## Facts

- National Exhibition Company operated the New York Giants; Charles A. Stoneham held a controlling share block and served as president.
- Stoneham sold minority blocks of stock to Francis X. McQuade and John J. McGraw, and the three executed a 1919 agreement tied to the transaction.
- The agreement required the parties to use their “best endeavors” to keep themselves as directors and as specified officers: Stoneham (president), McGraw (vice-president), and McQuade (treasurer).
- The agreement fixed salaries for those offices and required unanimous consent of the three for changes to salaries, capital structure, bylaws, or corporate business policy.
- The board had seven directors; four additional directors were effectively aligned with Stoneham.
- After disputes, the board elected another person treasurer instead of McQuade, and later did not reelect McQuade as a director.
- McQuade sued Stoneham and McGraw seeking specific performance (reinstatement) and damages for breach of the agreement.

## Issues

1. Whether a shareholder agreement among individuals who are also directors, requiring efforts to keep specified persons in corporate offices with fixed salaries and limiting policy changes to unanimous consent, is valid and enforceable.
2. Whether such an agreement is void as against public policy because it constrains directors’ independent judgment in managing corporate affairs.
3. Whether the agreement was independently illegal and unenforceable because McQuade, as a sitting city magistrate, was statutorily prohibited from engaging in outside business.

## Decision

- The Court of Appeals reversed the lower courts and dismissed the complaint.
- The court held the agreement illegal and void to the extent it bound directors to maintain particular officers, salaries, and corporate policies, thereby interfering with directors’ required independent judgment.
- The court further held the agreement unenforceable because it contemplated McQuade’s compensated service in a business while he was a city magistrate, contrary to statute.
- Because the agreement was unlawful, neither specific performance nor damages were available.

## Legal Principles

- Shareholders may lawfully combine to vote for directors, including by mechanisms such as voting arrangements, but cannot, through private contract, bind directors’ future exercise of managerial discretion.
- A contract is void insofar as it precludes the board of directors, at the risk of liability, from changing officers, compensation, or corporate policies.
- Courts will not enforce agreements that require directors to act under precommitment rather than in the corporation’s interests through independent judgment.
- An agreement is unenforceable when it requires performance that is illegal under a governing statute, and illegality bars both equitable relief and damages.

## Conclusion

The court invalidated a director-shareholder agreement that sought to lock in corporate offices, salaries, and policy choices by unanimous consent, holding it contrary to public policy because it constrained directors’ independent judgment; it also found the agreement independently unenforceable due to statutory restrictions on a city magistrate’s outside business activities, requiring dismissal of the action for both reinstatement and damages.


McQuade v. Stoneham, 263 N.Y. 323, 189 N.E. 234 (N.Y. 1934)