Keating v. KCK CORPORATION
1964 Tex. App. LEXIS 2256, 383 S.W.2d 69 (1964)
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Rule of Law:
Corporate bylaws requiring a supermajority vote for shareholder action are valid if authorized by statute. Bylaws can be implicitly amended by a consistent course of conduct and acquiescence by shareholders, even without formal compliance, when the governing statute and corporate charter do not prescribe specific formalities for amendment.
Facts:
- The K-C-K Corporation was formed as a closely held corporation.
- The initial bylaws, adopted by the corporation's directors, specified that the power to alter, amend, or repeal bylaws was reserved to the shareholders, requiring an affirmative vote of not less than three-fourths (3/4th) of the total outstanding shares.
- The corporate charter allowed the number of directors to be fixed by the bylaws, with a minimum of three, and also purported to authorize the board of directors to make, alter, or amend bylaws.
- In 1957 and 1958, three directors were elected for the corporation.
- From 1959 through 1962, four directors were elected annually by the shareholders.
- Minutes from the 1960, 1961, and 1962 shareholder meetings showed that owners of 100% of the outstanding stock were present and voted unanimously for the four nominated directors, who were declared duly elected.
- All stockholders were also directors and active in the management of the Corporation prior to and after 1959, and no one objected to the election of a four-member board of directors before the current dispute.
- At the June 14, 1963, stockholders meeting, a motion to elect three directors carried by a simple majority vote, but not by the 3/4ths majority required by the initial bylaws.
Procedural Posture:
- A suit was initiated in the trial court concerning a contest for the management of the K-C-K Corporation and the number of directors.
- The trial court conducted a jury trial.
- The jury found that the shareholders did not amend the bylaws by electing four directors for the years 1959-1962, and that there was no agreement for Leonard M. Keating to be Chief Operating Officer.
- The trial court entered a judgment enjoining appellants (Leonard M. Keating and Mrs. Leonard M. Keating) from performing their offices and Mrs. Keating from assuming the office of director.
- Appellants, Leonard M. Keating and Mrs. Leonard M. Keating, appealed the trial court's judgment.
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Issue:
Can a corporate bylaw, which requires a supermajority vote for amendment, be implicitly amended by the consistent practice and acquiescence of all shareholders in electing a different number of directors over several years, especially when the statute and charter do not specify the formalities for such amendments?
Opinions:
Majority - Coleman, Justice
Yes, a corporate bylaw can be implicitly amended by consistent shareholder conduct and acquiescence. The court first clarified that the bylaw requiring a 3/4ths supermajority vote for shareholder action was valid under Article 2.28 of the Texas Business Corporation Act, which authorizes such requirements. The court further noted that while corporate charters and bylaws may delegate bylaw amendment authority, the Act vests primary power in shareholders. Regarding the amendment of bylaws by conduct, the court held that where a statute or charter does not prescribe specific formalities for bylaw enactment or amendment, bylaws can be adopted or amended orally, or through a uniform course of proceeding, usage, and acquiescence. Given that four directors had been consistently elected for four consecutive years (1959-1962) with the full presence and apparent unanimous consent of all shareholders (who were also directors), the court concluded, as a matter of law, that the bylaw fixing the number of directors had been amended to provide for a four-member board. Therefore, the jury's finding to the contrary was deemed improperly submitted and should have been disregarded. As a result, the subsequent 1963 motion to elect three directors, which did not meet the supermajority requirement for amending the bylaw, was ineffective to change the established number of directors back to three.
Analysis:
This case clarifies crucial aspects of corporate governance, particularly regarding the implicit amendment of bylaws. It reinforces the principle that actual corporate practice, consistently followed and acquiesced to by shareholders, can effectively alter formal bylaws, even those with supermajority amendment requirements, especially in the absence of explicit statutory or charter procedural mandates. This ruling provides flexibility for closely held corporations but also highlights the need for careful record-keeping and clear formal processes to avoid unintended changes to governance structures. It underscores the judiciary's willingness to look beyond strict formalistic compliance when a clear pattern of corporate behavior demonstrates a de facto amendment, impacting future disputes over corporate control and director composition.
