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Law School Case Brief

Essex Universal Corp. v. Yates - 305 F.2d 572 (2d Cir. 1962)

Rule:

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. Under a contract for ownership of a majority of stock it is permissible for the seller to choose to facilitate immediate transfer of majority control.

Facts:

Essex Universal Corporation (“Essex”) purchased controlling shares in stock of company from Herbert J. Yates pursuant to contract allowing Yates to retain certificates as security and that gave Essex right to demand resignation and replacement of majority of purchased company's board of directors. The lower court declared the agreement to be invalid.

Issue:

Was a contract for the sale  of a controlling interest in a New York stock corporation invalid?

Answer:

No

Conclusion:

The Court disagreed with the lower court’s decision because, though an agreement to sell control of management of corporation by itself is invalid, Essex was actually buying substantial percentage of company's stock. It was not improper for defendant to derive premium from sale of controlling block of stock. There was no suggestion that transfer of control carried any threat to interests of company or its shareholders. Because contract was for ownership of majority of stock and because it was permissible for seller to choose to facilitate immediate transfer of majority control, contract was permissible.

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