In re Morse

• Decision Date: 14 February 1928
• Citation: 160 N.E. 374,247 N.Y. 290
• Parties: In re MORSE.
• Court: New York Court of Appeals Court of Appeals

247 N.Y. 290

160 N.E. 374

In re MORSE.

Court of Appeals of New York.

Feb. 14, 1928.

Proceeding by Edward P. Morse in respect to election of Directors of the Bank of America. From an order of the Appellate Division (220 App. Div. 830, 222 N. Y. S. 858), affirming an order of the Supreme Court denying a motion for review of an election of directors, made under General Corporation Law, § 32, petitioner and certain interveners appeal.

Reversed, and petitioner's motion for new election granted.Appeal from Supreme Court, Appellate Division, First Department.

Nathan L. Miller and Harold Otis, both of New York City, for appellant Morse.

Frank H. Stewart, Henry L. Sherman, and Abel E. Blackmar, all of New York City, for appellants intervening stockholders.

John Godfrey Saxe and Louis S. Posner, both of New York City, for appellants intervening certificate holders.

Albert Ottinger, Atty. Gen. (C. T. Dawes, of Albany, for the State.

Charles E. Hughes, Henry Root Stern, Bertram F. Shipman, and S. S. Jennings, Jr., all of New York City, for respondents.

POUND, J.

This is a proceeding to review the election of directors of the respondent, the Bank of America, a domestic banking corporation, held January 11, 1927. The question is as to the right of trustees under a voting trust agreement entered into prior to March 12, 1925, to vote the stock held by them at such election.

[1][2] A voting trust agreement confers on voting trustees the right to vote on stock transferred to them for such purpose, irrevocably for a definite period. Stock transferred under such an agreement is canceled and trust certificates are issued by the trustees to the stockholders. The right to vote is thereby separated from the beneficial ownership of the stock. The courts below have upheld the validity of the agreement in question.

Voting trust agreements whereby the voting power of the stock is separated from its beneficial ownership have been the subject of discussion and wide differences of opinion. They have in some jurisdictions, in the absence of statutory restrictions, been held within the policy of our law and lawful so long as their object is to carry out a particular policy to promote the best interests of all the stockholders or the corporation. Brightman v. Bates, 175 Mass. 105, 55 N. E. 809;Carnagie Trust Co. v. Security Life Ins. Co. of America, 111 Va. 1, 68 S. E. 412,31 L. R. A. (N. S.) 1186,21 Ann. Cas. 1287;Thompson-Starrett Co. v. E. B. Ellis Granite Co., 86 Vt. 282, 84 A. 1017. In other jurisdictions they have been held void on the ground that the voting power is inherently attached to and inseparable from the real ownership of each share and can only be delegated by proxy with power of revocation; that all agreements and devices by which stockholders surrender their voting powers are invalid as against a sound public policy. Bostwick v. Chapman, 60 Conn. 553, 24 A. 32;Harvey v. Linville Imp. Co., 118 N. C. 693, 24 S. E. 489, 32 L. R. A. 265, 54 Am. St. Rep. 749. See Cushing on Voting Trusts; Wormser on Disregard of the Corporate Fiction, p. 142; Smith on Validity of Voting Trusts, 22 Col. Law Review, 627.

[3] In New York voting trusts do not stand or fall on common-law theories of public policy. They are recognized and regulated by statute. Whether they would be valid at common law in the absence of a statute defining and regulating them is immaterial. Public policy in regard thereto is defined by the Legislature. Between the conflicting rules of the common law, a choice has been made. No voting trust not within the terms of the statute is legal, and any such trust, so long as its purpose is legitimate, coming within its terms, is legal. The test of validity is the rule of the statute. When the field was entered by the Legislature it was fully occupied and no place was left for other voting trusts.

Section 50 of the Stock Corporation Law (Consol. Laws, c. 59), prior to the amendment of 1925 (Laws 1925, c. 120), read as follows:

‘ Voting Trust Agreements.-A stockholder, by agreement in writing, may transfer his stock to a voting trustee or trustees for the purpose of conferring the right to vote thereon for a period not exceeding ten years upon the terms and conditions therein stated. Every other stockholder may transfer his stock to the same trustee or trustees and thereupon shall be a party to such agreement. The certificates of stock so transferred shall be surrendered and canceled and new certificates therefor issued to such trustee or trustees in which it shall appear that they are issued pursuant to such agreement, and in the entry of such ownership in the proper books of such corporation that fact shall also be noted, and thereupon such trustee or trustees may vote upon the stock so transferred during the term of such agreement. A duplicate of every such agreement shall be filed in the office of the corporation and at all times during business hours be open to inspection by any stockholder or his attorney.’

