Wilson v. McClenny

Annotate this Case

136 S.E.2d 569 (1964)

262 N.C. 121

S. E. WILSON v. G. Gay McCLENNY, D. F. McDavid, Walter G. Mason and William M. McClenny.

No. 237.

Supreme Court of North Carolina.

June 12, 1964.

*574 Battle, Winslow, Merrell, Scott & Wiley, Rocky Mount, for plaintiff.

Bridgers, Horton & Britt, Tarboro, and Dill & Fountain, Rocky Mount, for defendants.

SHARP, Justice.

The first question presented by this appeal is whether the agreement of November 21, 1958 was void as against public policy. This preincorporation contract between the parties was intended to serve as a stockholders' agreement after incorporation. Such agreements are governed by the general principles of contract law. 13 Am. Jur., Corporations, § 127. The signatories bound themselves "to use their influence and stock votes" to secure the election of each as a director and the election of plaintiff by the directors as president of the corporation for a five-year period at a beginning salary of ten thousand dollars with indefinite annual increases during the succeeding four years "contingent upon the progress of the company." Whatever may have been the legal status of such an agreement prior to the enactment of the Business Corporation Act of 1955, (see Harvey v. Linville Improvement Co., 118 N.C. 693, 24 S.E. 489, 32 L.R.A. 265; Bridgers v. Staton, 150 N.C. 216, 63 S.E. 892; Annot. 45 A.L.R.2d 799, 821), it is clear that this contract is not now prohibited by law. Under G.S. § 55-24(a) the board of directors is given the right to manage the affairs of the corporation "[s]ubject to the provisions of the charter, the bylaws or agreements between the shareholders otherwise lawful * * *." (Italics ours.) G.S. § 55-73(a) permits two or more shareholders of a North Carolina corporation to enter into a written agreement to vote the shares held by them as a unit for the election of directors. This section provides:

"An otherwise valid contract between two or more shareholders that the shares held by them shall be voted as a unit for the election of directors shall, if in writing and signed by the parties thereto, be valid and enforceable as between the parties thereto, but for not longer than ten years from the date of its execution. Nothing herein shall impair the privilege of the corporation to treat the shareholders of record as entitled to vote the shares standing in their names, as provided in G.S. 55-59 nor impair the power of a court to determine voting rights as provided in G.S. 55-71."

Likewise, the contract to elect plaintiff president of the corporation at a specified salary is not subject to the usual objection that it interferes with the discretion of the directors in view of the provisions of G.S. § 55-73(c), to wit:

"An agreement between all or less than all of the shareholders, whether solely between themselves or between one or more of them and a party who is not a shareholder, is not invalid, as between the parties thereto, on the ground that it so relates to the conduct of the affairs of the corporation as to interfere with the discretion of the board of directors, but the making of such an agreement shall impose upon the shareholders who are parties thereto the liability *575 for managerial acts that is imposed by this chapter upon directors."

Thus, the Business Corporation Act clearly aligns North Carolina with the majority of jurisdictions which hold that a contract entered into between corporate stockholders by which they agree to vote their stock in a specified mannerincluding agreements for the election of directors and corporate officersis not invalid unless it is inspired by fraud or will prejudice the other stockholders. The cases are collected in an annotation: Validity and Effect of Agreement Controlling the Vote of Corporate Stock, 45 A.L.R.2d 799, 802. See also 18 C.J.S. Corporations § 551b; 19 C.J.S. Corporations § 716d; 17 C.J.S. Contracts § 199. The modern view is stated in Fletcher, Private Corporations, §§ 191 and 208: "No public policy forbids contracts for promoting and managing a corporation according to law and for lawful purposes, or for determining among themselves (the promoters) what the stock shall be and how it shall be divided, or for election of themselves as officers and employment by the corporation when formed." (Italics ours.) "A contract for employment of a promoter as a corporate officer, made among the promoters, is not necessarily against public policy or in fraud of the corporation. * * *" Accord: King v. Barnes, 109 N.Y. 267, 16 N.E. 332.

The rationale of this rule is aptly stated in Mansfield v. Lang, 293 Mass. 386, 200 N.E. 110, a case involving facts very similar to those here: "* * * (S)uch agreements as the one in the case at bar, even if regarded as open to the objection that they pledge in advance the action of officers or stockholders, may be sustained on the ground of the practical necessity that it would be impossible to organize a corporation if its proper management were not assured."

