Fredrick owned a family
business. He brought in three of his sons, and gave each of them a small
amount of stock in the business. After a while, Fredrick decided that one
of his sons, Ransford, was the best choice to run the business.
Fredrick gave Ransford some
extra stock.
Fredrick and Ransford signed
a shareholder agreement agreeing
to vote each other onto the Board, and to then (as Boardmembers) vote to
make Fredrick the Chairman and Ransford the President.
The shareholder agreement also had a clause that said if Fredrick died,
then Ransford would get the option of buying all of Fredrick's stock.
Fredrick and Ransford had a falling
out, and Fredrick changed his will to give all of his stock to his
remaining two sons. Then Fredrick died.
Ransford went to Fredrick's
estate and asked them to honor his option to buy the stock. The estate
refused. Ransford sued for specific performance.
The estate argued that the
contract was invalid because it was illegal.
The estate argued that the
contract between Fredrick and Ransford was not approved by all the
corporate shareholders. That's illegal because the part where they
agreed to give each other jobs was an impermissible restriction on the
rights and obligations of the Board to manage the business.
See Manson v. Curtis (119 N.E. 559 (1918)).
Ransford argued that the
part of the contract agreeing to buy the stock was perfectly legal, even
if the other parts of the contract weren't.
The Trial Court found for
Ransford. The estate appealed.
The Appellate Court affirmed.
The estate appealed.
The New York Supreme Court
affirmed.
The New York Supreme Court
looked at the facts and found that Fredrick and Ransford never actively
attempted to manipulate the Board (they didn't have to, the Board voted
with them anyway).
The Court found that even if
the voting clause in the contract was illegal, that didn't affect the
legality of the clause allowing Ransford to buy the stock.
In a dissent it was argued
that the practical effect of the agreement was irrelevant, it was illegal
on its face because private contracts between shareholders to vote people
into jobs (other than to the board of directors) is not allowed.
In addition, there was no
evidence that Fredrick and Ransford intended the clauses of the contract
to be severable, so once one part of the contract is held unenforceable,
the entire contract should be held unenforceable.
In another dissent it was
argued that the entire agreement was perfectly legal as written. If there
was a problem with how the agreement was applied in the future, then at
that time the court could address the issue.
