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Keywords

contractdefendantappealtrialpleasummary judgmentcorporation
contractdefendantappealtrialsummary judgmentcorporation

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Essex Universal Corp. v. Yates, 305 F.2d 572, 13 A.L.R.3d 346

Facts

The defendant, Herbert J. Yates, was the president and chairman of the board of directors of Republic Pictures Corporation. In August 1957, Yates entered into a contract with Essex Universal Corporation to sell 28.3% of Republic's stock. The contract included a provision that allowed Essex to require the resignation of a majority of the directors, which was to be executed at the closing of the sale. However, when the closing occurred, Yates rejected the payment from Essex, leading to this legal dispute.

The defendant Herbert J. Yates, a resident of California, was president and chairman of the board of directors of Republic Pictures Corporation, a New York corporation which at the time relevant to this suit had 2,004,190 shares of common stock outstanding. Republic's stock was listed and traded on the New York Stock Exchange. In August 1957, Essex Universal Corporation, a Delaware corporation owning stock in various diversified businesses, learned of the possibility of purchasing from Yates an interest in Republic.

Issue

Whether the contract for the sale of 28.3% of the stock of Republic Pictures Corporation is invalid under New York law solely because it includes a clause giving the purchaser an option to require a majority of the existing directors to resign.

1 This appeal from the district court's summary judgment in favor of the defendant raises the question whether a contract for the sale of 28.3 per cent of the stock of a corporation is, under New York law, invalid as against public policy solely because it includes a clause giving the purchaser an option to require a majority of the existing directors to replace themselves, by a process of seriatim resignation, with a majority designated by the purchaser.

Rule

Under New York law, a contract for the sale of stock is not per se illegal if it includes a provision for the immediate transfer of management control, provided that the purchaser has a sufficient ownership interest in the corporation.

It is established beyond question under New York law that it is illegal to sell corporate office or management control by itself (that is, accompanied by no stock or insufficient stock to carry voting control).

Analysis

The court analyzed the legality of the provision allowing for the immediate transfer of control over the board of directors. It noted that while it is illegal to sell corporate office or management control without sufficient stock ownership, the contract in question involved a substantial percentage of stock that could effectively allow the purchaser to gain control. The court concluded that the provision did not render the entire contract illegal and that further factual determinations were necessary.

The court analyzed the legality of the provision allowing for the immediate transfer of control over the board of directors. It noted that while it is illegal to sell corporate office or management control without sufficient stock ownership, the contract in question involved a substantial percentage of stock that could effectively allow the purchaser to gain control.

Conclusion

The Court of Appeals reversed the summary judgment and remanded the case for trial to determine the legality of the contested provision and to address other defenses raised by the pleadings.

Reversed and remanded for further proceedings not inconsistent with the judgment of this court.

Who won?

The prevailing party is Essex Universal Corporation, as the court reversed the summary judgment in favor of Yates, allowing the case to proceed to trial.

The prevailing party is Essex Universal Corporation, as the court reversed the summary judgment in favor of Yates, allowing the case to proceed to trial.

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