Burnett v. Word, Inc.
1967 Tex. App. LEXIS 2406, 412 S.W.2d 792 (1967)
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Rule of Law:
Agreements among shareholders to vote their shares in a specific manner are generally valid, but provisions within those agreements that bind individuals in their capacity as directors and restrict their future fiduciary judgment are void as against public policy. Separately, a corporate action that complies with the plain language of a statute is valid, regardless of the stockholders' motive, such as diluting a dissenting shareholder's voting power to approve a merger.
Facts:
- Burnett and several associates purchased 50% of the stock in two corporations, Word Records, Inc. and Word Distributing Company, to balance the control held by another stockholder group led by McCracken.
- In 1958, Burnett, McCracken, and other key stockholders entered into a written agreement to govern their actions within the corporations.
- The agreement bound the signatories to vote as both stockholders and directors to ensure Burnett remained a director and to prevent the corporations from incurring new debt above a specified threshold without unanimous director approval.
- In 1966, the McCracken group sought to merge the two companies and take on a $200,000 loan, a plan Burnett opposed.
- Burnett owned 27% of the preferred stock, which was enough to block the merger under a state law requiring 80% approval from each class of stock.
- To overcome Burnett's veto power, the majority shareholders voted to issue treasury stock to an employee, Kurt Kaiser.
- This stock issuance diluted Burnett’s ownership to below 20%, thereby stripping him of his ability to block the merger.
- With Kaiser's shares voting in favor, the merger received the necessary 80% approval.
Procedural Posture:
- Word Records, Inc., and its stockholders sued Burnett in a Texas trial court, seeking a declaratory judgment that a 1958 shareholder agreement was void.
- Word, Inc., the successor from a merger, intervened in the suit, seeking declarations that the agreement was void and the merger was valid.
- Burnett filed a cross-action asserting that the contract was valid and the merger was void.
- The trial court granted summary judgment in favor of Word, Inc., declaring the contract entirely void and the merger valid.
- Burnett, as defendant-appellant, appealed the summary judgment to the Texas Court of Civil Appeals.
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Issue:
Is a contract among shareholders that binds them to vote in a particular way both as shareholders and as directors void in its entirety, and is a resulting corporate merger valid when achieved by issuing stock to dilute a dissenting shareholder's voting power?
Opinions:
Majority - McDonald, Chief Justice
No, the contract is not void in its entirety and the merger is valid. A shareholder agreement is severable; the portion binding parties as stockholders is valid, while the portion binding them as directors is void. A merger achieved after a statutorily compliant stock issuance is valid, irrespective of the motive to dilute a minority shareholder's vote. The court reasoned that the agreement's provision binding the parties as directors to restrict corporate borrowing is void because it requires directors to abdicate the independent judgment the law demands they exercise for the corporation. However, the provision binding them as stockholders to vote for Burnett as a director is valid under the modern view that shareholder voting agreements are generally enforceable. Regarding the merger, the Texas Business Corporation Act unambiguously permits the issuance of treasury stock to employees with a two-thirds shareholder vote. Since the corporation followed this statutory procedure, the court refused to 'engraft an arbitrary qualification' by inquiring into the motive behind the issuance, even if it was to overcome Burnett's dissent.
Analysis:
This decision solidifies the critical distinction between the rights of shareholders and the duties of directors. It affirms the validity of shareholder voting agreements, which are crucial tools for control in closely held corporations, while strictly prohibiting any contractual arrangement that pre-commits a director's vote, thereby preserving the sanctity of a director's fiduciary duty of care and independent judgment. The ruling also adopts a formalistic approach to statutory interpretation in corporate law, indicating that if a corporate action adheres to the letter of the law, courts are reluctant to invalidate it based on allegations of improper motive or unfairness to minority shareholders. This creates a predictable but potentially harsh environment for minority investors.
