Goldfield Corp. v. General Host Corp.

• Decision Date: 18 November 1971
• Citation: 277 N.E.2d 387,29 N.Y.2d 264,327 N.Y.S.2d 330
• Parties: , 277 N.E.2d 387 In the Matter of the GOLDFIELD CORPORATION, Appellant, v. GENERAL HOST CORPORATION et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

Page 330

327 N.Y.S.2d 330

29 N.Y.2d 264, 277 N.E.2d 387

In the Matter of the GOLDFIELD CORPORATION, Appellant, v. GENERAL HOST CORPORATION et al., Respondents.

Court of Appeals of New York.

Nov. 18, 1971.

Sheila L. Birnbaum, Emile Z. Berman, A. Harold Frost, Howard Lester and Michael N. Block, New York City, for appellant.

Edwin E. McAmis and Douglas Foster, New York City, for respondents.

BREITEL, Judge.

The issue summary motion is whether an annual corporate meeting may be annulled and the election of directors and adoption of resolutions set aside where the beneficial owner of 16.7% Of the outstanding common stock was deprived of an opportunity to request a proxy and to vote, and other shareholders were incorrectly informed that these shares could not be voted.

The election, it is concluded, was valid. No notice to the beneficial owner, Goldfield, of the meeting was required; and there was no misrepresentation in the proxy materials circulated which under the circumstances, could have misled a substantial number of other shareholders. Although General Host, the corporation concerned, may have breached a duty it owed as Goldfield's pledgee, in effect depriving Goldfield of a proxy vote at the shareholders' meeting, the wrong involved was only an individual wrong, not affecting shareholders at large. Since there was no showing that the results of the election would have been different because of the individual wrong, the election may not be annulled.

Section 619 of the Business Corporation Law, under which the proceeding was brought, provides: 'Upon the petition of any shareholder aggrieved by an election, and upon notice to the persons declared elected thereat, the corporation and such other persons as the court may direct, the supreme court at a special term held within the judicial district where the officer of the corporation is located shall forthwith hear the proofs and allegations of the parties, and confirm the election, order a new election, or take such other action as justice may require.' Since only the validity of elections may be challenged by summary proceeding under the statute, the validity of other action taken at the meeting will not be considered (see, for examples of plenary actions to void resolutions adopted at corporate meetings: United Hotels Co. of Amer v. Mealey, 2 Cir., 147 F.2d 816, 819; Lewis v. Matthews, 161 App.Div. 107, 108, 146 N.Y.S. 424, 425; Davison v. Parke Austin & Lipscomb, Inc., 165 Misc. 32, 33, 299 N.Y.S. 960, 962; see, also, 5 Fletcher's Cyclopedia Corporations (Perm. ed.), § 2073, pp. 350--351; 20 Carmody-Wait 2d New York Practice, Actions by and Against Shareholders, § 121:435).

Host, a New York corporation, had 2,610,336 common shares outstanding on July 10, 1970, of which 437,700 were beneficially owned by Goldfield. The Goldfield shares had been pledged to the Union Bank of Los Angeles to secure certain notes. These notes were sold to Host, and on April 8, 1970 Host pursuant to the security agreement transferred the collateral shares into its own name as pledgee. Host now claims, and Goldfield disputes, that by that date Goldfield was in default for failure to pay interest. It is undisputed, however, that Host had given no contemporaneous notice either of the default or the transfer.

Because of the transfer of record, Goldfield did not receive the July 13, 1970 notice of the annual meeting to be held August 13, 1970. The proxy materials stated that: 'As of July 10, 1970, the Goldfield Corporation ('Goldfield'), New York, N.Y. owned 437,700 shares of Common Stock * * * These shares are pledged to secure notes of Goldfield held by the Company and are subject to an option by the Company to purchase them at market value at any time prior to January 31, 1970. In the event that prior to the annual meeting, the option is exercised or a default is called under the notes, the 437,700 shares will then be held by the Company and will not be outstanding for purposes of the annual meeting.' Later, on July 20, 1970, Host sent a notice of default to Goldfield but made no mention of the earlier April 8 transfer of record title. On July 23, 1970 a letter was mailed to shareholders stating that a default had been called, and that Goldfield's shares could not be voted, again without mention of the April 8 record transfer. On July 28, 1970 Goldfield wrote the transfer agents of Host denying the default, and refusing to authorize a transfer of record title to Host. This letter went unanswered.

Goldfield concededly had actual notice of the meeting, the proxy materials, and the July 23 letter to shareholders. It made no attempt, however, to communicate with other shareholders, to solicit proxies, or to propose an alternative slate of directors. A resolution of Goldfield authorized its president to vote its shares against the management nominees, but did not offer an alternative slate. The resolution also directed its president to vote against management proposals, but again no attempt was made to communicate with other shareholders in advance of the meeting.

