonomous:Directors are elected and shareholders' resolutions are approved. Election ofdirectors is set apart because the right to elect directors is the basic right ofshare ownership, without which right the purchase of shares would be littlemore than investment in a blind trust. Lord v. Equitable Life Assur. Soc'y, 194N.Y. 212, 228-29, 87 N.E. 443, 448-49 (1909).

19. The one share - one vote rule is the statutory norm. Cal. Corp. Code s.700(a);Del. Gen. Corp. L. s.212(a); Fla. Gen. Corp. Act s.607.097(l); Ga. Gen. Bus.Code s.22-608(a); Maine Bus. Corp. Act s.612(1); Mich. Gen. Corp. Act s.450.1441(1); N.J. Bus. Corp. Act s.14A: 5-10; BCL s.612(a); N.C. Bus. Corp. Acts.55-67(a); S.C. Bus. Corp. Code, s.3 3 -11-110(a): CBCA s.134(1); Sask. Bus-iness Corporations Act, 1977 s.134(l); U.K. Companies Act 1948, s.134(e), butsee Sch. I, Table A, Part I, art. 62. Cf. Man. Corporations Act, s.135(1). Thecommon law rule was one person - one vote. In re Rochester Dist. Tel. Co.,40 Hun. (N.Y.) 172, 174 (Gen. T., 5th Dep't, 1886);In re Horbury Bridge Coal,Iron, & Waggon Co., [18791 11 Ch. 109 (C.A.). See D. Ratner, "The Govern-ment ot Business Corporations: Critical Reflections on the Rule of 'One Share,One Vote' ". 56 Cornel L. Rev. 1,3-11 (1970).

20. 273 N.C. at 81, 159 S.E.2d at 355. Under applicable law, a proxy was validfor 11 months. The special shareholders' meeting was held more than 11 monthsafter the Stock Voting Proxy had been executed.

21. 273 N.C. at 82, 159 S.E.2d at 355 (emphasis added). The last two sentences ofthe quotation apply two rules: (1) A pooling agreement is distinct from a restric-tion-of-transfer agreement. (2) A pooling agreement does not, of itself, bind a


transferee of a party to the pooling agreement.22. The formula for determination of the extent of change in voting strength is:

s]D -- 100

D = The deviation in voting strength of a party's holding from the one share -one vote rule, expressed as a per centum of his holding.

T = The number of outstanding shares.S = The number of shares held by a party.

Subsection (2) augmented Leeds' voting strength by 16.66%, and impairedMarcus's voting strength by 12.5%.The value of the vote attached to each share is magnified by cumulative voting.For this reason, a cumulative-voting provision, unlike a pooling agreement, mustbe included in the certificate of incorporation. Del. Gen. Corp. L s.214; Fla. Gen.Corp. Act s.607.097(4); Ga. Gen. Bus. Code s.22-608(d); Maine Bus. Corp. Acts.622; Mich. Gen. Corp. Act s.450.1451; NJ. Bus. Corp. Act s.14A: 5-24(2);BCL s.618. Cf. Cal. Corp. Code s.708 and S.C. Bus. Corp. Code 33-11-200(statutory cumulative voting; notice requirement). But see N.C. Bus. Corp. Acts.55-67(c) (optional cumulative voting; notice requirement).Fractional voting is permitted if the fractional vote is proportional to the frac-tional value of the fractional share. This proportionality maintains the consistencyof the fractional vote with the one share - one vote rule. Since the value of thevote is unchanged, a certificate-of-incorporation provision is not prerequisite tothe issuance and voting of fractional shares. Cal. Corp. Code s.407 ; Del. Gen. Corp.L s.155; Fla. Gen. Corp. Act s.607.071(4); Ga. Gen. Bus. Code s.22-509(a);Maine Bus. Corp. Act s.512(1); Mich. Gen. Corp. Act s.450.1338(l): NJ. Bus.Corp. Act s.14A; 7-13; BCL s.509(a); N.C. Bus. Corp. Act s.55-58; S.C. Bus.Corp. Code s.33-9-120(a).A pooling agreement may be utilized with either cumulative voting or fractionalvoting. Under cumulative voting, the number of votes in the pool equals theproduct of the number of directors to be elected and the number of shares.Under fractional voting, the number of votes in the pool equals the product ofthe reciprocal of the common fraction and the number of shares.

