Wilson v. McClenny

• Decision Date: 12 June 1964
• Docket Number: No. 237,237
• Citation: 262 N.C. 121,136 S.E.2d 569
• Parties: S. E. WILSON v. G. Gay McCLENNY, D. F. McDavid, Walter G. Mason and William M. McClenny.
• Court: North Carolina Supreme Court

Page 569

136 S.E.2d 569

262 N.C. 121

S. E. WILSON v. G. Gay McCLENNY, D. F. McDavid, Walter G. Mason and William M. McClenny.

No. 237

Supreme Court of North Carolina.

June 12, 1964

Battle, Winslow, Merrell, Scott & Wiley, Rocky Mount, for plaintiff.

Bridgers, Horton & Britt, Tarboro, and Dill & Fountain, Rocky Mount, for defendants.

SHARP, Justice.

The first question presented by this appeal is whether the agreement of November 21, 1958 was void as against public policy. This preincorporation contract between the parties was intended to serve as a stockholders' agreement after incorporation. Such agreements are governed by the general principles of contract law. 13 Am. Jur., Corporations, § 127. The signatories bound themselves 'to use their influence and stock votes' to secure the election of each as a director and the election of plaintiff by the directors as president of the corporation for a five-year period at a beginning salary of ten thousand dollars with indefinite annual increases during the succeeding four years 'contingent upon the progress of the company.' Whatever may have been the legal status of such an agreement prior to the enactment of the Business Corporation Act of 1955, (see Harvey v. Linville Improvement Co., 118 N.C. 693, 24 S.E. 489, 32 L.R.A. 265; Bridgers v. Staton, 150 N.C. 216, 63 S.E. 892; Annot. 45 A.L.R.2d 799, 821), it is clear that this contract is not now prohibited by law. Under G.S. § 55-24(a) the board of directors is given the right to manage the affairs of the corporation '[s]ubject to the provisions of the charter, the bylaws or agreements between the shareholders otherwise lawful * * *.' (Italics ours.) G.S. § 55-73(a) permits two or more shareholders of a North Carolina corporation to enter into a written agreement to vote the shares held by them as a unit for the election of directors. This section provides:

'An otherwise valid contract between two or more shareholders that the shares held by them shall be voted as a unit for the election of directors shall, if in writing and signed by the parties thereto, be valid and enforceable as between the parties thereto, but for not longer than ten years from the date of its execution. Nothing herein shall impair the privilege of the corporation to treat the shareholders of record as entitled to vote the shares standing in their names, as provided in G.S. 55-59 nor impair the power of a court to determine voting rights as provided in G.S. 55-71.'

Likewise, the contract to elect plaintiff president of the corporation at a specified salary is not subject to the usual objection that it interferes with the discretion of the directors in view of the provisions of G.S. § 55-73(c), to wit:

'An agreement between all or less than all of the shareholders, whether solely between themselves or between one or more of them and a party who is not a shareholder, is not invalid, as between the parties thereto, on the ground that it so relates to the conduct of the affairs of the corporation as to interfere with the discretion of the board of directors, but the making of such an agreement shall impose upon the shareholders who are parties thereto the liability for managerial acts that is imposed by this chapter upon directors.'

Thus, the Business Corporation Act clearly aligns North Carolina with the majority of jurisdictions which hold that a contract entered into between corporate stockholders by which they agree to vote their stock in a specified manner--including agreements for the election of directors and corporate officers--is not invalid unless it is inspired by fraud or will prejudice the other stockholders. The cases are collected in an annotation: Validity and Effect of Agreement Controlling the Vote of Corporate Stock, 45 A.L.R.2d 799, 802. See also 18 C.J.S. Corporations § 551b; 19 C.J.S. Corporations § 716d; 17 C.J.S. Contracts § 199. The modern view is stated in Fletcher, Private Corporations, §§ 191 and 208: 'No public policy forbids contracts for promoting and managing a corporation according to law and for lawful purposes, or for determining among themselves (the promoters) what the stock shall be and how it shall be divided, or for election of themselves as officers and employment by the corporation when formed.' (Italics ours.) 'A contract for employment of a promoter as a corporate officer, made among the promoters, is not necessarily against public policy or in fraud of the corporation. * * *' Accord: King v. Barnes, 109 N.Y. 267, 16 N.E. 332.

