Manson v. Curtis - 223 N.Y. 313, 119 N.E. 559 (1918)

Rule:

Directors are the exclusive, executive representatives of the corporation and are charged with the administration of its internal affairs and the management and use of its assets. Clearly, the law does not permit stockholders to create a sterilized board of directors. Corporations are the creatures of the state and must comply with the exactions and regulations it imposes.

Facts:

Plaintiff and defendant were directors of a corporation. Plaintiff and defendant entered into an agreement by which defendant acquired a controlling interest in the outstanding shares and the parties in effect agreed to withdraw from the directors of the corporation the control and direction of the corporate affairs and business. The obligations of the plaintiff under the agreement were performed by him, in so far as performance was permitted. The defendant violated the agreement in that he refused to sell the twenty shares of the stock to plaintiff; he, through his control of dummy directors elected by his majority votes, placed all control and management of the corporate affairs in charge of a person unfit and other than plaintiff; he refused to carve out of his stockholdings five thousand dollars in amount for use by a disinterested party for voting purposes or to co-operate with the plaintiff in the designation of a disinterested party. The business and affairs of the corporation were consequently negligently and inefficiently carried on, resulting in the bankruptcy of the corporation. Plaintiff instituted the present action to recover damages from the defendant. The trial court decided, under demurrers of the plaintiff to certain defenses alleged in the answer, that the complaint did not state facts sufficient to constitute a cause of action and that it should be dismissed. Plaintiff sought review. 

Issue:

Did the complaint state a sufficient cause of action? 

Answer:

No.

Conclusion:

The appellate court affirmed. On appeal, the court held that the agreement was illegal and void and that violation of the agreement did not state a cause of action. Directors were the exclusive, executive representatives of the corporation and were charged with the administration of its internal affairs and the management and use of its assets. The law did not permit the stockholders to create a sterilized board of directors. Corporations were creatures of the state and were required to comply with the regulations that the state imposed.