23. Plurality election of directors: Cal. Corp. Code s.708(c); Maine Bus. Corp. Acts.611(1) (B); Mich. Gen. Corp. Act s.450.1441(2); NJ. Bus. Corp. Act s.14A:5-24(3); BCL s.614(a); N.C. Bus. Corp. Act s.55-67(c); S.C. Bus. Corp. Codes.33-11-100(a) (2).

A pluralitv is a number greater than any related other number. Oxford EnglishDictionary (1933) ed.), vol. VI, 58 at 59.

Majority approval of shareholders'resolutions: Cal. Corp. Code ss. 152 & 153;Fla. Gen. Corp. Act s.607.094(2); Ga. Gen. Bus. Code s.22-607(b); Maine Bus.Corp. Act s.611(l)(A); Mich. Gen. Corp. Act s.450.1441(2); NJ. Bus. Corp.Act s.14A:5-11(l); BCL s.614(b); N.C. Bus. Corp. Act s.55-66 a); S.C. Bus.Corn. Code s.33-11-I00(a)l 1.

The majority is more than half the total number. Oxford English Dictionary(1933 ed.), vol. VII, 1026.

In Delaware, the vote necessary for the transaction of business is to be setforth in the certificate of incorporation or in the by-laws. Del. Corp. L. s.216.In Florida and Georgia, directors are elected by majority vote. Fla. Gen. Corp.Act s.607.094(2);Ga. Gen. Bus. Code s.22-607(b).

24. 281 F. Supp. 524 (D.D.C. 1968), aff'd sub nom. Benn v. Sankin, 410 F.2d 1060(D.C. Cir. 1969). cert. denied. 396 U.S. 1041 (1970).

25. Id., 281 F. Supp. at 551. There was not (and is not) any District of Columbialaw concerning pooling agreements, nor was there (and, except for Sankin, isthere) any case on point. However, the District of Columbia Business CorporationAct did (and does) mandate the one share - one vote rule. D.C. Bus. Corp. Acts.29-91 (a).

26. The District Court's reasoning from the conditional is evocative of the tran-scendent expression of subjunctive-mood thought: "Had my grandmother hadwheels, she would have been a wagon.".

98 ANGLO-AMERICAN LAW RE VIEW

Whatever Sankin and Garfield could have done, it was incumbent upon theDistrict Court to decide with reference to that which they did. Courts do notmake contracts for litigants. Reliable Consr. & Realty Co. v. Waterproofing Serv.,Inc. 34 A.2d 124, 126 (D.C. Mun. Ct. App. 1943). The unambiguous languageof the Sankin-Garfield shareholders' agreements was controlling, Vogel v. TennecoOil Co., 465 F.2d 563, 565 (D.C. Cir. 1972), and the District Court ought nothave re-written its terms, Columbia Hosp. for Women v. United States Fid. &Guar. Co., 188 F.2d 654, 659 (D.C. Cir.), cert. denied, 342 U.S. 817 (1951).Though a court may interpret a contract to avoid a violation of law, a contractmay be interpreted thusly only if it is ambiguous. Retail Clerks v. NLRB, 510F.2d 802, 806 at n.15 (D.C. Cir. 1975). Therefore, the District Court's revisionof the shareholders' agreements was unauthorized.

The District Court sought to explain away the parties' contractual abrogationof the statutory one share - one vote rule by stating ingenuously that the validityof contracts is to be determined by the effects of their provisions. Id., 281 F.Supp. at 551. Though ends justify the means in the corporate jungle, unprincipledutilitarianism has no root in the vineyard of the law. Manson v. Curtis, supra, n. 6,223 N.Y. at pp.32 4 -25, 119 N.E. at 562.

27. Cf., e.g., D.C. Unif. Part. Act s.41-317(e) and D.C. Bus. Corp. Act s.29-911(a);N.Y. Part L. s.40(5) and BCL s.612(a).

27a. Benintendi v. Kenton Hotel, Inc., 294 N.Y. 112, 121, 60 N.E.2d 829,832 (1945).28. Greyhound Corp. v. Mount Hood Stages, Inc., 437 U.S. 322, 330 (1978); Great

Lakes Properties, Inc. v. City of El Segundo, 19 Cal.3d 152, 155, 561 P.2d 244,246, 137 Cal. Reptr. 154, 156 (1977); Patrolmen's Ben. Ass'n v. City of NewYork, 41 N.Y.2d 205, 208, 359 N.E.2d 1338, 1340, 391 N.Y.S.2d 544, 546(1976); National Industrial Cred. Corp. (Rhodesia) Ltd. v. Gumede, [1964(4)]S. Afr. L. Rep. 258, 261 (S. Rhod. High Ct.).

