Court Opinion

ID: 9642723
Source: CourtListenerOpinion
Date Created: 2023-08-22 18:07:44.51849+00
Date Added: 2024-06-11T18:10:51.783003
License: Public Domain

*27Hornby, J.,
filed the following dissenting opinion, in which McLaughlin, J., specially assigned, concurs.
The majority opinion affirming the decrees of the lower court in the equity cases—brought by Maxwell Cummings and others (the Cummings group) against United Artists Theatre Circuit (United Artists) and Michael Naify and others (the Naify group) to restrain consummation of the stock exchange agreement (whereby the Naify group were assured practical control of United Artists)—notwithstanding the simultaneous order in the mandamus proceeding requiring United Artists to call a special meeting of its stockholders for the purpose of removing directors of the corporation pursuant to the request of the Cummings group (which but for the consummation of the exchange agreement might have been in the majority), seems to be based on the conclusion that control of the corporation was immaterial and that the agreement should stand or fall depending on whether it was fair to the corporation.
While it may be true that the board of directors denied the request for a special meeting of stockholders in good faith, it was error, in my opinion, to refuse the injunctive relief sought by the Cummings group. Cf. Richman v. DeVal Aerodynamics, 183 A. 2d 569 (Del. Ch. 1962), where, as here, the request for a special meeting of stockholders was denied because the board of directors was of the opinion that the requisite percentage of shareholders had not made a demand, the request was held to have been wrongfully denied and a mandatory injunction compelling the special meeting was granted. Furthermore, in a subsequent suit to recover counsel fees incurred in the injunction proceedings—see Richman v. DeVal Aerodynamics, 185 A. 2d 884 (Del. Ch. 1962)—it was recognized that the injunction issued, aside from compelling the holding of a special stockholders’ meeting, prohibited the directors from carrying out any contemplated action which might have proved to be binding on the corporation and which the requesting stockholders apparently thought unwise. Although the facts in these Rickman cases do not indicate whether or not control of the corporation was involved, or even whether or not the contemplated action of the board was fair to the corporation, the significance of the cases is that the board of directors was enjoined *28from taking the action when they knew that the special meeting was requested for the purpose of removing them from office and that the corporate action contemplated was opposed by a group of stockholders.
Although Code (1957), Art. 23, § 38(c), specifically affords the “holders of shares entitled to not less than twenty-five percent of all the votes entitled to be cast,” a right to have a special meeting of stockholders called for the purpose, among others specified in § 52(d), of removing “any director or directors from office,” the request by the Cummings group for a special meeting was refused by the secretary of the corporation and the board of directors at its next regular meeting approved the exchange agreement the president of the corporation had formulated with the Naify group and passed a formal resolution denying the requested stockholders’ meeting. The lower court, though finding that the action of the board was motivated by the fear that the Cummings group might gain control as well as by the belief that consummation of the agreement would serve a legitimate corporate purpose, held that the agreement was fair under the circumstances, and the majority has affirmed this holding.
But regardless of the fairness of the exchange agreement, it seems clear to me that affirmance has the effect of nullifying, if it does not repeal outright, the statutory right of stockholders in a case such as this to call a special meeting for the purpose of removing directors. In affirming, the majority has not cited a single case for the proposition that a board of directors may, in the exercise of good faith under circumstances which appear to be fair to the corporation, shift control by means of stock transactions from one group of stockholders to another before complying with a lawful request for a special meeting to remove directors. In the main, all that the majority has done in this case is to try to distinguish the cases relied on by the Cummings group to entitle them to reversal, often without significant success, and to hold that “where a good corporate purpose” is shown, a shift in control is not only permissible but is proper. On the contrary, there are a number of cases in this and other states which are indicative of what the holding ought to be in a situation such as this case involves. Besides the cases *29hereinafter discussed at some length, see Mortgage Bond Association v. Baker, 157 Md. 309, 145 Atl. 876 (1929)1; Kullgren v. Navy Gas & Supply Co., 135 P. 2d 1007 (Colo. 1943); Yasik v. Wachtel, 17 A. 2d 309 (Del. Ch. 1941); L. E. Fosgate Co. v. Boston Market Terminal Co., 175 N.E. 86 (Mass. 1931) ; Glenn v. Kittanning Brewing Co., 103 Atl. 340 (Pa. 1918); Trask v. Chase, 77 Atl. 698 (Me. 1910); Elliott v. Baker, 80 N. E. 450 (Mass. 1907) ; and Luther v. C. J. Luther Co., 94 N. W. 69 (Wis. 1903), all of which, without particular refence to fairness, stand for the principle that where, as here, a material motivating force for the issuance or exchange of stock is the maintenance of control, the transaction should be set aside. Other than this it is questionable whether a transaction such as the one in this case, which results in a shift of control, can ever be said to be within the realm of “carrying out the business of a corporation,” particularly when the transaction is consummated after the directors have become aware of a plan to remove them from office and replace them with directors favorable to the stockholders seeking control.
