Auer v. Dressel
306 N.Y. 427, 118 N.E.2d 590, 48 A.L.R. 2d 604 (1954)
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Rule of Law:
A corporate president's duty to call a special stockholders' meeting upon a valid request from a majority of stockholders is mandatory, not discretionary. Stockholders possess an inherent power to remove directors for cause, and proposing to do so is a proper purpose for such a meeting, even if the corporate charter provides an alternative removal mechanism by the board of directors.
Facts:
- The by-laws of R. Hoe & Co., Inc. stated that it was the duty of the President to call a special meeting upon written request from stockholders owning a majority of the capital stock entitled to vote.
- The corporation's board of directors had previously removed Joseph L. Auer from his position as president.
- On October 16, 1953, holders of over 55% of the Class A stock submitted written requests to the current president demanding a special meeting.
- The stated purposes for the meeting were to: (A) endorse the administration of the removed president, Auer, and demand his reinstatement; (B) amend by-laws regarding the filling of director vacancies; (C) hear charges against four directors and vote on their removal; and (D) amend by-laws concerning the quorum for director meetings.
- The president of R. Hoe & Co., Inc. failed to call the special meeting as requested by the stockholders.
Procedural Posture:
- The Class A stockholders (petitioners) initiated an Article 78 proceeding in the nature of mandamus in the New York Supreme Court, Special Term (the trial court of first instance).
- The Special Term granted the order compelling the president of R. Hoe & Co., Inc. to call the special meeting.
- The corporation and its president (appellants) appealed this decision to the Appellate Division of the Supreme Court (the intermediate appellate court).
- The Appellate Division affirmed the order of the Special Term.
- The corporation and its president then appealed to the Court of Appeals of New York (the state's highest court).
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Issue:
Does a corporate president have a mandatory legal duty under the corporate by-laws to call a special meeting requested by a majority of stockholders when the proposed purposes include removing directors for cause and amending the by-laws?
Opinions:
Majority - Desmond, J.
Yes. A corporate president has a mandatory duty to call a special stockholders' meeting as required by the by-laws when requested by a majority of stockholders for proper purposes. The duty to call the meeting is a positive, ministerial one, not subject to the officer's discretion. The court found all four proposed purposes for the meeting to be valid subjects for stockholder consideration. Critically, the court affirmed that stockholders who are empowered to elect directors have the inherent power to remove them for cause. This power is not nullified or abdicated merely because the certificate of incorporation also grants the board of directors a similar power to remove directors; rather, the charter provides an additional, not exclusive, method for removal. While directors facing removal are entitled to due process (specific charges, notice, and an opportunity to be heard), the stockholders have the right to convene a meeting to initiate that process.
Dissenting - Van Voorhis, J.
No. The president was justified in refusing to call the meeting because none of the business proposed could be legally transacted. A court should not issue a mandamus order to compel a futile or illegal act. Purpose (A) was futile as stockholders cannot appoint officers; Purpose (B) was illegal as it would improperly alter the voting rights of common stockholders without their consent; and Purpose (C) was improper because the certificate of incorporation delegated the power to remove directors for cause to the board of directors, precluding stockholder action. Furthermore, a 'trial' of directors by proxy vote is inherently unfair and fails to provide the due process required for removal for cause, as the stockholders solicited have already prejudged the case.
Analysis:
This case is a foundational decision in corporate governance, strongly affirming the inherent power of shareholders to hold directors accountable. It establishes that shareholder power to remove directors for cause is a fundamental right that is not easily contracted away, even by provisions in the corporate charter that grant similar authority to the board itself. The ruling empowers activist shareholders by making it more difficult for corporate management to use procedural tactics or claims of improper purpose to block meetings aimed at challenging board control. The decision solidifies the principle that by-laws imposing a duty on officers to call meetings are mandatory and will be strictly enforced by the courts.