29. Caminetti v. United States, 242 U.S. 470, 485 (1917); People ex rel. Youngerv. Superior Court. 16 Cal.3d 30. 40. 544 P.2d 1322. 1330. 127 Cal. Reptr. 122.130 (1976); Patrolmen's Ben. Assn v. City of New York, supra, n.28, 41 N.Y.2dAt 208 359 N.E.2d at 1340, 391 N.Y.S.2d at 546; Tait v. Ghana Airways Corp.,[1970(3)] Afr. L. Rep. Comm. 249, 256-57 (Ghana Sup. Ct.); Elson-VernonKnitters, Ltd. v. Sino-Indo-American Spinners, Ltd., [19721 H.K.L.R. 468, 476;Prasad v. Kapurchand, [19761 AIR (Madhya Pradesh) 136, 141 (M.P. High Ct.);Duigan v. R. F. Fry (Associates) Ltd., [19711 I.R. 176, 190-1 (Ireland Sup.Ct.); Cooper v. Republic, 19 Lib. L. Rep. 269, 280 (1969); Kuala Lumpur,Klang & Port Swettenham Omnibus Co., BHD v. Transport Workers' Union,[1971] 1 Malaysia L.J. 102, 105 (Fed. Ct.); Parsand v. Permanent SecretaryMinistry of Labour & Social Security. (19641 Mauritius Rep. 141. 145: R. v.Wildsmith, (1974), 8 N.S.R.2d 58, 62 (Sup. Ct., App. Div.); Rupani v. State,[19601 12 PLD (Karachi Bench) 15, 18 (W. Pak. High Ct.);Mobitel v. Dun &Bradstreet, (1977) 17 S.A.S.R. 140, 143; Sussex Peerage Case, [18441 11 Cl.& F. 85, 143, 8 Eng. Rep. 1034, 1057 (H.L.);Higgon v. O'Dea, [19621 W.A.R.140, 141; Sinkamba v. Doyle, [1974] Zambia L. Rep. 1, 4 (Ct. App.); 1 W.Blackstone, Commentaries *59.

30. Matter of Albano v. Kirby, 36 N.Y.2d 526, 529-30, 330 N.E.2d 615, 618, 369N.Y.S.2d 655, 658 (1975).

30a. Sussex Peerage case, supra, n.29.31. Scripps Howard Radio v. FCC, 316 U.S. 4, 11 (1942); Chemehueri Tribe of

Indians v. FPC, 489 F.2d 1207, 1234 (D.C. Cir. 1973), vacated on other grounds,420 U.S. 395 (1975); People v. Olah, 300 N.Y. 96, 102, 89 N.E.2d 329, 332(1909); Magor & St. Mellons Rural Dist. Council v. Newport Corp., [1952] A.C.189, 191; B. Cardozo, The Nature of the Judicial Process 141 (1921).

The obligation of the judiciary to follow the enacted law arises from thedistinction between the legislative function and the judicial function. "[I]tis to be borne in mind that the office of the Judges is not to legislate, but todeclare the expressed intention of the Legislature, even if that intention appearsto the court injudicious." River Wear Corm'rs v. Adamson. (18771 2 Ap. Cas.743, 764; accord. Osborn v. Bank of the United States, 22 U.S. (9 Wheat.) 1, 190(1824). This ancient rule, see e.g., Harrison v. Burwell, [1670] 2 Vent. 9, 10,86 Eng. Rep. 278, 278 (K.B.), which is encompassed in the concept of separationof powers, Marbury v. Madison, 5 U.S. (I Cranch) 137, 177 (1803);Dash v. VanKleeck, 7 Johns. (N.Y.) 477, 508-9 (Sup. Ct. of Judicature, 1811), is a fun-