While the ultimate result of the exchange of stock may prove to be beneficial to United Artists, it is apparent that it was the fear of dissolution of United Cal (United California Theatres) if Cummings were in control, and the known intention of Cummings to wage a proxy fight to gain control of United Artists, which motivated the execution of the stock exchange agreement. As a result of the exchange of stock, the Naify group, through their 46% ownership of United Artists stock and United Artists 100% ownership of United Cal stock, not only gained practical control of United Artists hut still retained their control over United Cal. The swiftness with which the exchange agreement was executed after the denial of the special meeting of stockholders, the fear the Naify group had of the Cummings group and the resulting advantage to the Naify group, clearly indicate that the primary purpose of the actions of the board in ex*30ecuting the agreement and denying the special meeting, was to shift control of United Artists so as to prevent the Cummings group from gaining the control they sought. The exchange of stock therefore, instead of having some effect on the control of the corporation, as the majority has found, had a total effect, as to which group was to be the dominating force in United Artists.
Furthermore, despite the effort of the majority to distinguish Lazar v. Knolls Cooperative, 130 N. Y. S. 2d 407 (1954), by-saying that the board of directors of United Artists was a duly elected board and not an interim one holding office illegally, that the action of the board was not a violation of a by-law of' United Artists and that the Maryland statute fixed no time when a special meeting must be held, it is apparent that Lazar is directly in point here. For, in that case, the holdings, as they ought to be in this case, were to the effect that the denial of a special stockholders’ meeting was improper even though the-calling of one might have entailed a delay and consequent injury to the corporation and that stockholders’ rights should not have been violated for the sake of speed since it was their fundamental right to have a special meeting called, and not that of the unlawfully constituted board, which was the determinative-factor.
For cases not cited by either of the contending groups or by the majority, see Rowland v. Times Pub. Co., 35 So. 2d 399 (Fla. 1948), where an issuance of stock that shifted control after a special meeting of stockholders had been wrongfully denied, was held to be unlawful despite the fact that compliance with a statute concerning the issuance of stock would not have been in the best interests of the corporations; and see Thwing v. Weibatch Liquid Scale Co., 206 N. W. 320 (Mich. 1925), where an issuance of stock was held unlawful even though it was subsequently voted in the best interests of the-corporation.
In this case, where there was no showing that the stockholders, had they been given an opportunity to do so, would have removed the incumbent directors and replaced them with a Cummings related board, where there was no showing that the *31exchange agreement would not have been approved had a new board of directors been placed in office before the agreement was consummated, and particularly where there is a serious question as to whether the shift in control was a “carrying out” of the ordinary business affairs of the corporation, the requesting stockholders should not have been deprived of their absolute right to have a meeting called and held before the exchange agreement was finally consummated. For, by allowing a well-nigh irreversible shift in control to stand without having given the stockholders an opportunity to even attempt to remove the unwanted directors, the provisions of Art. 23, § 38(c) and § 52(d) were thereby rendered absolutely nugatory so far as the Cummings group was concerned. This should not have been permitted. See Weisblum v. Li Falco Mfg. Co., 84 N. Y. S. 2d 162 (1947), where the Court, in stating that it would be improper for it to assume that the action taken at a special meeting would be against the best interests of the corporation and thereby deprive the requesting stockholders of their lawful rights, held that the request for a special meeting of stockholders was proper and that the refusal to call the meeting was improper despite the belief of the board of directors that the meeting would have a detrimental effect on the corporation.
If what the lower court decreed is to be the law of this State, as the majority has said it is, the opinion leaves open the vital question as to what force Art. 23, § 38(c) still has, if any. Not to have answered this question makes it possible for the board of directors of any corporation, having its own shares or the shares of affiliated corporations at its disposal, to perpetuate itself in office indefinitely by merely denying a request for a special meeting of stockholders and then, by some sort of stock transaction, either retain control or shift it to a friendly group. This ought not to be possible and in fact is exactly what this Court said in Mortgage Bond Association v. Baker, supra (at p. 320 of 157 Md.), would not be tolerated. As the legislature undoubtedly intended, it is the rights of stockholders that should be protected and the courts should not allow directors to infringe upon these rights under any circumstance when they are aware of a lawful plan to remove them from office under § 52(d). Cf. Rolling Inn, Inc. v. Iula, 212 Md. 596, 130 A. 2d *32758 (1957) ; Moore v. Linahan, 117 F. 2d 140 (C. C. A. 2d 1941), cert. den. sub nom. Sargent & Co. v. Moore, 314 U. S. 628 (1941).
In my opinion the decrees of the lower court should be reversed and remanded for further proceedings.
Judge McLaughlin authorizes me to say that he concurs in the views herein expressed.

. There are also two nisi ftrius decisions by the Circuit Court of Baltimore City. See United Funds v. Carter Products, published in the Daily Record of Sept. 33, 1963, and Maslin v. Baltimore Radio Show, filed in Circuit Court No. 2 on Jan. 24, 1934, the latter of which is directly in point.