McQuade v. Stoneham
189 N.E. 234, 263 N.Y. 323 (1934)
Rule of Law:
A contract among shareholders that requires them, as directors, to vote for specific individuals as officers at set salaries is void as against public policy. Such an agreement improperly restricts the directors' fiduciary duty to exercise their independent judgment for the benefit of the corporation and all its shareholders.
Facts:
- Charles A. Stoneham was the majority shareholder of the National Exhibition Company, which owned the New York Giants baseball team.
- Stoneham sold some of his shares to John J. McGraw and Francis X. McQuade.
- As part of the transaction on May 21, 1919, Stoneham, McGraw, and McQuade entered into a shareholder agreement.
- The agreement stipulated they would use their best endeavors to keep themselves in perpetuity as directors and officers: Stoneham as President, McGraw as Vice-President, and McQuade as Treasurer, at specified salaries.
- The agreement also required unanimous consent among the three parties for any changes in salaries, capital structure, bylaws, or corporate policy.
- At the time the contract was made and for most of its duration, McQuade was a New York City Magistrate.
- After a falling out between McQuade and Stoneham, McQuade was not re-elected as treasurer on May 2, 1928; Stoneham and McGraw did not vote for him, and the other directors, controlled by Stoneham, voted for a replacement.
- Subsequently, McQuade was also removed as a director of the company.
Procedural Posture:
- Francis X. McQuade sued Charles A. Stoneham and John J. McGraw in a New York trial court, seeking specific performance of their agreement.
- The trial court denied specific performance but awarded McQuade monetary damages for wrongful discharge.
- Stoneham and McGraw (appellants) appealed the judgment to the Appellate Division of the Supreme Court of New York, an intermediate appellate court.
- The Appellate Division affirmed the trial court's judgment in favor of McQuade (appellee).
- Stoneham and McGraw (appellants) then appealed 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:
Is a contract among shareholders that binds their discretion as directors in matters of corporate management, such as the selection of officers and the setting of salaries, enforceable?
Opinions:
Majority - Pound, Ch. J.
No. A contract among shareholders that binds their discretion as directors in matters of corporate management is unenforceable because it violates public policy. Directors have an exclusive duty to act for the corporation according to their best judgment, and they cannot abrogate this independent judgment by private agreement. While stockholders may lawfully combine to elect directors, they cannot extend that power to contracts that control directors' decisions on selecting officers, setting salaries, or determining corporate policy. Furthermore, the contract was unenforceable for a separate reason: McQuade's position as a City Magistrate, which he held while serving as treasurer, violated a statute prohibiting magistrates from engaging in any other business. Performance of the contract constituted an ongoing illegal act, and McQuade cannot recover damages for the refusal to continue such an arrangement.
Concurring - Lehman, J.
No, the contract is not enforceable, but for a different reason than the majority's primary holding. The argument that the agreement violates public policy is unpersuasive, as shareholder agreements to elect specific officers and adhere to certain policies are common and legitimate in close corporations, provided they do not harm the corporation or minority shareholders. This agreement was intended to protect the parties' legitimate interests. The contract is unenforceable only because its performance was illegal. McQuade's simultaneous employment as a salaried corporate treasurer and a City Magistrate violated a state statute, rendering the employment relationship illegal. Therefore, he cannot seek damages for the termination of an illegal arrangement.
Analysis:
This case establishes the traditional, foundational rule that shareholder agreements cannot unduly restrict the independent business judgment of a corporation's board of directors. The decision prioritizes the board's fiduciary duties to the corporation and all shareholders over the private contractual rights of a few controlling shareholders. This ruling created significant challenges for participants in close corporations who often rely on such agreements to define their roles and protect their investments. While many modern statutes for close corporations now permit shareholder agreements that impinge on director discretion, McQuade remains a landmark case illustrating the default common law principle separating shareholder power from director management.
Gunnerbot
AI-powered case assistant
Loaded: McQuade v. Stoneham (1934)
Try: "What was the holding?" or "Explain the dissent"