Before LUMBARD, Chief Judge, and CLARK and FRIENDLY, Circuit Judges.
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. Despite the disagreement evidenced by the diversity of our opinions, my brethren and I agree that such a provision does not on its face render the contract illegal and unenforceable, and thus that it was improper to grant summary judgment. Judge Friendly would reject the defense of illegality without further inquiry concerning the provision itself (as distinguished from any contention that control could not be safely transferred to the particular purchaser). Judge Clark and I are agreed that on remand, which must be had in any event to consider other defenses raised by the pleadings, further factual issues may be raised by the parties upon which the legality of the clause in question will depend; we disagree, however, on the nature of those factual issues, as our separate opinions reveal. Accordingly, the grant of summary judgment is reversed and the case is remanded for trial of the question of the legality of the contested provision and such further proceedings as may be proper on the other issues raised by the pleadings.
Since we are in agreement on certain preliminary questions, this opinion constitutes the opinion of the court up to the point where it is indicated that it thenceforth states only my individual views.
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. Negotiations proceeded rapidly, and on August 28 Yates and Joseph Harris, the president of Essex, signed a contract in which Essex agreed to buy, and Yates agreed "to sell or cause to be sold" at least 500,000 and not more than 600,000 shares of Republic stock. The price was set at eight dollars a share, roughly two dollars above the then market price on the Exchange. Three dollars per share was to be paid at the closing on September 18, 1957 and the remainder in twenty-four equal monthly payments beginning January 31, 1958. The shares were to be transferred on the closing date, but Yates was to retain the certificates, endorsed in blank by Essex, as security for full payment. In addition to other provisions not relevant to the present motion, the contract contained the following paragraph:
Upon and as a condition to the closing of this transaction if requested by Buyer at least ten (10) days prior to the date of the closing:
(a) Seller will deliver to Buyer the resignations of the majority of the directors of Republic.
(b) Seller will cause a special meeting of the board of directors of Republic to be held, legally convened pursuant to law and the by-laws of Republic, and simultaneously with the acceptance of the directors' resignations set forth in paragraph 6(a) immediately preceding will cause nominees of Buyer to be elected directors of Republic in place of the resigned directors."
Before the date of the closing, as provided in the contract, Yates notified Essex that he would deliver 566,223 shares, or 28.3 per cent of the Republic stock then outstanding, and Essex formally requested Yates to arrange for the replacement of a majority of Republic's directors with Essex nominees pursuant to paragraph 6 of the contract. This was to be accomplished by having eight of the fourteen directors resign seriatim, each in turn being replaced by an Essex nominee elected by the others; such a procedure was in form permissible under the charter and by-laws of Republic, which empowered the board to choose the successor of any of its members who might resign.
On September 18, the parties met as arranged for the closing at Republic's office in New York City. Essex tendered bank drafts and cashier's checks totalling $1,698,690, which was the 37 1/2 per cent of the total price of $4,529,784 due at this time. The drafts and checks were payable to one Benjamin C. Cohen, who was Essex' banker and had arranged for the borrowing of the necessary funds. Although Cohen was prepared to endorse these to Yates, Yates upon advice of his lawyer rejected the tender as "unsatisfactory" and said, according to his deposition testimony, "Well, there can be no deal. We can't close it."
Essex began this action in the New York Supreme Court, and it was removed to the district court on account of diversity of citizenship. Essex seeks damages of $2,700,000, claiming that at the time of the aborted closing the stock was in actuality worth more than $12.75 a share.*fn1 Yates' answer raised a number of defenses, but the motion for summary judgment now before us was made and decided only on the theory that the provision in the contract for immediate transfer of control of the board of directors was illegal per se and tainted the entire contract. We have no doubt, and the parties agree, that New York law governs.
Appellant's contention that the provision for transfer of director control is separable from the rest of the contract can quickly be rejected. We see no significance in the fact that the contract gave Essex only an option to have the directors replaced, rather than providing directly for such a transfer of control, and the most elementary application of the parol evidence rule forbids us to entertain Essex' argument that there is a factual issue as to whether the transfer clause was central to the negotiations or only an afterthought.
On the face of the contract the sale of stock and the transfer of director control are but two aspects of a single transaction; the provision for the latter in paragraph 6 states that it is to be "a condition to the closing of this transaction." A matter so practically important as achieving immediate rather than deferred acquisition of control over the day-to-day operations of the corporation in ...