Clark v Dodge

The 2 corporate defendants are NJ corporations manufacturing medicinal preparations by

secret formulae
- Main office, factory, and assets of both is located in NY

1921
- At all time Clark owned 25 per cent.
- Dodge 75 per cent
- Of the stock of each corporation

Dodge took no active part in the business although he was a director and through ownership
of qualifying shares controlled the other directors of both corporations
- He was president of Bell&Co
- Nominally general manager of Hollings-Smith

Plaintiff, Clark, was a director and held offices of treasurer and general manager of Bell & CO.
and also had charge of the major portion of the business of Hollings
- Formulae and methods manufacture where known to him alone

February
Dodge and Clark entered into written agreement which after reciting stock ownership, the
desire of Dodge that Clark should continue in the efficient management and control the
business of Bell&CO
- So long as he should remain faithful, efficient, and competent to manage and control

Further desire that Clark should not be the sole custodian of a specified formula, but should
share his knowledge and the method of manufacture with a son of Dodge
- Provided that:
i. Dodge during his lifetime and after death a trustee would be appointed by his will,
would vote his stock and so vote as a director that plaintiff is:
A. Should continue to be director of Bell & CO
B. Continues as general manger so long as he is faithful, efficient, and competent
C. During his life receive ¼ of net income of the corporations either by way of salary
or dividends
D. No unreasonable or incommensurate salaries should be paid to other officers or
agents which would so reduce the net income as material to affect Clarks profits

Clark on his part agreed to disclose the formula to the son and instruct him in details and
methods of manufacture
- At end of his life, bequeath his stock, if no issue survived him, to wife and children of
dodge

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Further provided that provision In regard to division of net profits and regulation of salaries
should also apply to Holling Co.

Complaint alleges due performance of the contract by Clark and breach of Dodge in that he
failed to use his stock control to continue Clark as a director and as General Manager
- Prevented Clark from receiving his portion of the income while taking his own
- By causing the employment of incompetent persons at excessive salaries and otherwise

Relief sought us reinstatement as director and GM and accounting by Dodge and by

corporations for waste and the proportion of net income due to plaintiff
- Injunction against further violation

Whether the contract is illegal as against public policy with McQuade decision upon the
authority of which the complaint was dismissed by Appellate division?

There is ample authority supporting McQuade decision

- It furnishes a simple arbitrary test

Public policy, the intent of legislature, detriment to corporation are phrases which in this
connection mean little
- Possible harm to bona fide purchasers of stock or to creditors or to stockholding
minorities have more substance
- But such harms are absent in many cases

If enforcement of contracts damages nobody – not even in a perceptible degree, the public –
one sees no reason for holding it illegal even though it impinges slightly upon broad provision
of section 27

Damage suffered or threatened is a logical and practical test and has come to be the one
generally adopted by the courts
1. Where directors are sole stockholders, there seems to be no objection to enforcing an
agreement among them to vote for certain people as officer
- No direct decision to that effect in this court
- Yet there are strong indication that such a rule has been long recognized

Manson v Curtis
The rule that all stockholders by their universal consent may do as they choose with the
corporate concerns and assets, provided the interests of creditors are not affected, because
they are the complete owners of the corporation, cannot be invoked here
- Because all stockholders were not parties to the agreement in question

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Where the public was not affected, “the parties in interest might by their original agreement
of incorporation, limit their respective rights and powers
- Even there was a conflicting statutory standard

Except for broad dicta in McQuade, we think there can be no doubt that agreement here in
question was legal and that complaint states a cause of action.
1. There was no attempt to sterilize the board of directors as in MCquade
2. Only restrictions on Dodge were A-D

If there was any invasion of the powers of the directorate under that agreement, it was so slight
as to be negligible
- Certainly no damage suffered by or threatened to anybody

The broad statements in McQuade applicable to the facts here, should be confined to those
facts