Gearing v. Kelly
182 N.E.2d 391, 227 N.Y.S.2d 897, 11 N.Y.2d 201 (1962)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A director who intentionally and deliberately stays away from a board meeting for the sole purpose of preventing a quorum cannot later seek equitable relief from a court to set aside an election conducted at that meeting.
Facts:
- Appellants Gearing and her daughter, Meacham, together owned 50% of the stock of Radium Chemical Company, Inc.
- The company's by-laws required a majority of the four-member board of directors to constitute a quorum for transacting business.
- In 1955, the board's composition changed when Kelly, Jr. was elected, joining his father, Kelly, Sr., appellant Meacham, and a fourth director, Margaret Lee.
- In 1961, Margaret Lee offered her resignation from the board.
- A directors' meeting was called for March 6, 1961, to address the resignation and other matters.
- Director Meacham intentionally and deliberately stayed away from the March 6, 1961 meeting for the purpose of preventing a quorum.
- At the meeting, with only the two Kellys and Margaret Lee present, Lee's resignation was accepted.
- The two Kellys then elected Julian Hemphill to the board to fill the vacancy left by Lee.
- Mrs. Gearing, the other appellant and Meacham's mother, fully supported and encouraged Meacham's refusal to attend the meeting.
Procedural Posture:
- Appellants Gearing and Meacham brought a proceeding in the New York Supreme Court, Special Term (trial court) under section 25 of the General Corporation Law to set aside a director's election.
- The case was appealed to the Appellate Division of the Supreme Court (intermediate appellate court), where a majority affirmed the denial of relief to the appellants.
- Appellants then appealed the decision of the Appellate Division to the Court of Appeals of New York (the state's highest court).
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a director's intentional absence from a board meeting, for the sole purpose of preventing a quorum and paralyzing the board, bar that director and an associated stockholder from seeking equitable relief to set aside a director election held at that meeting?
Opinions:
Majority - Per Curiam
No. A director's intentional absence from a board meeting for the purpose of preventing a quorum precludes that director and their associates from later seeking equitable relief to nullify actions taken at the meeting. The court, sitting in equity, will not grant relief to a party complaining of an irregularity that they themselves intentionally caused. Mrs. Meacham's absence was a deliberate attempt to paralyze the board, and her mother, Mrs. Gearing, fully supported this action. To grant their request would allow a director and an associated stockholder to frustrate corporate action through bad-faith obstructionism. Furthermore, ordering a new election would be a futile act, as Mrs. Meacham would then be required to attend, and courts do not order futile acts.
Dissenting - Froessel, J.
Yes. The election should be set aside because it was wholly void, not merely irregular. The company's by-laws explicitly required a majority of the four-director board (i.e., three directors) for a quorum. The election of the new director was conducted by only two directors, which is insufficient to constitute a quorum. An action taken without a quorum is a nullity, and the court's equitable powers do not extend to validating a void act. The doctrine of estoppel is inapplicable, especially against Mrs. Gearing, a non-director stockholder. The court should not assist one faction in a control contest by disregarding fundamental corporate by-laws.
Analysis:
This case establishes that the equitable doctrine of 'unclean hands' can override strict adherence to corporate formalities like quorum requirements. It significantly impacts corporate governance by deterring directors from engaging in obstructionist tactics, such as boycotting meetings to prevent a quorum. The ruling signals that courts may refuse to provide a remedy to those who act in bad faith to create the very procedural defect they later challenge. This precedent forces directors in corporate control disputes to engage with the governance process rather than attempting to paralyze it, as doing the latter may result in forfeiting their right to judicial relief.
Unlock the full brief for Gearing v. Kelly