damental principle of common law jurisdictions. Marbury v. Madison, supra;Bodinson Mfg. Co. v. California Emp. Comm'n, 17 Cal.2d 321, 326, 109 P.2d935, 939 (1941); Dash v. Van Kleeck, supra; City of Lethbridge v. NorthernTrusts Co., [1925] 4 D.L.R. 422, 424 (Alb. Sup. Ct., App. Div.);AmalgamatedSoc. of Engineers v. Adelaide Steamship Co., Ltd., (1920) 28"C.L.R. 129, 148-49;The King v. Du Bois, [1935] 3 D.L.R. 209, 209-10 (Canada Sup. Ct.);Michaelv. Antoniou, [1969] 1 Cyprus L. Rep. 547, 553; Enmore-Hope Village Dist.Council v. Shaw, (1974) 21 West Indian Rep. 275, 280 (Guyana Ct. App.);R. v. Miles, [1842] Jebb. & B. 219, 327 (Ireland Q.B.); Tarshish v. Shoenlicht,(1974(1]) 28 P.D. 572, 575 (Israel Sup. Ct.);Jury v. Brasting, [1976] 1 N.Z.L.R.231, 235; Rural Municipality of Brass Lakes v. Hudson's Bay Co., (1918) 11 Sask.357, 362 (Sup. Ct.), aff'd, 12 Sask. 28 (Ct. App.).

32. Beresowski v. Warszawski, 28 N.Y.2d 419, 423, 217 N.E.2d 520, 522, 322N.Y.S.2d 673, 675 (1971); Mode Roland & Co. v. Indusirial Acoustics, Inc.,16 N.Y.2d 703, 209 N.E.2d 553, 261 N.Y.S.2d 896 (1965); Mook v. Berger,6 N.Y.2d 833, 159 N.E.2d 702, 188 N.Y.S.2d 219 (1959);In re William Faehn-drich, Inc., 2 N.Y.2d 468, 141 N.E.2d 597, 161 N.Y.S.2d 99 (1957). These casesare instances of the general rule that corporate action may not be in conflict withany law. See, e.g., Loew's Theatres, Inc. v. Commercial Credit Co., 243 A.2d 78,81 (Del. Ch. 1968); Olincy v. Merle Norman Cosmetics, Inc., 200 Cal. App.2d260, 266-67, 19 Cal. Reptr. 387, 390-91 (Dist. Ct. App. 1962); Booker v. FirstFed. S. & L. Ass'n, 215 Ga. 277, 280, 110 S.E.2d 360, 362 (1959); Webb v.Moorehead, 251 N.C. 394, 398, 111 S.E.2d 586, 589 (1959);Penn-Texas Corp.v. Niles-Bement-Pond Co., 34 NJ. Sup. 373, 378, 112 A.2d 302, 305 (1955);Benintendi v. Kenton Hotel, Inc., supra, n. 27A, 294 N.Y. at 118, 60 N.E.2dat 831.

33. Bank of Attica v. Maufacturers' and Traders' Bank, 20 N.Y. 510, 505 (1859).The court's reference is the rule of expressio unius est exclusio alterius: Theexpress mention of one act, mode, or thing raises the irrefutable inference thatevery other act, mode, or thing is excluded thereby. Botany Mills v. UnitedStates, 278 U.S. 282, 289 (1929);Patrolmen's Ben. Ass'n v. City of New York,supra, n. 28, 41 N.Y.2d at 208-9, 359 N.E.2d at 1341, 391 N.Y.S.2d at 546.

34. The Supreme Court's interpretation of subs.(2) was both contrary to law anddivorced from corporate reality. The Supreme Court manufactured a counterfeitvoting trust agreement, under which Marcus retained full ownership, of hisshares, but was a trustee obligated to act at Leeds' direction. Alternatively, theSupreme Court had in mind an impossible species of proxy agreement, where-under Marcus was agent for Leeds with respect to property (Marius' votingrights) which Leeds did now own.

Either way, the Supreme Court would have had Marcus undertake to votecertain of his shares, not only in a different way from the remainder of them(itself a ludicrous negation of one's voting power), but, also, against his owninterests. The convention against colorful language in law review articles fore-stalls accurate description of such a shareholders' agreement, and of the com-petence of a shareholder who enters into it.

35. Id., 93 N.H. at 113, 36 A.2d at 268. The statement by the court that the trusteetook "subject to" the plaintiff-Chadwick-Holden shareholders' agreement, andthat the trustee consequently had "no greater rights with respect thereto" thanHolden, is incorrect. The principle that no third party is bound to a contractunless he .assents to it, Division of Labor Law Enf. v. Transpacific Trans. Co.,69 Cal. App.3d 268, 137 Cal. Reptr. 855 (Ct. App. 1977); Tanenbaum TextileCo. v. Schlanger, 287 N.Y. 400, 40 N.E.2d 255 (1942), applies to all shareholders'agreements with respect to voting. Stein v. Capital Outdoor Advertsing, Inc.,273 N.C. at 82,159 S.E.2dat 355, discussed in the text at pp.76-77. and see n.21,supra, Greenhalgh v. Mallard, [19431 2 All Eng. Rep. 234 (C.A.) (shareholders'agreement).

