Corporations – Officers and Directors – Agreement Interfering with Management by Board of Directors

Plaintiffs, minority stockholders in a closely held corporation, asked that the court declare invalid an agreement between the majority stockholders and their “agent-directors” for the management of the business. The agreement provided that for ten years the stock of the parties to the agreement would be voted as a unit as any seven of the agents should direct or, if they could not agree, as directed by an arbitrator chosen by them. The agents were to be elected to the board of directors by the stockholders who appointed them. Under a cumulative voting provision, the parties to the agreement had sufficient shares to elect eight directors. It was further agreed to maintain the number of directors at fifteen, to remove any director who voted contrary to any plan which they favored, and to confer on all matters of policy and planning for future action. If any seven of the agent-directors failed to agree, the matter was to be submitted to an arbitrator. The plaintiffs attacked the agreement. on the ground that it deprived the directors of their discretion and made management by the board a mere sham. The defendants argued that the provisions of the agreement merely tended to preserve control in the hands of the majority and were absolutely necessary in today’s business world. Held, the agreement is an invalid attempt to encroach upon the directors’ exercise of independent business judgment and might possibly permit director action to be dictated by an outsider or a minority of the board, thus violating the Delaware Corporation Law. Abercrombie v. Davies, (Del. 1956) 123 A. (2d) 893.