APPEAL from a judgment of the Appellate Division of the Supreme Court in the first judicial department, entered July 7, 1947, affirming, by a divided court, a judgment of the Supreme Court, in favor of defendant-respondent, entered in New York County upon an order of the court at Special Term (NULL, J.; opinion 188 Misc. 793), dismissing the complaint on the merits.
Corporations Directors --- New York General Corporation Law (§ 27) requires, as does New Jersey statute, that business of corporation be managed by board of directors --- Stockholders' agreement, stipulated to be construed according to New York law, that holders of classes of stock comprising half of shares of New Jersey corporation should designate manager of business for nineteen years unless management changed by arbitration to holders of other half of shares --- No power in directors to select or change manager --- Agreement illegal and unenforcible
The General Corporation Law (§ 27) provides that 'The business of a corporation shall be managed by its board of directors'. This is the same as the New Jersey statute. Stockholders of a New Jersey corporation entered into an agreement (stipulated in this stockholder's action to be construed according to New York law) which provided that for a period of nineteen years the holders of certain classes of stock, comprising half the corporate shares, should designate the manager of the theatre business of the corporation, unless and until the management should be changed by arbitration to the holders of the other classes, comprising half the corporate shares. By virtue of this agreement, management was vested in another corporation, without approval of the board of directors and with no power in them to select, discharge or change the manager. Such restrictions on the powers of directors violate both the New York and the New Jersey statutes. In a stockholder's suit, judgment should be granted declaring the agreement to be illegal, void and unenforcible.
Long Park, Inc., v. Trenton-New Brunswick Theatres Co., 272 App. Div. 902, reversed.
The opinion of the court was delivered by: Thacher, J.
The plaintiff, Long Park, Inc., a corporate stockholder of Trenton-New Brunswick Theatres Company (hereinafter referred to as Trenton), appeals from a judgment dismissing the complaint in an action brought in behalf of itself and of all other stockholders of Trenton for a declaratory judgment determining the validity or invalidity of an agreement to which all of the stockholders of Trenton and Trenton itself were parties. This agreement was held valid at Special Term and in the Appellate Division, and the single question presented here is whether the challenged portions of the agreement are invalid under the provisions of section 27 of the General Corporation Law of the State, which provides: 'The business of a corporation shall be managed by its board of directors'. The same provision appears in the New Jersey statute (New Jersey Statutes, tit. 14, Corporations, General, § 14: 7-1).
The principal defendant, B. F. Keith Corporation (hereinafter referred to as Keith), is a corporation organized and existing under the laws of the State of New York and, pursuant to the terms of the agreement in question, has for some time been acting as manager of all theatres leased and operated by Trenton. The plaintiff and all of the other corporate defendants are corporations organized and existing under the laws of the State of New Jersey. The appellant and the respondent have stipulated that for the purposes of this suit the agreement dated September 1, 1942, is in all respects a New York contract made and entered into in the State of New York and that it is to be construed according to the laws of the State of New York. The question presented by counsel both for the appellant and the respondent upon this appeal is whether the agreement of September 1, 1942, is valid and legal under the laws of this State. Under these circumstances we are not impelled to relinquish our discretionary jurisdiction.
The authorized capital stock of Trenton consists of 1,000 shares of the par value of $100 each, divided into four classes of 250 shares, designated as Class A-1, Class A-2, Class B and Class C. The Class A-1 and Class A-2 shares are owned by defendant-respondent Keith, the Class B shares are owned by plaintiff-appellant, and the Class C stock is owned by Trenton Theatres Building Company.
The agreement is for a period of nineteen years from September 1, 1942, to August 31, 1961, with an option in Trenton to extend the term.
With reference to the powers of Keith as the owner of all the Class A-1 and Class A-2 stocks and as the manager of the theatres, article XIV of the agreement provides:
'SECTION 1. Management of Theatres: During the term of this agreement, unless the management of the theatres is changed as hereinafter provided, the holders from time to time of the Class A-1 and A-2 stocks of the Tenant, agree to manage, or to cause RKO Service Corporation or any company affiliated with and designated by the holders of such Class A-1 and A-2 stocks, to manage the Capitol, Palace, Trent, South Broad, Lincoln, State (during the term of the lease of said State Theatre or any extension or renewal thereof) and Brunswick Theatres, all in the City of Trenton, New Jersey, and the Albany, Rivoli and State Theatres in the City of New Brunswick, New Jersey, and any other theatres which may hereafter be leased or operated by the Tenant or any subsidiary thereof. The person managing such theatres (which shall be the holders of Class A-1 and A-2 stocks unless and until the management is changed as hereinafter provided) from time to time during the term of this agreement, is herein sometimes referred to as •the Manager.'
'The Manager is hereby given full authority and power to supervise and direct the operation and management of all such theatres and in furtherance and not in limitation of the foregoing, it shall have power and authority to buy and book all features, short subjects, newsreels and other motion pictures, stage shows, personal appearances, television and other attractions and entertainment to be exhibited, played or performed in the theatres; to designate and, from time to time, to change the entertainment policy and scale of admission prices; to select, engage, supervise and direct and discharge any and all necessary employees or personnel for each of said theatres; to maintain the theatres in good operating condition; to do any and all other acts and things which are customary in connection with the management of theatres; and to carry out such policies or projects as the Board of Directors of the Tenant or its subsidiaries may approve.'
These powers continue as stated 'unless and until the management is changed as hereinafter provided', and the provision for change is found in section ...