## Facts

- David H. Clark owned 25% and John L. Dodge owned 75% of the shares of two closely held corporations.
- Clark served as a director and as treasurer and general manager of one corporation and managed major operations of the other; key manufacturing formulas and methods were known only to him.
- Clark and Dodge, as the only shareholders, executed a sealed written agreement.
- Dodge promised to use his shareholder voting power and director votes to keep Clark as director and general manager so long as Clark remained “faithful, efficient and competent.”
- The agreement provided Clark would receive 25% of the businesses’ net income during his lifetime, conditioned on faithful service.
- The agreement also required that no unreasonable officer salaries be paid in a way that would reduce net income used to compute Clark’s 25% share.
- In exchange, Clark agreed to disclose the secret formula and manufacturing methods to Dodge’s son.
- Clark sued for specific performance and related relief, alleging Dodge failed to vote to keep him in office and employed incompetent persons at excessive salaries to reduce net income.
- The trial court denied defendants’ motion to dismiss on the pleadings; the Appellate Division reversed and dismissed, treating the agreement as void on public policy grounds.
- The Court of Appeals reviewed the dismissal as a pleading-stage ruling, taking the complaint’s allegations as true.

## Issues

1. Whether an agreement between the only shareholders of a close corporation, requiring the controlling shareholder/director to vote to retain a manager and protect a profit-share, is void as against public policy for restricting directors’ discretion.
2. Whether, on a motion to dismiss, the complaint stated a valid claim for enforcement of such an agreement where no harm to the corporation, creditors, or other shareholders appeared on the pleadings.

## Decision

- The Court of Appeals reversed the Appellate Division and affirmed the order denying the motion to dismiss.
- The court held the agreement was not illegal or void as against public policy on the face of the pleadings.
- The court distinguished precedent invalidating shareholder agreements that bind directors where nonconsenting shareholders or other interests may be affected.
- The action for specific performance and related relief was permitted to proceed.

## Legal Principles

- An agreement among all shareholders in a closely held corporation concerning voting, management, and allocation of corporate earnings may be enforceable when it does not injure the corporation, its creditors, or nonparty shareholders.
- Public policy concerns about “fettering” directors’ discretion are strongest where an agreement binds directors in a way that may harm persons not party to the agreement; those concerns are reduced where the contracting parties are the only shareholders.
- A shareholder may contract to exercise voting power in a specified manner; director-related commitments arising from an all-shareholder compact may be upheld when the practical effect on corporate welfare is not shown to be harmful.
- At the pleading stage, absent allegations or clear indications that the arrangement damages corporate or third-party interests, courts should not declare such an all-shareholder agreement void on public policy grounds.

## Conclusion

The court held that a close-corporation agreement between the only shareholders—providing for continued managerial control and a fixed share of net income in exchange for disclosure of valuable trade secrets—was not void as against public policy where no harm to the corporation, creditors, or other shareholders was shown on the pleadings, and it reinstated the complaint for further proceedings.


Clark v. Dodge, 269 N.Y. 410, 199 N.E. 641 (N.Y. 1936)