Opinion ID: 2336109
Heading Depth: 1
Heading Rank: 3

Heading: The question of a quorum.

Text: There remains for consideration the contention that no quorum was present at the meeing of the board of directors of Mayflower on March 6, 1952, at which the merger was approved. Six of the nine directors were present  Messrs. Baxter, Folger, Fleming, Herndon, Hilton and Mack. Under the by-laws a quorum consists of five directors. Plaintiffs appear to concede that Messrs. Baxter and Folger were qualified to act, but say that the others are, by reason of some interest in or connection with Hilton, disqualified for quorum purposes. Defendants' answer (among others) is that Mayflower's certificate of incorporation permits the counting of interested directors for quorum purposes; and plaintiffs reply that the provision to that effect is invalid. An excerpt from Article Thirteenth of Mayflower's certificate of incorporation is set forth in the margin. [3] In substance, so far as here pertinent, it provides that, fraud being absent, a transaction with another corporation is not invalidated by reason of the existence of interlocking directors or directors otherwise interested in such other corporation; and further provides that any such director may be counted toward a quorum. It is this latter provision which is assailed as invalid. Paragraph 8 of Section 5 of the General Corporation Law, Rev.Code of Del., 1935, Par. 2037, sub-par. 8, provides: 8. The Certificate of Incorporation may also contain any provision which the incorporators may choose to insert for the management of the business and for the conduct of the affairs of the corporation, and any provisions creating, defining, limiting and regulating the powers of the corporation, the directors and the stockholders, or any class of the stockholders, or, in the case of a corporation which is to have no capital stock, of the members of such corporation; provided, such provisions are not contrary to the laws of this State. Plaintiffs say that the word laws in the concluding proviso of this paragraph means the common law as well as statute law; and that the provision in Mayflower's charter permitting an interested director to be counted toward a quorum is contrary to the common law of this state as announced in Blish v. Thompson Automatic Arms Corp., 30 Del.Ch. 538, 64 A.2d 581. If plaintiffs are right, this proviso, originally enacted in the General Corporation Law of 1899, Vol. 21, Laws of Del.Ch. 273, has the effect of forbidding the stockholders of a Delaware corporation to modify by agreement the effect of any rule of the common law relating to the regulation of the corporate enterprise. Such a construction unwarrantably narrows the scope of the enabling portion of the paragraph. That portion confers, in the most general language, the right to include in a certificate of incorporation any provision deemed appropriate for the conduct of the corporate affairs. The rapid development of corporation law in this country  certainly in this state  furnishes repeated examples of departure from common law principles, and negatives the suggestion that the legislature intended by this provision to codify (in effect) all the common law rules applicable to the governance of corporate affairs. In Butler v. New Keystone Copper Co., 10 Del.Ch. 371, 93 A. 380, a charter provision authorizing sale of all the corporate assets with the consent of three-fourths in interest of the stockholders was upheld against the objection here made, viz., that such a provision was not expressly authorized by statute and was contrary to the common law. We are unwilling to assent to plaintiffs' contention that all the rules of the common law applicable to corporations are brought within the sweep of the phrase laws of this State. Plaintiffs cite the case of State ex rel. Cochran v. Penn-Beaver Oil Co., 4 W.W. Harr. 81, 34 Del. 81, 143 A. 257, in which the Superior Court en Banc held invalid a charter provision amounting in effect to a denial of any right of inspection of corporate books by a stockholder. The reasoning of the court appears to emphasize the introductory language of paragraph 8 rather than the language of the proviso and draws a distinction between regulation and prohibition of the common law rights of stockholders. There is also language suggesting that a right given by the common law may not be abrogated. We need not review the soundness of this reasoning except to say that if the opinion is read as announcing the broad rule contended for by plaintiffs we cannot agree with it. The case is, of course, clearly distinguishable upon its facts. On the other hand, it is clear that the scope of the proviso is broader than the field of statutory law. In Greene v. E. H. Rollins & Sons, Inc., 22 Del.Ch. 394, 2 A.2d 249, 252, a charter provision was found to contain unreasonable restraints on alienation of shares of stock and was held invalid. Answering the argument that a corporate charter is a contract binding on the stockholders, Chancellor Wolcott said: No individual may exercise his broad power to enter into contract relations with another so as to offend against what the law deems to be sound public policy. The language of Section 5, Paragraph 8, was not discussed; but the case may be said to hold that the broad powers conferred by Paragraph 8 of Section 5 of the General Corporation Law do not authorize the stockholders to contract with each other or with the corporation to achieve a result forbidden by settled rules of public policy. Such a provision would be contrary to the laws of this State. A precise delimitation of the scope of the proviso is difficult to formulate; the limits of public policy are ill-defined and changing. We do not attempt a definition; but we say that the stockholders of a Delaware corporation may by contract embody in the charter a provision departing from the rules of the common law, provided that it does not transgress a statutory enactment or a public policy settled by the common law or implicit in the General Corporation Law itself. Turning to the charter provision before us, we find it to be one relating to the powers of the directors in conducting the corporate business. It permits interested directors to be counted toward a quorum. There is no Delaware decision dealing directly with the validity of such a provision, although in Martin Foundation v. North American Rayon Corp., Del.Ch., 68 A.2d 313, the Chancellor upheld the validity of a charter provision that broadened the definition of disqualifying interest of directors for quorum purposes. In Piccard v. Sperry Corp., D.C.N.Y.1943, 48 F.Supp. 465, affirmed 2 Cir., 152 F.2d 462, Judge Rifkind was of opinion that the law of Delaware did not forbid such a provision. We see no reason to hold that stockholders may not agree that interested directors may be counted toward a quorum. Such a provision does no more than to permit the directors to act as a board, leaving untouched questions of alleged unfairness or inequity that it is the duty of the courts in a proper case to resolve. Interlocking directorates are not in themselves unlawful and a provision such as here assailed, which merely facilitates the functioning of the board, cannot be said to constitute a contract contrary to public policy. The Blish decision does not announce any doctrine of public policy but merely approves a general rule of the common law. Action of interested directors under authority of such a provision will necessarily receive careful and objective scrutiny when reviewed in the courts, but this is not to say that the stockholders may not lawfully grant authority to act as a board. The Chancellor's comments on the bearing of such a charter provision upon the efficient functioning of a board of directors are pertinent. He said: The basis for the common law rule is the prevention of conflict between duty and self-interest or divided interest. See Italo-Petroleum Corp. v. Hannigan, 1 Terry 534, 14 A.2d 401. However, there are many cases where there is such a conflict and the court deals with it as here, by placing the good faith and fairness burden on those espousing the transaction. Assuming, as I have here done, that action by a quorum of directors is necessary, it would seem unrealistic to say that no action could be taken because of the inability to procure a disinterested quorum. To adopt a rule having that effect, particularly where stockholder approval is also necessary, is merely to invite subterfuge and encourage the election of so-called dummy directors. 89 A.2d 866. This is in effect to say that such a provision may well fill a legitimate need in the efficient functioning of the corporate enterprise. We agree; and we see no basis for declaring it unlawful. We are of opinion that at the meeting of the Mayflower directors at which the merger was approved a quorum was present. This conclusion makes it unnecessary to consider other reasons advanced by defendants in defense of the validity of the meeting. The order of the Court of Chancery of New Castle County dated June 18, 1952, is affirmed; and the cause is remanded to that court for further proceedings in conformity with this opinion.