## Facts

- Mountain Manor, Inc. (MMI) was a Maryland corporation operating an alcoholism-rehabilitation facility on real property owned by Mountain Manor Realty, Inc. (Realty).
- Realty was owned and controlled by John V. Conway. MMI leased the facility property from Realty under a long-term lease.
- MMI had authorized 10,000 shares of $10-par common stock, but only 56 shares had been issued.
- A 1974 stockholder agreement (reflected in corporate minutes) restricted transfers by giving MMI a right of first refusal: before selling, a stockholder had to offer the shares to MMI, which could match a bona fide third-party offer or pay book value, whichever was less.
- By 1978, MMI’s issued shares were concentrated among three individuals who also served as directors: Conway (22 shares), E. Gordon Leatherman (22 shares), and Charles W. Roby (12 shares).
- Leatherman and Roby sold their shares to Jean M. Buccheri, who sought voting control, and both resigned as MMI directors. Conway became the sole remaining director.
- Conway called a stockholders meeting to challenge Roby’s transfer on the ground that Roby had not first offered his shares to MMI as required by the 1974 agreement.
- The day before the stockholders meeting, Conway convened a “special” board meeting without notice to Leatherman, Roby, or Buccheri. Conway invited Margaret Faulstich and William Widman to attend.
- Acting as the only director, Conway appointed Faulstich and Widman to fill the vacancies created by the resignations. With the newly constituted board, MMI approved issuing 13 new shares to Realty.
- Realty’s purchase price for the 13 shares was structured as a credit against an alleged rent arrearage owed by MMI to Realty under the lease.
- At the stockholders meeting, Conway refused to recognize Roby’s sale and disclosed the prior day’s board actions. Conway then attempted to vote 35 shares (his 22 plus Realty’s 13) to elect himself, Faulstich, and Widman as directors; Buccheri’s side disputed the validity of Realty’s 13 shares and nominated a competing slate.
- Depending on whether Realty’s 13 shares were validly issued, the election outcome would either favor Conway’s slate or Buccheri’s slate.
- Conway and Realty sought declaratory relief that (1) Roby’s sale was invalid, (2) the 13-share issuance to Realty was valid, and (3) Conway, Faulstich, and Widman were MMI’s lawful directors.
- The trial court ruled that Roby’s sale violated the 1974 agreement and was invalid. It also invalidated the 13-share issuance to Realty and rejected Conway’s slate, reasoning that Conway could not unilaterally transact corporate business and that his actions were improper in light of the impending stockholders meeting.
- Conway and Realty appealed the rulings that invalidated the 13-share issuance and, as a consequence, the status of Conway’s slate of directors; the ruling on Roby’s transfer was left undisturbed on appeal.

## Issues

1. Whether, under Maryland law and MMI’s bylaws, a sole remaining director had authority to fill board vacancies created by resignations.
2. Whether a stock issuance to an entity controlled by the remaining director that altered voting control was void solely because of its effect on control, or instead required a purpose-and-fiduciary-duty analysis.
3. Whether the trial court applied the correct standard in invalidating the 13-share issuance to Realty and the resulting claim that Conway’s slate constituted MMI’s board.

## Decision

- The appellate court agreed that the trial court’s invalidation of Roby’s transfer (for violating the right-of-first-refusal agreement) was not part of the appeal and remained in place.
- The appellate court held that the trial court used an incorrect legal premise in treating the corporation as disabled from acting because only one director remained; a sole remaining director could have authority to fill vacancies under Maryland law and the bylaws.
- The appellate court vacated the judgment invalidating the board appointments and the 13-share issuance to Realty to the extent those rulings rested on the wrong legal standard.
- The case was remanded for the trial court to determine, using proper fiduciary-duty and business-judgment analysis, whether the stock issuance was driven mainly by a proper corporate objective (such as addressing a genuine rent arrearage) or mainly by an improper effort to affect voting power and keep control.
- Because the director election depended on whether the 13 shares were valid, the appellate court also required reconsideration of the conclusion that Conway’s slate did not constitute the board.

## Legal Principles

- Under Maryland corporate law and typical bylaw provisions, a board reduced by resignations is not automatically powerless; remaining director(s) may act to fill vacancies so the board can function.
- Director decisions are generally protected by the business judgment rule when made in good faith, with due care, and for the corporation’s benefit; courts may intervene for fraud, bad faith, gross negligence, or loyalty breaches.
- A stock issuance that shifts control is not invalid per se. When the issuance both affects control and benefits a director (directly or through an affiliate), courts examine the directors’ main purpose and whether the action was taken for a legitimate corporate end rather than for self-interested entrenchment.
- When a challenged issuance determines voting outcomes, the validity of related director elections turns on the validity of the issuance and the fiduciary-duty analysis applied to it.

## Conclusion

Mountain Manor Realty, Inc. v. Buccheri holds that a sole remaining director may have authority to appoint directors to fill vacancies, and that a control-shifting issuance of stock to an affiliate is not automatically void; instead, the transaction must be reviewed under the business judgment rule with attention to whether the directors’ main purpose was a proper corporate objective or an improper attempt to secure voting control, warranting remand for that determination.


Mountain Manor Realty, Inc. v. Buccheri, 461 A.2d 45 (1983)