Case ID: ad_109/html/0049-01.html
Source: Caselaw Access Project
Author: {"author": "Laughlin, J. \n      O’Bbien, P. J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Maurice J. Katz, Respondent, v. The H. & H. Manufacturing Company, Appellant.
    First Department,
    November, 1905.
    Corporation—by-law governing change in number of directors incon- , sistent with statute.
    Section 21 of the Stock Corporation Law, providing that the number of directors in such corporations may be increased or diminished within the limits allowed by law when the stockholders owning a majority of the stock shall so determine, is inconsistent with a by-law requiring the vote of those holding a larger percentage of stock to effect such change and such by-law is null and void.
    O’Brien, P. J., dissented.
    Appeal by the defendant, The H. & H. Manufacturing Company, from an ordér of the Supreme Court, made at the Hew York Special Term and entered in the office of the clerk of the county of Hew York on the 20th day of July, 1905, continuing a preliminary injunction theretofore issued in the action.
    
      William H. Hirsh, for the appellant.
    
      Herbert B. Limburger, for the respondent.
   Laughlin, J.

This is an action by a stockholder of a domestic business corporation to enjoin the election of directors of the corporation “ until the further order of the court in this action,” and adjudging that an attempted amendment of the by-laws of the company by which a majority instead of ninety per cent of the stock may reduce or increase the number of directors be adjudged null and void, and that the officers and directors of the company be enjoined and restrained from acting under or pursuant to said amendment. The. company was incorporated with only four directors. On the 13th day of February, 1902, at a special meeting of the stockholders, a resolution was adopted increasing the number'd directors from four to five. The provisions of section 21 of the Stock Corporation Law requiring that a, verified transcript of the minutes of a meeting of the stockholders at which the number of directors is increased or diminished should be filed in the ' offices where the original certificates of incorporation were filed, which, by section 5 of the General Corporation Law (Laws of 1892, chap. 687, as amd. by Laws of 1895, chap. 672) are the offices of the Secretary of State and the county clerk, was not complied'with as to the county clerk Until after the commencement of this- action,, although the requirement as to filing a copy with the Secretary .of State was complied with at the time;.. but the action increasing the number of directors from, four to five was ' , s acquiesced in, and from that time there have been five directors. A. special meeting of' the stockholders was duly called for the purpose of reducing the number of (directors from five to four and was held on the 23d day of May, 1905. ' .

The learned. Counsel for the appellant contends that the increase in* the number of directors from four to five never became. effectual owing to the failure to file a tfansCript of the minutes of the proceedings with the county clerk, and. that consequently the proposed election of four directors sought to be enjoined is perfectly legal regardless- of the validity of the by-law which provides -that the number of directors shall not be increased or diminished by a vote of less than ninety per cent of the stock issued and outstanding, and the case of Matter of Dolgeville El. L. & P. Co. (160 N. Y. 500) is cited as authority for that proposition. The learned counsel for the respondent contends on the authority of Wallace, v. Walsh (125 N. Y. 26, 32) that, the corporation is estopped, by its action in elect-. ing five directors and in attempting to amend the by-laws by reducing the number from five to four, from* denying that the number was’ lawfully increased. It would seem, however’, that the action of 'the stockholders- in increasing the number of directors from four to. five became effectual before the hearing of the motion,, for at that time a transcript of the minutes had been duly filed both in the office*©! the Secretary of State and with the county clerk. Section 21 of the. Stock Corporation Law (Laws of 1892, chap; 688), so far as material, provides as follows: “ The number of. directors of any stock corporation may be increased or reduced, but not above the maximum nor below the minimum number prescribed by law, when the stockholders owning a majority of the stock of the corporation shall so determine at a meeting to be held at the usual place of meeting of the directors on two weeks’ notice in writing to each stockholder of record. •* * * The proceedings of such meeting shall be entered in the minutes of the corporation and a transcript thereof verified by the president and secretary of the meeting shall be filed in the offices where the original certificates of incorporation were filed.” This section has been since amended by chapter 320 of the Laws of 1903, chapter 307 of the Laws of 1904 and chapter 750 of the Laws of 1905. The provision of the statute relating to the filing of the verified transcript has not been changed, but the words in italic in the quotation supra have been omitted.

It appears that one of the by-laws of the corporation provides that the board of directors shall consist of five, and another by-law provides that stockholders by a vote of ninety (90%) per cent of the stock issued and outstanding, may, at any regular or any special meeting, alter or amend ” the by-laws. It is contended on the one hand that it is competent for the stockholders even to forbid a change in the number of directors without the unanimous consent of the stockholders, and, on the other hand, that the statute has prescribed that a majority of the stockholders may alter the number of directors," and that, therefore, any action of the stockholders or directors prescribing differently is inconsistent therewith and void. The authority to make by-laws is conferred by section 11 of the General Corporation Law (as amd. by Laws of 1895, chap. 672) and is limited to such by-laws for the management of its property, the regulation of its affairs, etc., as are not inconsistent with any existing law.' It seems to me clear that, so far as this case is concerned, this is a matter that. is regulated by section 21 of the Stock Corporation Law, which provides in express terms that the owners of a majority of the stock may at a regular or special meeting called for the purpose as therein provided increase of decrease the number of directors within the -limits prescribed by law* I think it was not competent for the stockholders to prescribe that such increase or decrease could not be made except by a vote of those representing a larger percentage of the stock than that prescribed by 'the' statute. ' I .am of opinion that a person purchasing stock in such corporation has a right to assume that, the directorate may be increased or reduced by a majority vote or in any other manner authorized by the'statutes of the State, and that he is not called upon to examine the by-laws to discover whether some different percentage is. therein prescribed. If it be Competent for the stockholders to prescribe that the number of directors may only be increased or diminished by a vote -representing a percentage of the stock greater than a majority it must be likewise competent for them to prescribe that this may be done by those representing 'a percentage of the stock less than a majority. Such action, I think, would be clearly inconsistent with the statute. It would permit the stockholders at a particular time to control the number of directors for all future time by a requirement not prescribed by the statute and inconsistent with the express provisions thereof.

The action of the stockhdlders in reducing the number of directs ors from five to four was taken by three resolutions apparently all put and carried as a single resolution. The first was a simple resolution reducing the number from five to four. The second provided that the action should take effect on the 30th day of June, 1905, and the third amended the by-law by substitutihg four for five in the provision relating to the number of the directors.. The resolutions were adopted by a vote of the owners of a majority of the stock of the company but- not the owners, of ninety per cent of such stock. I am of opinion that the action taken was valid and that the pro- . posed call issued subsequently for the election of four instead of five directors is legal and valid. The facts are not in dispute. The question presented is one of law. It is evident that the merits of the litigation are presented by the appeal. In these circumstances the temporary injunction should not be allowed to stand.

It follows that the order should be reversed, with ten dollars costs and disbursements, and the motion denied, with ten dollars Costs. ■ ;

Patterson, Ingraham and McLaughlin, JJ., concurred.

O’Bbien, P. J.

(dissenting):

I dissent.- Section 21 of the Stock Corporation Law is intended in my view to prevent an amendment of a by-law, by less than a majority vote; but it does not prohibit a corporation from fixing or requiring a greater vote in order to amend.

Order reversed, with ten dollars costs and disbursements, and motion denied, with ten dollars costs.