We are unable to apply any rule of statutory construction which would exclude banking corporations from the operation of the section. Banking Law (Consol. Laws, c. 2, § 120) provides: ‘The rights, powers and duties of stockholders of banks shall be as prescribed in the general corporation law and the stock corporation law.’ One of the rights and powers of a stockholder in a bank was the right and power to transfer his stock to a voting trustee or trustees for the purpose of conveying the right to vote thereon for a period of not exceeding ten years. One of the rights and powers of every other stockholder was the right and power to become a party to any such agreement.

[4][5] Voting trusts are, therefore, legal in New York only when organized and existing under the statute for proper ends. Whatever the rule of the common law may have been, when the Legislature, the source of corporate power and authority, acts, voting trusts become legal when organized in conformity with the statute and not otherwise. No stock corporations were excepted prior to the amendment of 1925. Public policy. although an aid to the interpretation of ambiguous statutes, is powerless to create an exception when the language is plain and all-comprehensive. However cogent the reasons may have been for not applying the voting trust statute to banks by reason of their peculiar relations with the public, it is enough to say that the Legislature did not recognize such reasons as controlling. The trust agreement herein considered was, therefore, valid at the time it was entered into, viz., December 31, 1924.

[6] On March 12, 1925, a new public policy was declared by the Legislature. The words, ‘this section shall not apply to a banking corporation,’ were added to section 50 (Laws 1925, c. 120). The only question here presented is as to the effect of this amendment as to existing valid voting trust agreements made by the stockholders of banking corporations. The amendatory statute is not a mere repealing statute. It creates a specific exception to the existing law. Section 93 of the General Construction Law (Consol. Laws, c. 22) provides:

‘Section 93. Effect of repealing statute upon existing rights.-The repeal of a statute or part thereof shall not affect or impair any act done, offense committed or right accruing, accrued or acquired, or liability, penalty, forfeiture or punishment incurred prior to the time such repeal takes effect, but the same may be enjoyed, asserted, enforced, prosecuted or inflicted, as fully and to the same extent as if such repeal had not been effected.’

The general object and the context of the language used indicate that the new law operates on existing rights by direct action as well as repeal. Section 110, of the General Construction Law, provides:

‘Section 110. Application of Chapter.-This chapter is applicable to every statute unless its general object, or the context of the language construed, or other provisions of law indicate that a different meaning or application was intended from that required to be given by this chapter.’

It follows that no existing rights of stockholders or voting trustees are saved by force of the provisions of section 93 of the General Construction Law, relative to the effect of a repealing statute upon rights accrued prior to the repeal of a statute.

[7] Without the application of section 50 of the Stock Corporation Law to banking corporations, the voting rights and powers of stockholders are defined by the General Corporation Law (Consol. Laws, c. 23) and the Stock Corporation Law. The statutes relative to the question must, therefore, be considered.

A corporation organized under the Banking Law may not issue nonvoting shares of stock. Stock Corporation Law, § 11. ‘Unless otherwise provided in the certificate of incorporation or other certificate filed pursuant to law, every stockholder of record of a stock corporation shall be entitled at every meeting of the corporation to one vote for every share of stock standing in his name on the books of the corporation.’ General Corporation Law, § 23; Stock Corporation Law, § 47. Stockholders may vote by proxy but every proxy of a stock corporation is revocable at the pleasure of the person executing it, and no officer, clerk, teller or bookkeeper of a corporation formed under or subject to the Banking Law shall act as proxy for any stockholder at any meeting of the corporation. General Corporation Law, § 26. ‘The stockholders of every bank shall hold an annualmeeting for the election of directors on the second Tuesday in January or within ten days thereafter.’ Banking Law, § 122.

[8] When the voting trust privilege is withdrawn from the stockholders of a banking corporation, it becomes the duty of the stockholders...