A competent person gainfully employed in his chosen field, will not ordinarily give up a secure position to take another with a new enterprise without some assurance as to his future. No corporation could ever be created without a preliminary agreement between the parties proposing to form it as to the mode and manner of doing so. However, when such agreements providing for the future management and control of a corporation violate the express charter or statutory provision, contemplate an illegal object, involve any fraud, oppression or wrong against other stockholders, or are made in consideration of a private benefit to the promisor, the courts will declare them invalid. Annot. 45 A.L.R.2d 799, 811; 12 A.L.R. 1070; 45 A.L.R. 795. The promoters of a corporation occupy a relation of trust and confidence towards the corporation which they are calling into existence as well as to each other, and the law requires of them the same good faith it exacts from directors and other fiduciaries. Goodman v. White, 174 N.C. 399, 93 S.E. 906; 13 Am.Jur., Corporations §§ 126, 127. Both G.S. § 55-24 and G.S. § 55-73 require that the contemplated agreements be "otherwise lawful."

There is no evidence here that the contract between the plaintiff and defendants was not made in good faith or that, at the time it was made, it was not in the best interest of the corporation. Prima facie, it was a valid exercise of the promoters' right to contract. 13 Am.Jur., Corporations § 127. Since the organization of the corporation, the defendants have not owned a majority of its stock. Therefore, they could not have forced their will upon either the stockholders or the other eight directors. To remove plaintiff from the board of directors and the presidency of the corporation they ultimately required the proxies and votes of other stockholders.

The defendants' contention that the agreement was void as against public policy is not sustained. Furthermore, as parties to the agreement and recipients of the benefit of plaintiff's knowledge, experience, work, financial support, and voting support under it, they are in a poor position to assert *576 the invalidity of the contract on the ground that it is contrary to public policy. Bonta v. Gridley, 77 App.Div. 33, 78 N.Y.S. 961.

The defendants' second defense is that plaintiff's acceptance of a contract with Gateway for one year's employment instead of five was in legal effect a novation. In Tomberlin v. Long, 250 N.C. 640, 109 S.E.2d 365, this Court explained the meaning of novation:

"In this connection `"Novation" may be defined as a substitution of a new contract or obligation for an old one which is thereby extinguished * * *. The essential requisites of a novation are a previous valid obligation, the agreement of all the parties to the new contract, the extinguishment of the old contract, and the validity of the new contract * * *.' 66 C.J.S. Novation §§ 1 and 3. "`Novation implies the extinguishment of one obligation by the substitution of another.' (Citations omitted) "`Ordinarily,' as stated in Growers Exchange v. Hartman, 220 N.C. 30, 16 S.E.2d 398, in opinion by Devin, J., later C. J., `in order to constitute a novation the transaction must have been so intended by the parties.'"

The agreement of November 28, 1958 must receive that construction which will best effectuate the intention of the parties. Faust v. Rohr, 166 N.C. 187, 81 S.E. 1096. "Where an instrument is wholly in writing and the intention of the writer must be ascertained from the document itself, the intention of the writer as well as the effect of that intention is a question of law." Strigas v. Durham Insurance Co., 236 N.C. 734, 73 S.E.2d 788.

"`An elementary rule invoked in the construction of contracts requires the court to ascertain the intention of the parties, and to do this note must be taken of the purpose to be accomplished, the situation of the parties when they made (the contract), and the subject-matter of the contract.'" De Bruhl v. State Highway & Public Works Commission, 245 N.C. 139, 95 S.E.2d 553.

It is difficult to follow defendants' contention that, when the corporate directors declined to give plaintiff an employment contract for longer than one year, and he accepted the one-year appointment as the best bargain he could make at the time, such acceptance released them from any further obligation to work for his election as a director and appointment as president for the ensuing four years. As it applied to the plaintiff, the obvious purpose of their agreement was to insure, as nearly as possible, his prospective position with Gateway for a five-year period before he severed his connection with Coastal Plain Life Insurance Company. When the directors declined to give him a contract for a longer period than twelve months, the only way in which the parties could then accomplish the end they had in view was to secure from the corporation four additional one-year terms for the plaintiff. There is no evidence from which it can be inferred that plaintiff ever intended to release defendants from their obligation to support him for president of the company until he had served five years, or that defendants themselves ever thought they were released. The evidence in this case fails to establish a novation whereby Gateway's employment contract with plaintiff was substituted for his voting agreement with defendants.

