Brief Fact Summary. Plaintiff, Essex Universal Corp., brought this action to recoup damages stemming from a contract breach by Defendant, Herbert Yates. The contract provided for Defendant to sell Plaintiff shares of Republic Pictures Corp. and allow Plaintiff to replace members of the board upon purchase.
Synopsis of Rule of Law. An agreement to sell the control of management along with the sale of a substantial percentage of shares is not against public policy.
Issue. The issue is whether the stock purchase agreement is invalid because it provided for the termination of prior board members and subsequent control of management for Plaintiff.
Held. Chief Judge Lumbard held that the agreement is valid and does not violate public policy. Plaintiff was receiving a sizable portion of the shares which would have eventually entitled them to elect representatives to the board. The agreement only accelerated that process. It was also acceptable for the majority shareholder to obtain a premium for selling the control of the company in this case because, unlike Perlman v. Feldmann, there was no breach of a fiduciary duty to minority shareholders. On remand, the burden would be on Defendant to prove that a voting block greater than Plaintiff’s size would have not approved of the deal.
Circuit Judge Clark agreed with the other judges to decline to grant a summary judgment, but his reasoning was simply that not enough facts were available to determine the legality of the transaction.
Circuit Judge Friendly voted to remand the case as well, but he declined to accept Chief Judge Lumbard’s reasoning. Judge Friendly personally would void a contract that gave controlling majority of management to a company that held less than fifty percent of the shares. But he wanted the state of New York to be able to determine what policy they would follow on their own.
Discussion. There was no majority consensus on whether a stock purchase agreement that gave management control to the purchaser was valid, although two of the three judges did not rule it out.