Court Opinion

ID: 5762315
Source: CourtListenerOpinion
Date Created: 2022-01-12 17:16:40.345293+00
Date Added: 2024-06-11T08:41:35.079730
License: Public Domain

McGivern, J. (dissenting).
I dissent and would affirm. The petitioners, representing the only power bloc in Unexcelled, Inc., presently have no representation on its board of directors, although they are the owners of 68,557 shares of the stock, constituting approximately 10% of its outstanding shares, the current market value of which is allegedly in excess of $1,200,000. Further, they make the representation that there are other friends and associates, owning in the aggregate 100,000 shares of Unexcelled, who also wish to exercise their legitimate right to be represented by directors of their own choosing. The pres*48ent board members are the beneficial owners of about .041% of the corporate stock, two members possessing no shares at all.
And the present board was aware of discord in the ranks of the shareholders. At the meeting of July 12, 1966, wherein 10 directors were elected “ to hold office for the ensuing year,” petitioners refused to vote for the management slate. Notwithstanding the fact that the period of a year had not ensued, and the terms of the directors had not expired, the board sent out a notice of annual meeting, dated February 28,1967, the meeting to be held on March 21, 1967. This, in spite of the fact that Unexcelled’s listing application, filed with the American Stock Exchange on October 20, 1966, and a public document, stated: “ The Annual Meeting of shareholders shall be held on the fourth Wednesday in July in each year.” The by-laws actually prescribed ‘ ‘ the annual meeting of share-holders shall be held * * * not later than the fourth Wednesday in July of each calendar year ”.
This stratagem of the board, in precipitately advancing the meeting, had the clear purpose of fending off an anticipated proxy contest, or is open to such an inference. In any event, the petitioners assert this was the result; having received no intimation of the board’s intent to schedule the annual meeting four months prior to the expiration of one year from the last “ annual ” meeting, they were caught completely off guard. It is asserted some of the notices were received during the periods of March 2 to March 8, 1967. A collateral effect was to abridge the terms of the incumbent directors from 12 to 8 months, and also to make it possible that the next “ annual ” meeting could be held again in July of the next year, allowing for a prolongation of the terms of office of incumbent re-elected directors for an additional 16 months. The maneuver also made it possible for the incumbent management to keep their chosen directors in office for a period of two years as against the legislative mandate calling for the annual election of directors.
In my opinion, the holding of the 1967 meeting on March 21, 1967 was in contravention of the Business Corporation Law, the notice of meeting and the proxy statement pertaining thereto.
Subdivision (b) of section 703 of the Business Corporation Law reads: “ Each director shall hold office until the expiration of the term for which he is elected ”.
Subdivision (b) of section 602 of the Business Corporation Law reads: “A meeting of shareholders shall be held annually for the election of directors ’ ’.
*49Paragraph (2) of subdivision (b) of section 702 of the Business Corporation Law reads: “No decrease shall shorten the term of any incumbent director.”
These statutes were not made to be evaded. And they will not budge, not even to suit the purposes of a management group. The Business Corporation Law was designed to protect the shareholders of public corporations and to prevent ‘ ‘ the possibility of undue manipulation by incumbent directors ” (Revisers’ Comment to § 704).
The notice of the July 12, 1966 meeting said that one of the purposes was to elect 10 directors “ to hold office for the ensuing year.”
The proxy statement for the July 12, 1966 meeting said: “ It is proposed to elect 10 Directors at the Meeting to serve for the ensuing year.”
And this court has declared, in a similar matter involving a corporate coup: “ A different obligation of disclosure is involved in proxy solicitation than that involved in formal notices of meeting ” (Matter of Ideal Mut. Ins. Co., 9 A D 2d 60, 62).
In my view, thé majority disposition condones a want of fundamental fair play and good faith as exacted by the statutes for the public interest and protection. The very purpose of these statutes is to prevent the wrongful perpetration or manipulation of directors by management and to compel honesty and candid disclosure in the solicitation of proxies (Business Corporation Law, § 602, subd. [b]; § 703, subd. [b]; Securities Exchange Act of 1934, § 14, subd. [a]; U. S. Code, tit. 15, § 78n, subd. [a]).
The majority seems to attach significance to the fact that prior to 1966, the annual meetings were held in February or March. It should be noted that section 2 of article II of the by-laws was adopted at the 1965 meeting. And prior to 1966, Unexcelled was not yet subject to the stringent exactions of section 12 of the Securities Exchange Act of 1934, as amended in 1964 (U. S. Code, tit. 15 § 781), nor were its shares listed on the American Stock Exchange. After 1966, Unexcelled was a public corporation, and the date of its annual meetings to elect directors had to comply with all the statutory regulations, both State and Federal. The directors would not be powerless to restore their annual meeting to the first quarter of the year, as the majority indicates. They could do so by a notice and a proxy statement that would actually, honestly and fully set forth the complete purpose of the meeting and not, by a failure to disclose, play cat and mouse with the shareholders.
*50The majority also opines that: “To do so would further run counter to the consistent policy of our courts to avoid interference with the internal management and operation of corporations (Matter of Grace v. Grace Inst., 19 N Y 2d 307, 313).”
In the first place, Grace involved a 19th Century charitable corporation created by a special act of the Legislature, one of whose exalted purposes was “ to afford such protection, instruction and assistance to young women to the end that they may become useful and virtuous citizens.” (L. 1897, ch. 285, § 7.) We have here a purely business corporation, publicly owned, having some 3,000 shareholders. I believe it appropriate also to give recognition to the fact that the public policy of this State, as expressed in our statutes, supra, is to protect the shareholders of our publicly held corporations from the machinations of some uninhibited management groups. It is this policy I would uphold.
Lastly, the Business Corporation Law became effective in September of 1963. It is virtually identical with the same Ohio statute, construed in Toledo Traction, Light & Power Co. v. Smith (205 F. 643) pertaining to a mandatory annual meeting. Therein, the court held that a change in the date of the annual meeting for the election of directors 1 ‘ cannot affect the term of office of the directors then in office. ’ ’
The interpretation accorded the law and the facts by Special Term was correct, and its order should be affirmed.
Stbuer, J. P., Capozzoli and MoNally, JJ., concur with Witmeb, J.; McGtvern, J. dissents in opinion.
Order entered on May 1, 1967, reversed, on the law and on the facts, with $50 costs and disbursements to the respondents-appellants, and respondents-appellants ’ cross motion to dismiss the petition granted.