The defendant's third defense is that plaintiff, by accepting the one-year contract, waived his rights under the agreement and is estopped to claim under it. The mode of performance was not the essence of the agreement, and plaintiff did not waive his rights or estop himself merely because he took from the corporation the only contract of employment obtainable. If defendants are to be released from their obligations under the agreement they must establish their fourth defense, i. e., that *577 plaintiff failed to perform his duties as president because of alcoholism.

Any agreement to employ an individual, or to promote his continued employment, contains the implied condition that the agreement may be terminated at any time for cause. Mansfield v. Lang, supra. An employer undertakes to pay an employee only so long as he performs his duties with reasonable care, diligence, and attention. He may discharge an employee for just cause at any time without incurring liability therefor. This rule protects him in the efficient conduct of his business, and employment contracts thus impliedly conditioned are not against public policy. Mt. Pleasant Coal Co. v. Watts, 91 Ind.App. 501, 151 N.E. 7. See also 45 A.L.R.2d 799, 820.

As justification for the abandonment of their agreement, defendants alleged that plaintiff's addiction to alcohol had caused him to neglect the business of Gateway. Plaintiff denied the allegation. It therefore became a question for the jury whether plaintiff used alcohol to an extent which would justify his discharge.

"Confirmed habits of intoxication on the part of an employee are necessarily inconsistent with the duties of any employment and justify discharge, but the extent to which drinking of liquor or occasional excess may disqualify an employee depends upon the character of the employment." 4 Williston on Contracts, (rev. ed.) 1020; 35 Am.Jur., Master and Servant § 43.

The rule is well stated in 56 C.J.S. Master and Servant § 43i:

"Independently of any agreement to that effect, the master may discharge the servant when, by intoxication, he unfits himself for the full and proper discharge of his duties, and it is immaterial that at the time of the discharge the employee had quit drinking, and discharge is justifiable even when the employee is not incapacitated thereby, if his intoxication is or may be prejudicial to the master's interests; and this is especially true when the employment, in its very nature, requires sobriety. The fact that liquor was drunk as medicine is no excuse for gross intoxication."

If plaintiff used alcohol to the extent that it interfered with the proper discharge of his duties as a director and president of Gateway, defendants were justified in withdrawing the support which they had agreed to give him. However, as to the first cause of action, this is an affirmative defense interposed by defendants in a suit on their individual contract with plaintiff. It is, therefore, for the jury to determine the validity of that defense. The granting of defendants' motion to nonsuit the plaintiff's first cause of action was erroneous and that ruling must be reversed.

Plaintiff's second cause of action is in tort for the wrongful interference by defendants with the contractual relation existing between him and Gateway. It is based upon Childress v. Abeles, 240 N.C. 667, 84 S.E.2d 176, wherein it is stated:

"* * * (T)he overwhelming weight of authority in this nation is that an action in tort lies against an outsider who knowingly, intentionally and unjustifiably induces one party to a contract to breach it to the damage of the other party. * * * "To subject the outsider to liability for compensatory damages on account of this tort, the plaintiff must allege and prove these essential elements of the wrong: First, that a valid contract existed between the plaintiff and a third person, conferring upon the plaintiff some contractual right against the third person. Second, that the outsider had knowledge of the plaintiff's contract with the third person. Third, that the outsider intentionally induced the third person not to perform his contract with the plaintiff. Fourth, that in *578 so doing the outsider acted without justification. Fifth, that the outsider's act caused the plaintiff actual damages." (All citations are omitted.)