Six persons connected with Goldfield, including its president and counsel, attended the meeting. They were refused admission as representatives of Goldfiled, but were allowed to participate as shareholders or proxyholders in their individual capacities. On each issue, except the selection of an accountant, Goldfield's counsel stated Goldfield's position contrary to that of management.

At the meeting management held proxies for 1,591,372 shares, or 60% Of the total, if Goldfield's shares are considered outstanding. Each management nominee for the three director positions received 1,685.627 favorable votes. Under Host's system of cumulative voting, Goldfield could have cast 1,313,100 votes for one nominee of its own choosing, still not enough to elect a single director.

There are basic rules. First, if Goldfield had been the record owner on July 10, 1970 it would have been entitled to receive notice of the meeting. Although persons connected with Goldfield attended the meeting and presented Goldfield's views, there was no waiver since these persons were not allowed to participate by voice or vote as Goldfield's representatives (Business Corporation Law, § 606). Generally, failure to give notice in accord with the statute and the corporate by-laws would have rendered the election void, and, if void, a new election would have been required even without a showing that the results of the election would, or might have been different (Matter of Empire State Supreme Lodge, 118 App.Div. 616, 103 N.Y.S. 1124; Matter of Keller, 116 App.Div. 58, 60, 101 N.Y.S. 133, 135; Matter of Melloh v. Beattie, 17 Misc.2d 902, 903, 187 N.Y.S.2d 203, 204; Matter of M. & O. Realty Corp., 16 Misc.2d 562, 182 N.Y.S.2d 186; Matter of 74 Tremont Ave. Corp., 10 Misc.2d 662, 663, 173 N.Y.S.2d 154, 155; Matter of Janaug, Inc. v. Szlapka, 6 Misc.2d 84, 85, 162 N.Y.S.2d 668, 669; Matter of Green Bus Lines (Turner), 166 Misc. 800, 804, 2 N.Y.S.2d 556, 560; Matter of Maurer, Inc., Sup., 77 N.Y.S.2d 159, 161; E. Aranow & H. Einhorn, Proxy Contests For Corporate Control (2d ed. 1968), pp. 500, 509; Ann., Stockholders' Meeting--Informality, 51 A.L.R. 941, esp. p. 954; 3 White, New York Corporations, Shareholders, par. 619.04, subd. (1); 20 Carmody-Wait 2d New York Practice, Action by and Against Corporations, § 121:438; 11 N.Y.Jur., Corporations, §§ 407, 410). But since Goldfield was not the owner of record on the record date, it was not, without more, entitled to notice of the election, and thus, at least on this ground, the election is invulnerable.

In a proper case, it may be that the courts would look beyond record ownership in favor of beneficial ownership to uphold or overturn an election, but this is not such a case (cf. Andrews v. Precision Apparatus, D.C., 217 F.Supp. 679, 685--686; Benintendi v. Kenton Hotel, 181 Misc. 897, 899, 45 N.Y.S.2d 705, 707, affd. 268, App.Div. 857, 50 N.Y.S.2d 843 mod. on other grounds, 294 N.Y. 112, 60 N.E.2d 829; Aranow & Einhorn, Op. cit. supra, pp. 506--508). So, too, on the other side of the problem, an issue also not necessary to decide is whether the court in its discretion may abstain from undoing the election where there is an inadvertent or insignificant failure to give proper notice of meeting to holders of very few shares who have actual, adequate notice. The point is that the statute provides a discretionary alternative for the hearing court, namely, 'to take such other action as justice may require.' In this context it is relevant that a defect in notice of a meeting may be waived before or after the meeting (Business Corporation Law, § 606).

Second, if there had been material misrepresentations to shareholders at large, the election could be overturned. Again, there is no necessity to show that without the misrepresentations a different result would have ensued. Elections, however, will not be overturned for just any misrepresentation. The materiality of the misrepresentation, the completeness of other information from which shareholders could determine the truth, and the likelihood, given the circumstances of the election, that some shareholder might have voted differently as a result of the misrepresentation, without going so far as to show an entirely different result on the tallied vote, should all be considered (see Matter of Hoe & Co., 14 Misc.2d 500, 505, 137 N.Y.S.2d 142, affd. 285 App.Div. 927, 139 N.Y.S.2d 883, affd. 309 N.Y. 719, 128 N.E.2d 420; General Time Corp. v. Talley Ind., 2 Cir., 403 F.2d 159, 162, cert. den. 393 U.S. 1026, 89 S.Ct. 631, 21 L.Ed.2d 570; Matter of Scheuer, Sup., 59 N.Y.S.2d 500, 501; General Inv. Co. v. American Hide & Leather Co., 97 N.J.Eq. 230, 235, 127 A. 659; cf. Matter of Doeskin Prods., 7 A.D.2d 42, 46, 180 N.Y.S.2d 760, 764; Aranow & Einhorn, Op. cit. supra, pp. 503--506, 510; see, generally, 11 N.Y.Jur., Corporations, § 442).

A supplemental...