## Facts

- Republic Pictures Corporation had approximately 2,004,190 shares outstanding and a 14-member board.
- Essex Universal Corporation agreed to buy from Herbert J. Yates 566,223 shares (about 28.3%) at $8 per share, with 37.5% due at closing and the balance payable over 24 monthly installments; Yates would hold the stock as security until paid.
- The agreement gave Essex an option, at closing, to require that eight directors resign and be replaced seriatim by Essex’s nominees so Essex’s designees would immediately hold a board majority.
- Under the corporation’s regular election cycle (staggered board), Essex claimed it would otherwise take about 18 months to obtain board control through shareholder votes.
- Essex tendered the initial closing payment; Yates refused to close, asserting the tender was unsatisfactory and that the board-control provision was unlawful.
- Essex sued for damages measured by the difference between the contract price and the claimed market value at the time of closing; the case proceeded in federal court on diversity jurisdiction.
- The district court granted summary judgment for Yates, holding the board-resignation provision illegal per se under New York public policy and therefore unenforceable.

## Issues

1. Whether, under New York law, a stock-sale contract is void as against public policy solely because it gives the buyer of a substantial but non-majority block the option to obtain immediate board control through director resignations and replacements.
2. Whether summary judgment was proper on the ground that the control-transfer provision was facially illegal and rendered the entire agreement unenforceable.

## Decision

- The Second Circuit reversed the grant of summary judgment and remanded.
- The court held the agreement was not illegal on its face merely because it included an option for seriatim director resignations to shift board control at closing.
- The court directed further proceedings to develop relevant facts bearing on legality under New York law and to address other defenses.

## Legal Principles

- A contractual mechanism for prompt board turnover incident to the sale of a substantial stock block is not automatically a “sale of office” and is not void per se under New York public policy.
- In a widely held corporation, a large minority block may confer effective voting control; an agreement that accelerates the board’s alignment with that control is not inherently improper.
- A premium paid for stock that carries control is not unlawful in itself absent facts showing diversion of corporate value or harm to the corporation or minority shareholders.
- When legality depends on context (e.g., shareholder distribution, actual voting control, and potential harm), summary judgment is improper on a bare claim of per se illegality.

## Conclusion

The appellate court held that a stock-purchase agreement for a substantial minority block, coupled with an option to obtain immediate board control through director resignations and replacements, was not facially invalid under New York law; the case required factual development before the illegality defense could bar enforcement.


Essex Universal Corp. v. Yates, 305 F.2d 572 (2d Cir. 1962)