Control and Management of Corporation 4.
The day before the directors' meeting, Vogel, as president, sent out a notice
Campbell vs Loew’s Inc
Seitz
(From the B2015 Reviewer) Two factions are fighting for control of the corporation
(Vogel faction vs. Tomlinson faction). President Vogel called for a special
stockholder’s meeting to remove 2 incumbent Tomlinson directors for cause, fill
existing directorship vacancies, and to increase the total number of directors. The
notice for stockholder’s meeting was accompanied by a letter from President giving
the reasons for the ouster of the 2 directors, as well as a proxy form to be signed
by the stockholder giving their vote for the removal of said directors. Court: The
President can call the special meeting. The stockholders can remove directors for
‘cause’. The charges, if true, constitute ‘cause’ for ouster. However, the votes for
ouster attained by proxy solicitation are invalidated because the 2 directors were
not given an opportunity to be heard.
DOCTRINE
Stockholders have the inherent right between annual meetings to fill newly created
directorships.
Matters for stockholder consideration need not be conducted with the formality of
judicial proceedings.
Directors that are to be ousted for cause have the right to be heard and present
their side to the stockholders before the vote to oust them occurs.
FACTS
1. Two factions were fighting for control of Loew's. (Tomlinson faction against
the Vogel faction. Vogel is the President of the corporation.)
2. The two factions reached a compromise at the annual stockholder’s meeting.
- Each nominated 6 directors and they in turn nominated a 13 th neutral
director.
- However, 2 out of 6 Vogel directors and the neutral director resigned.
3. The Tomlinson faction asked that a directors' meeting (on July 30) be called
to consider the problem of filling director vacancies.
- On the eve of this meeting one of the Tomlinson directors resigned.
- This left 5 Tomlinson directors and 5 Vogel directors in office.
- Only the 5 Tomlinson directors attended the meeting.
o They purported to fill 2 of the director vacancies.
o In a previous case, the Court ruled that 2 directors were not
validly elected because of a lack of a quorum.
calling a stockholders' meeting for September 12 for the following purposes:
- to fill director vacancies.
- to amend the by-laws to increase the number of the board from 13 to 19;
to increase the quorum from 7 to 10 and to elect six additional directors.
- to remove Stanley Meyer and Joseph Tomlinson as directors and to fill
such vacancies.
5. Another notice for a September 12 stockholders' meeting as well as a proxy
statement went out over the signature of Vogel, as president.
- It was accompanied by a letter from Vogel, soliciting stockholder support
for the matters noticed in the call of the meeting, and particularly seeking
to fill the vacancies and newly created directorships with his nominees.
6. Campbell (plaintiff) filed an action for a preliminary injunction to restrain the
holding of a stockholders' meeting or alternatively to prevent the meeting from
considering certain matters or to prevent the voting of certain proxies.
ISSUE with HOLDING
1. On legality of the call of the stockholders' meeting for the purposes stated –
President may call the special meeting.
- Plaintiff: President had no authority to call a special meeting of
stockholders to act upon policy matters which have not been defined by
the board of directors.
- Defendant: By-laws specifically authorize the action taken.
- Court:
o The by-laws provide:
Sec 7, Art I: "Special meetings of the stockholders for any
purpose or purposes, other than those regulated by statute, may
be called by the President…"
Sec 2, Art IV: "The President… shall have power to call special
meetings of the stockholders… for any purpose or purposes…”
o The stockholders, by permitting the above by-laws to stand,
have given the president the power to state these broad
purposes in his call.
- Plaintiff: The above by-laws are contrary to law which provides that
corporations shall be managed by a board of directors, except as
hereinafter or in its certificate of incorporation otherwise provided.
- Court:
o A by-law giving the president the power to submit matters for
stockholder action presumably only embraces matters which are
appropriate for stockholder action.
- Plaintiff: President has no authority, without board approval, to propose
an amendment of the by-laws to enlarge the board of directors
- Court: Wording of the by-laws authorizes such action.
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- Plaintiff: President had no power to call a stockholders' meeting to fill
vacancies on the board.
o By-laws provide that the stockholders or the remaining directors
may fill vacancies.
o By implication, this precludes the president from calling a
stockholders' meeting for that purpose; that provision being
intended for stockholder use only at the initiative of the
stockholders.
- Court: The by-laws permit the president to call a meeting for any
purpose. This is broad and all-embracing language and it must include
the power to call a meeting to fill vacancies.
o The fact that the stockholders may on their initiative have the
right to call a meeting for that purpose is not a sufficient reason
for implying that the president is thereby deprived of such power.
- Plaintiff: President's action in calling a stockholders' meeting to fill
vacancies was unlawful because it was in conflict with the previously
scheduled action by the board on the same subject.
- Court: The proxy statement sent out by the president states that the
stockholders would only fill the two vacancies purportedly filled by the
board, if their election by the board was held to be invalid. To this
extent the call was not in conflict with this aspect of the board's action.