The rationale of this rule is aptly stated in Mansfield v. Lang, 293 Mass. 386, 200 N.E. 110, a case involving facts very similar to those here: '* * * (s)uch agreements as the one in the case at bar, even if regarded as open to the objection that they pledge in advance the action of officers or stockholders, may be sustained on the ground of the practical necessity that it would be impossible to organize a corporation if its proper management were not assured.'

A competent person gainfully employed in his chosen field, will not ordinarily give up a secure position to take another with a new enterprise without some assurance as to his future. No corporation could ever be created without a preliminary agreement between the parties proposing to form it as to the mode and manner of doing so. However, when such agreements providing for the future management and control of a corporation violate the express charter or statutory provision, contemplate an illegal object, involve any fraud, oppression or wrong against other stockholders, or are made in consideration of a private benefit to the promisor, the courts will declare them invalid. Annot. 45 A.L.R.2d 799, 811; 12 A.L.R. 1070; 45 A.L.R. 795. The promoters of a corporation occupy a relation of trust and confidence towards the corporation which they are calling into existence as well as to each other, and the law requires of them the same good faith it exacts from directors and other fiduciaries. Goodman v. White, 174 N.C. 399, 93 S.E. 906; 13 Am.Jur., Corporations §§ 126, 127. Both G.S. § 55-24 and G.S. § 55-73 require that the contemplated agreements be 'otherwise lawful.'

There is no evidence here that the contract between the plaintiff and defendants was not made in good faith or that, at the time it was made, it was not in the best interest of the corporation. Prima facie, it was a valid exercise of the promoters' right to contract. 13 Am.Jur., Corporations § 127. Since the organization of the corporation, the defendants have not owned a majority of its stock. Therefore, they could not have forced their will upon either the stockholders or the other eight directors. To remove plaintiff from the board of directors and the presidency of the corporation they ultimately required the proxies and votes of other stockholders.

The defendants' contention that the agreement was void as against public policy is not sustained. Furthermore, as parties to the agreement and recipients of the benefit of plaintiff's knowledge, experience, work, financial support, and voting support under it, they are in a poor position to assert the invalidity of the contract on the ground that it is contrary to public policy. Bonta v. Gridley, 77 App.Div. 33, 78 N.Y. S. 961.

The defendants' second defense is that plaintiff's acceptance of a contract with Gateway for one year's employment instead of five was in legal effect a novation. In Tomberlin v. Long, 250 N.C. 640, 109 S.E. 2d 365, this Court explained the meaning of novation:

'In this connection "Novation" may be defined as a substitution of a new contract or obligation for an old one which is thereby extinguished * * *. The essential requisites of a novation are a previous valid obligation, the agreement of all the parties to the new contract, the extinguishment of the old contract, and the validity of the new contract * * *.' 66 C.J.S. Novation §§ 1 and 3.

''Novation implies the extinguishment of one obligation by the substitution of another.' (Citations omitted)

"Ordinarily,' as stated in Growers Exchange v. Hartman, 220 N.C. 30, 16 S.E.2d 398, in opinion by Devin, J., later C. J., 'in order to constitute a novation the transaction must have been so intended by the parties."'

The agreement of November 28, 1958 must receive that construction which will best effectuate the intention of the parties. Faust v. Rohr, 166 N.C. 187, 81 S.E. 1096. 'Where an instrument is wholly in writing and the intention of the writer must be ascertained from the document itself, the intention of the writer as well as the effect of that intention is a question of law.' Strigas v. Durham Insurance Co., 236 N.C. 734, 73 S.E.2d 788.

"An elementary rule invoked in the construction of contracts requires the court to ascertain the intention of the parties, and to do this note must be taken of the purpose to be accomplished, the situation of the parties when they made (the contract), and the subject-matter of the contract."' De Bruhl v. State Highway & Public Works Commission, 245 N.C. 139, 95 S.E.2d 553.

It is difficult to follow defendants' contention that, when the corporate directors declined to give plaintiff an employment contract for longer than one year, and he accepted the one-year appointment as the best bargain he could make at the time, such acceptance released them from any further obligation to work for his election as a director and appointment as president for the ensuing four years. As it applied to the plaintiff, the obvious purpose of their agreement was to insure, as nearly as possible, his prospective position with Gateway for a five-year period before he severed his connection with Coastal Plain Life Insurance Company. When the directors declined to give him a contract for a longer period than twelve months, the only way in which the parties could then accomplish the end they had in view was to secure from the corporation four additional one-year terms for the plaintiff. There is no...