The contract which defendants' interference caused to be terminated in Childress was terminable at the will of the parties. The contract here was for one year only, but it is a fair inference that both plaintiff and Gateway expected it to be renewed from year to year as long as plaintiff was able to perform his duties. The distinction between Childress and the case sub judice is that defendants here are not outsiders. They are all stockholders and directors of Gateway. As stockholders they had a financial interest in the corporation; as directors they owed it fidelity and the duty to use due care in the management of its business. G.S. § 55-35. As either directors or stockholders, they were privileged purposely to cause the corporation not to renew plaintiff's contract as president if, in securing this action, they did not employ any improper means and if they acted in good faith to protect the interests of the corporation. In other words, because of their financial interest and fiduciary relationship they had a qualified privilege to interfere with contractual relations between the corporation and a third party. Restatement, Torts, § 769 (1939); 30 Am.Jur., Interference §§ 34, 37; Annot., 26 A.L.R.2d 1227, 1270. To hold otherwise, "would tend to hinder directors of a corporation from acting on their judgment for the interest of their corporation * * *." 3 Fletcher, Private Corporations § 1001; May v. Santa Fe Trail Transportation Co., 189 Kan. 419, 370 P.2d 390; Schuster v. Largman, 318 Pa. 26, 178 A. 45.

In an article entitled Liability For Inducing a Corporation to Breach its Contract, 43 Cornell Law Quarterly, 55, 65, by Avins, we find this statement:

"Officers, directors, agents or employees who have an interest in the activities of a corporation or the duty to advise or direct such activities should be immune from liability for inducing the corporation to breach its contract, assuming their actions are in pursuit of such interests or duties. Public policy demands that so long as these parties act in good faith and for the best interests of their corporation, they should not be deterred by the danger of personal liability. * * *"

The comment of the Georgia Court of Appeals in Rhine v. Sanders, 100 Ga.App. 68, 110 S.E.2d 128 is also applicable here.

"* * * They (defendants) had the right while acting as corporate officers and agents to counsel and advise with the defendant corporation as to the management of its affairs in all matters with which the corporation was concerned without the risk of rendering themselves personally liable to third parties for their acts in that regard if they should err. `Any other rule would make it impossible for corporate business to be carried on at all except at the peril that every agent who advised concerning corporate action would be suable under some such allegations as are made in this complaint.'"

The acts of a corporate officer in inducing his company to sever contractual relations with a third party are presumed to have been done in the interest of the corporation. "Individual liability may, however, be imposed where his acts involve individual and separate torts distinguishable from acts solely on his employer's behalf or where his acts are performed in his own interest and adverse to that of his firm." Rampell, Inc. v. Hyster Co., 1 Misc.2d 788, 148 N.Y.S.2d 102; 2 A.D.2d 739, 153 N.Y.S.2d 176; 3 N.Y.2d 369, 165 N.Y.S.2d 475, 144 N.E.2d 371; Pennington Trap Rock Co. v. Pennington Quarry Co., 38 A.2d 869, 22 N.J.Misc. 318; Iverson & Co. v. Dunham Mfg. Co., 18 Ill.App.2d 404, 152 N.E.2d 615.

Plaintiff's own testimony reveals that he voluntarily committed himself to *579 the State Hospital as an inebriate in January 1960. The testimony of other witnesses for the plaintiff tended to show that it was plaintiff's use of alcohol which prompted defendants to take the action which resulted in Gateway's failure to renew his contract. Directors of an insurance company may not be subjected to liability for acting on the assumption that it might prejudice the corporation to retain as president a man with a drinking problem who had been committed to a State institution as an inebriate. Plaintiff offered no evidence tending to show that the defendants abused their privilege as directors.

The question whether plaintiff's use of alcohol had actually rendered him unfit to perform his duties or prejudiced the business of Gateway is not determinative of the second cause of action. An error in judgment about this would not impose liability upon the directors. The judgment of nonsuit as to the second cause of action must be sustained. Langley v. Russell, 218 N.C. 216, 10 S.E.2d 721; Herndon v. Melton, 249 N.C. 217, 105 S.E.2d 531; Yancey v. Gillespie, 242 N.C. 227, 87 S.E.2d 210.

The plaintiff excepted to the order of the court below striking certain allegations from his complaint relative to special damages. The assignment of error based on these exceptions has been considered and it is overruled. The briefs debate the admissibility of certain evidence which the court excluded over plaintiff's objection. Without this evidence plaintiff was still entitled to go to the jury on his first cause of action, and it could not have changed the status of the second cause of action. Since these questions of evidence may not arise on the retrial, this opinion will not be lengthened with further discussion.

As to the first cause of action

Reversed.

As to the second cause of action

Affirmed.