However, the board did not legally fill the vacancies (see fact#3) so the
issue is moot.
- Plaintiff: Stockholders have no power between annual meetings to elect
directors to fill newly created directorships.
o Courts have construed "vacancy" not to embrace "newly created
directorships", thus the attempted call by the president for the
purpose of filling newly created directorships was invalid.
- Court: In Moon v. Moon Motor Car Co. it was held that the stockholders
had the inherent right between annual meetings to fill newly created
directorships
- Plaintiff: Shareholders have no power to remove directors from office
even for cause and thus the call for that purpose is invalid.
o There is no provision in statutory law providing for the removal
of directors by stockholder action.
o Loew's by-laws provide for the removal of officers and
employees but not directors.
- Court: Stockholders have the power to remove a director for cause.
This power must be implied when we consider that otherwise a director
who is guilty of the worst sort of violation of his duty could nevertheless
remain on the board.
2. On the procedural defects and to irregularities in proxy solicitation by the
Vogel group. - The procedural sequence here adopted for soliciting
proxies seeking authority to vote on the removal of the two directors is
contrary to law.
- Plaintiff: Stockholders can vote to remove a director for cause only after
such director has been given adequate notice of charges of grave
impropriety and afforded an opportunity to be heard.
- Defendant: Plaintiff, being only a stockholder, has no standing.
- Court: Where the procedure adopted to remove a director for cause is
invalid on its face, a stockholder can attack such matters before the
meeting. This conclusion is dictated both by the desirability of avoiding
unnecessary and expensive action and by the importance of settling
internal disputes, where reasonably possible, at the earliest moment.
- Plaintiff: When the shareholders attempt to remove a director for cause,
there must be the service of specific charges, adequate notice and full
opportunity of meeting the accusation
o In this case, no specific charges have been served upon the two
directors sought to be ousted
o The notice of the special meeting fails to contain a specific
statement of the charges
o The proxy statement which accompanied the notice also failed
to notify the stockholders of the specific charges; and it does not
inform the stockholders that the accused must be afforded an
opportunity to meet the accusations before a vote is taken.
- Court: The accompanying letter was sufficient compliance with the notice
requirement
o Matters for stockholder consideration need not be conducted
with the same formality as judicial proceedings.
o The proxy statement specifically recites that the two directors
are sought to be removed for the reasons stated in the
president's accompanying letter.
o Both directors involved received copies of the letter.
o Under the circumstances, the two directors involved were
served with notice of the charges against them.
- Plaintiff: Charges against the two directors do not constitute "cause" as
a matter of law.
- Court: The charge of "a planned scheme of harassment" as detailed in
the letter constitutes a justifiable legal basis for removing a director.
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- Whether the directors sought to be removed have been given a DISPOSITIVE PORTION
reasonable opportunity to be heard by the stockholders on the charges A preliminary injunction will issue restraining the corporation from recognizing or
made. (No) counting any proxies held by the Vogel group and others insofar as such proxies
o The corporate defendant admits that it has refused to give the 5 purport to grant authority to vote for the removal of Tomlinson and Meyer as
Tomlinson directors or the plaintiff a stockholders' list. directors of the corporation.
 By this action the corporation through the Vogel group
has deliberately refused to afford the directors in
question an adequate opportunity to be heard by the DIGESTER: Sarah
stockholders on the charges made. This is contrary to
the legal requirements which must be met before a
director can be removed for cause.
o The defendant's attorney offered to mail any material which
might be presented by the Tomlinson faction.
 This falls far short of meeting the requirements of the
law when directors are sought to be ousted for cause.
Nor does the granting of the statutory right to inspect
and copy some 26,000 names fulfill the requirement
that a director sought to be removed for cause must be
afforded an opportunity to present his case to the
stockholders before they vote.
o When Vogel as president caused the notice of meeting to be
sent, he accompanied it with a letter requesting proxies granting
authority to vote for the removal of the two named directors.
However, only the Vogel accusations accompanied the
request for a proxy. Thus, while the stockholder could vote for
or against removal, he would be voting with only one view-point
presented. This violates every sense of equity and fair play
in a removal for cause situation.
o While the directors involved or some other group could mail a
letter to the stockholders and ask for a proxy which would revoke
the earlier proxy, this procedure does not comport with the legal
requirement that the directors in question must be afforded an
opportunity to be heard before the shareholders vote.
o To the extent the matter is to be voted upon by the use of
proxies, such proxies may be solicited only after the
accused directors are afforded an opportunity to present
their case to the stockholders.
o An opportunity must be provided such directors to present
their defense to the stockholders by a statement which
must accompany or precede the initial solicitation of
proxies seeking authority to vote for the removal of such
director for cause. If not provided then such proxies may not
be voted for removal. And the corporation has a duty to see that
this opportunity is given the directors at its expense.