## Facts

- A New York corporation operated a steamship line; two principal shareholders/directors each owned substantial stock, and a third shareholder held a significant block.
- One shareholder had a separate arrangement with the third shareholder to vote together and to restrict the third shareholder’s ability to sell his shares without first offering them to the shareholder-manager.
- The other principal shareholder sought to buy the third shareholder’s shares to obtain majority stock control; the shareholder-manager consented only if an agreement preserved his effective control of corporate management.
- The agreement provided, in substance, that for a year there would be no change from the shareholder-manager’s prior control of business operations; any president elected would be a nominal head and would not interfere with the shareholder-manager’s methods.
- The shareholder-manager alleged the majority shareholder breached the agreement by acts including refusing to sell stock to him, installing hostile or unfit management, and failing to cooperate in agreed board arrangements.
- The corporation later became bankrupt, and the shareholder-manager alleged his shares lost all value; he sued the majority shareholder for damages for breach of the agreement.

## Issues

1. Whether an agreement among shareholders/directors that effectively withdraws management authority from the board and vests it in one shareholder-manager is valid and enforceable.
2. Whether a plaintiff may recover damages for breach of such an agreement when its essential purpose conflicts with statutory corporate governance and public policy.

## Decision

- The New York Court of Appeals affirmed dismissal of the complaint for failure to state a cause of action.
- The court held the agreement was illegal and void because its fundamental purpose was to remove control of corporate business from the board of directors and vest it in a shareholder.
- Because the contract was void, no action for damages could be maintained based on its breach, regardless of alleged bad faith or resulting losses.

## Legal Principles

- Corporate management authority is allocated by statute to the board of directors; directors must exercise independent judgment as directors.
- Shareholders may make voting agreements concerning the election of directors, but they may not by private contract:
  - deprive the board of its statutory power and duty to manage corporate affairs, or
  - bind directors in advance to follow another person’s directions in matters requiring director discretion.
- A court will not enforce, or award damages for breach of, a contract whose essential purpose is contrary to statute and public policy.

## Conclusion

The court rejected a shareholder agreement designed to create “passive” directors and preserve one shareholder’s exclusive managerial control, holding it void as inconsistent with statutory board governance; the complaint therefore stated no legally cognizable claim for damages.


Manson v. Curtis, 223 N.Y. 313, 119 N.E. 559 (N.Y. 1918)