Simonson v. Helburn

• Decision Date: 17 May 1950
• Citation: 198 Misc. 430
• Parties: Lee Simonson et al., Plaintiffs,<BR>v.<BR>Theresa Helburn et al., Defendants.
• Court: New York Supreme Court

198 Misc. 430

Lee Simonson et al., Plaintiffs,

v.Theresa Helburn et al., Defendants.

May 17, 1950.

Irving S. Ottenberg, J. George Levy and T. Girard Wharton for plaintiffs.

Benjamin M. Kaye and Milton Kunen for Theresa Helburn, defendant.

Theodore Kiendl for Lawrence Langner, defendant.

Bertram A. Mayers, H. W. Fitelson and Harold J. Sherman for Theatre Guild, Inc., defendant.

George A. Spiegelberg and Walter J. Freid for Maurice Wertheim, defendant.

Samuel J. Silverman for Warren P. Munsell, defendant.

GAVAGAN, J.

This is a declaratory judgment action in which the plaintiffs seek to have a stockholders' agreement declared illegal. In addition they ask the court for coercive relief re-establishing the ownership interests in the corporation as they existed prior to the agreement.

The agreement was executed on January 7, 1941. At that time the distribution of stock in the Theatre Guild, Inc., was as follows: The plaintiffs or their predecessors in interest and the defendants Langner, Helburn and Wertheim each owned 1,000 shares of nonvoting 6% preferred and one share of common; the defendant Munsell owned 250 shares of preferred and no common. All the stockholders except Munsell signed the agreement but Munsell voluntarily gave up his 250 shares.

The substance of the agreement may be summarized under five headings:

1. A change in the capital structure and ownership interests in the corporation;

2. Employment of defendants Langner and Helburn;

3. Restrictive covenants upon the sale of stock, provisions for the distribution of assets upon sale or liquidation, and provisions for dissolution upon the happening of certain events;

4. Employment of the plaintiffs;

5. Restrictions on management.

Plaintiffs' fundamental contention is that the agreement sterilized the board of directors (McQuade v. Stoneham, 263 N.Y. 323 [1934], motion for reargument denied 264 N.Y. 460 [1934]; Long Park v. Trenton-New Brunswick Theatres Co., 297 N.Y. 174 [1948]; General Corporation Law, § 27; but see Clark v. Dodge, 269 N.Y. 410 [1936]).

It is not claimed that what was done under the first heading is itself illegal, yet the reorganization was the central point of the bargain and remains the central objective of this action. It is difficult to appreciate the position that the plaintiffs take without a full appraisal of the business considerations which led up to the corporate reorganization and the nature of the reorganization itself.

With the approach of the 1939 theatre season, the guild found itself on the verge of financial failure. This resulted in part from the depression, but to a considerable extent was caused by internal dissension among the six stockholders, who also constituted the board of directors. They could not agree on plays to be produced, actors or directors to be employed, etc. At this time, Mr. Barry offered the guild his play, "The Philadelphia Story", on condition that the defendants Langner and Helburn were to have complete charge of its production. The spectacular success of that venture, as well as other successful plays produced under the same guidance and control, led to the six-party agreement.

The purpose of the agreement was to solidify and perpetuate this arrangement so that the talents of Mr. Langner and Miss Helburn could be made effective for the benefit of the corporation. Although somewhat alleviated, the financial condition of the guild was still serious. A disputed bondholders' claim for about $375,000 had been asserted and was later settled for $120,000. In addition, the guild owed about $45,000 in back salaries. Furthermore, the working capital of the corporation had not reached a level of reasonable security, considering the speculative nature of the business. In view of these obligations, the stock interests were worth very little. The bondholders' committee exerted considerable and justifiable pressure in favor of the agreement.

With this situation before them, the plaintiffs knew they were getting out. The only question was how much they could salvage in the process. Their sole bargaining weapon was the power to insist on their legal rights as stockholders and directors and thus bring foreclosure and bankruptcy on the enterprise. This power had trading value, and, represented by able counsel, these plaintiffs got all that it was worth.

The agreement provided that all stock was to be turned back to the corporation, except that the defendants Langner, Helburn and Wertheim were to retain one share of common stock each. The plaintiffs were then to receive seventy-five shares each of new 5% noncumulative, nonvoting preferred stock. The board of directors was to be reduced from six in number to three. This capital reorganization, promised in the agreement, was subsequently effected by corporate action at stockholders' and directors' meetings, held on December 9, 1941.

The virtue of the agreement is the fact that such management provisions as may be read into its terms are fairly reflected in the new capital structure of the corporation. Control ordinarily goes with the common stock; and pursuant to the agreement, the common stock kept control. Likewise, management resides in the board of directors; and pursuant to the agreement the individuals constituting an absolute majority of the board of directors in fact managed the corporation. As preferred stockholders, the plaintiffs are little more than debenture holders. They neither control nor manage because they have sold or exchanged their controlling interest.

Here lies the critical difference between the case at bar and Long Park v. Trenton-New Brunswick Theatres Co. (297 N.Y. 174, supra) upon which the plaintiffs chiefly rely. (See, also, Matter of Abbey [Meyerson], 274 App. Div. 389 [1948], affd. 299 N.Y. 557, following the Long Park case.) In the Long Park case the agreement provided for management and control of the corporation by one class of common stockholders. The reorganization was purely formal; there was no attempt to effect a fundamental change in capital structure. Each stockholder retained the same ownership interest that he had prior to the agreement, yet Keith obtained by way of a management contract, which vested in it as class A stockholder, exclusive control over important aspects of the corporation's business. The broad powers held by Keith for a term of nineteen years were not a reflection of Keith's power on the board of directors: the board remained deadlocked after, as before, the agreement.

Plaintiffs here, however, are seeking to upset an agreement effecting a complete redistribution of the common stock, which placed ownership in the hands of the management. The desire to give Langner and Helburn control was successfully effected by conveying to them a majority of the common stock and providing that "All the voting power will reside in the common stock and through its exercise the common stockholders will elect the Board of Directors and have absolute control over management." Thus, by electing the board of directors, the common stockholders control management. This is in accord with the statutory scheme and cannot justly be held to violate section 27 of the General Corporation Law.

The capital reorganization of the guild, which distinguishes the transaction from the Long Park case (supra) is only significant in relation to the second principal provision of the six-party agreement — i. e., the employment of Langner and Helburn.

The agreement provides in paragraph 8 that Miss Helburn and Mr. Langner shall have written contracts "covering their compensation for their present duties as Administrative Directors of the Theatre Guild and requiring them to use their best efforts to get opportunities for the Guild and each of them agrees to make such a contract for at least one year."

This clause does not explicity grant any management powers whatsoever to the administrative directors. There is an oblique reference to "compensation for their present duties," which may fairly be interpreted to extend those duties into the contemplated employment contracts. But under the informal arrangement existing at the time of the agreement (to which the phrase "present duties" refers) the power of the board remained intact. Important duties were imposed upon Langner and Helburn as administrative directors, but the board retained power to withdraw those duties whenever it saw fit. Perpetuating that relationship between the full board and its executive employees cannot justly be construed as a violation of section 27 of the General Corporation Law.

A comparison of the above employment clause with the management provisions under scrutiny in the Long Park case (supra) illustrates the wide disparity in the two agreements. There the contract provided: "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." (Italics added.) (Long Park v. Trenton-New Brunswick Theatres Co., 297 N.Y. 174, 177-178.)

No such specific grant of broad managerial powers is contained in the agreement which is the...