36. An exception to the personal nature of contractual obligations is a first-purchaseoption agreement, which a transferee with knowledge must honor. Allen v. Bilt-more Tissue Corp., 2 N.Y.2d 534, 141 N.E.2d 812, 161 N.Y.S.2d 418 (1957).The District Court sought to apply this exception by reference to Doss v. Yingling,95 Ind. App. 494, 172 N.E. 801 (1930) and Baumohl v. Goldstein, 95 NJ. Eq.597, 124 Atl. 118 (1924), two first-purchase option agreement cases. The court'sanalogy was that a transferee (Benn, the principal of his corporate alter ego) withknowledge of his transferor's (Garfield's) agreement (the Sankin-Garfield share-holders' agreements) with a third party (Sankin) concerning the transferred shares

100 ANGLO-AMERICAN LA W RE VIEW

is bound by the transferor's agreement.The analogy fails because the exception was not applicable to the case before

the District Court. If, as interpreted by the District Court, the Sankin-Garfieldshareholders' agreements required Garfield to refrain from voting half his shares,the supposed agreements to refrain from voting were not first-purchase optionagreements, so Benn's actual knowledge of the Sankin-Garfield shareholders'agreements was of no legal consequence. Thus, Doss and Baumohl do not sustainthe District Court's conclusion of law. A failure of authority would result alsounder U.C.C. s. 8-204, both under the original version of the section and underthe 1977 version, because no shareholders' agreement with respect to voting is arestriction on transfer. Stein v. Capital Outdoor Advertising, Inc. supra, n. 35, andsee n. 21, supra; Greenhalgh v. Mallard, supra, n. 35.

The District Court's analogy fails in another respect: Garfield's position differsfrom that of the second trustee in Trefethen. Since the intended Garfield - 5410Connecticut Avenue Corporation - Garfield transaction was a sham, Garfield wasnever lawfully Benn's successor-in-interest. Garfield's obligations, if any, underthe Sankin-Garfield shareholders' agreements remained those of a party to them.The Sankin-Garfield shareholders' agreements did not impose any obligationson Garfield because they were equal vote agreements, and, therefore, unforceableon the ground of illegality. See n. 40, infra, and text thereat.

37. BCL s.608(a) sets the majority of the shares entitled to vote as the quorum atshareholders' meetings. BCL s. 608(b) permits, pursuant to BCL s. 616, a provisionin the certificate of incorporation for a greater quorum. Accord, Cal. Corp. Codes.602(a); Fla. Gen. Corp. Act s.607.094(1); Ga. Gen. Bus. Code s.22-607(a);Maine Bus. Corp. Act s. 608(1); Mich. Gen. Corp. Act s. 450.1415(1); NJ. Bus.Corp. Act s. 14A:5-9(l); N.C. Bus. Corp. Act s. 55-65(a); S.C. Bus. Corp. Codes. 33-11-80(a). But see Del. Gen. Corp. L. s. 216 (no statutory quorum).

38. First Nat'l Stores, Inc. v. Yellowstone Shopping Centre, Inc., 21 N.Y.2d 630,638, 237 N.E.2d 868, 871, 290 N.Y.S.2d 721, 725 (1968);In re William Faehn-drich, Inc., supra, n.32, 2 N.Y.2d at 472, 141 N.E.2d at 599-600, 161 N.Y.S.2dat 103.

39. Capital Investors Co. v. Executors of Estate of Morrison, 584. F.2d 652, 661 andn. 12 thereat (4th Cir. 1978) (dissenting opinion) (reference to Benn), cert.denied sub nom. Frost v. Executors of Estate of Morrison, 440 U.S. 981 (1979).An artificial means (be it sympathy or character evaluation or erroneous law) isunnecessary to a result which is both just and consistent with statute, because,contrary to the misrepresentation perpetuated by court house statuary, Justice isnot blind. Jones v. National Coal Board, [1957] 2 Q.B. 55, 64 (C.A.).Justice hasthe capacity to discern the wrongdoer, to whom the doors of law and the gates ofequity are closed. Bank of

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