Auer v. Dressel

Desmond, J. This article 78 of the Civil Practice Act proceeding was brought by class A stockholders of appellant R. Hoe & Co., Inc., for an order in the nature of mandamus to compel the president of Hoe to comply with a positive duty imposed on him by the corporation’s by-laws. Section 2 of article I of those by-laws says that “ It shall be the duty of the President to call a special meeting whenever requested in writing so to do, by stockholders owning a majority of the capital stock entitled to vote at such meeting ”. On October 16, 1953, petitioners submitted to the president written requests for a special meeting of class A stockholders, which writings were signed in the names of the holders of record of slightly more than 55% of the class A stock. The president failed to call the meeting and, after waiting a week, the petitioners brought the present proceeding. The answer of the corporation and its president was not forthcoming until October 28, 1953, and it contained, in response to the petition’s allegation that the demand was by more than a majority of class, A stockholders, only a denial that the corporation and the president had any knowledge or information sufficient to form a belief as to the [431] stockholdings of those who had signed the requests. Since the president, when he filed that answer, had had before him for at least ten days the signed requests themselves, his denial that he had any information sufficient for a belief as to the adequacy of the number of signatures was obviously perfunctory and raised no issue whatever (see People ex rel. Kelly v. Common Council, 77 N. Y. 503, 511; People ex rel. Fallert Brewing Co. v. Lyman, 53 App. Div. 470, 474, affd. 168 N. Y. 669; Mutter of Guess, 16 Misc. 306, 307). There was no discretion in this corporate officer as to whether or not to call a meeting when a demand therefor was put before him by owners of the required number of shares. The important right of stockholders to have such meetings called will be of little practical value if corporate management can ignore the requests, force the stockholders to commence legal proceedings, and then, by purely formal denials, put the stockholders to lengtñy and expensive litigation, to establish facts as to stockholdings which are peculiarly within the knowledge of the corporate officers. In such a situation, Special Term did the correct thing in disposing of the matter summarily, as commanded by section 1295 of the Civil Practice Act (see Third Annual Report of N. Y. Judicial Council, 1937, pp. 186-188; Matter of Ackerman v. Kern, 256 App. Div. 626, 629, 630, affd. 281 N. Y. 87). The petition was opposed on the further alleged ground that none of the four purposes for which petitioners wished the meeting called was a proper one for such a class A stockholders’ meeting. Those four stated purposes were these: (A) to vote upon a resolution indorsing the administration of petitioner Joseph L. Auer, who had been removed as president by the directors, and demanding that he be reinstated as such president; (B) voting upon a proposal to amend the charter and by-laws to provide that vacancies on the board of directors, arising from the removal of a director by stockholders or by resignation of a director against whom charges have been preferred, may be filled, for the unexpired term, by the stockholders only of the class theretofore represented by the director so removed or so resigned; (C) voting upon a proposal that the stockholders hear certain charges preferred, in the requests, against four of the directors, determine whether the conduct [432] of such directors or any of them was inimical to the corporation and, if so, to vote upon their removal and vote for the election of their successors; and (D) voting upon a proposal to amend the by-laws so as to provide that half of the total number of directors in office and, in any event, not less than one third of the whole authorized number of directors constitute a quorum of the directors. The Hoe certificate of incorporation provides for eleven directors, of whom the class A stockholders, more than a majority of whom join in this petition, elect nine and the common stockholders elect two. The obvious purpose of the meeting here sought to be called (aside from the indorsement and reinstatement of former president Auer) is to hear charges against four of the class A directors, to remove them if the charges be proven, to amend the by-laws so that the successor directors be elected by the class A stockholders, and further to amend the by-laws so that an effective quorum of directors will be made up of no fewer than half of the directors in office and no fewer than one third of the whole authorized number of directors. No reason appears why the class A stockholders should not be allowed to vote on any or all of those proposals. The stockholders, by expressing their approval of Mr. Auer’s conduct as president and their demand that he be put back in that office, will not be able, directly, to effect that change in officers, but there is nothing invalid in their so expressing themselves and thus putting on notice the directors who will stand for election at the annual meeting. As to purpose (B), that is, amending the charter and by-laws to authorize the stockholders to fill vacancies as to class A directors who have been removed on charges or who have resigned, it seems to be settled law that the stockholders who are empowered to elect directors have the inherent power to remove them for cause (Matter of Koch, 257 N. Y. 318, 321, 322; Ablerger v. Kulp, 156 Misc. 210, 212; 1 White on New York Corporations, pp. 558-559; 2 Fletcher’s Cyclopedia Corporations [Perm, ed.], §§ 351, 356). Of course, as the Koch case points out, there must be the service of specific charges, adequate notice and full opportunity of meeting the accusations, but there is no present showing of any lack of any of those in this instance. Since these particular stockholders [433] have the right to elect nine directors and to remove them on proven charges, it is not inappropriate that they should use their further power to amend the by-laws to elect the successors of such directors as shall be removed after hearing, or who shall resign pending hearing. Quite pertinent at this point is Rogers v. Hill (289 U. S. 582, 589) which made light of an argument that stockholders, by giving power to the directors to make by-laws, had lost their own power to make them; quoting a New Jersey case, the United States Supreme Court said: “ ‘ It would be preposterous to leave the real owners of the corporate property at the mercy of their agents, and the law has not done so ’ Such a change in the by-laws, dealing with class A directors only, has no effect on the voting rights of the common stockholders, which rights have to do with the selection of the remaining two directors only. True, the certificate of incorporation authorizes the board of directors to remove any director on charges, but we do not consider that provision as an abdication by the stockholders of their own traditional, inherent power to remove their own directors. Bather, it provides an additional method. Were that not so, the stockholders might find themselves without effective remedy in a case where a majority of the directors were accused of wrongdoing and, obviously, would be unwilling to remove themselves from office. We fail to see, in the proposal to allow class A stockholders to fill vacancies as to class A directors, any impairment or any violation of paragraph (h) of article Third of the certificate of incorporation, which says that class A stock has exclusive voting rights with respect to all matters “ other than the election of directors ’ \ That negative language should not be taken •to mean that class A stockholders, who have an absolute right to elect nine of these eleven directors, cannot amend their bylaws to guarantee a similar right in the class A stockholders, and to the exclusion of common stockholders, to fill vacancies in the class A group of directors. There is urged upon us the impracticability and unfairness of constituting the numerous stockholders a tribunal to hear charges made by themselves, and the incongruity of letting the stockholders hear and pass on those charges by proxy. Such questions are really not before us at all on this appeal. The [434] charges here are not, on their face, frivolous or inconsequential, and all that we are holding as to the charges is that a meeting may be held to deal with them. Any director illegally removed can have his remedy in the courts (see People ex rel. Manice v. Powell, 201 N. Y. 194). The order should be affirmed, with costs, and the Special Term directed forthwith to make an order in the same form as the Appellate Division order with appropriate changes of dates.