Clark vs Dodge, et al.

SUMMARY: Clark and Dodge had an agreement whereby Dodge, the majority shareholder in common of
two corporations, was to vote Clark as director and have him continue to be a general manager, in
exchange of Clark sharing exclusive knowledge of formulae for business. Clark filed a complaint for
breach of contract when he was not so voted as a director and general manager. The issue is whether or
not such agreement was legal to begin with. The Court rules in the affirmative, citing the broad nature of
powers given to the directorate, such that if agreements do not damage the public, then they shall be
valid, even as they limit and define the exercise of the board of some of their rights to some degree.

FACTS:

 Two corporations involved: Bell & Company, Inc. (Bell) and Hollings-Smith Company, Inc.
(Hollings-Smith)
- Manufacturing medicinal preparations by secret formulae
 Dodge:
- Owned 75% of both
- No active part in the business of both
- Director in both corporations; President of Bell; General Manager of Hollings-Smith
 Clark:
- Owned 25% of both
- In charge of the major portion of the business of Hollings-Smith
- Director of Bell; Treasurer and General Manager of Bell
- Formulae and methods of manufacture were known to him alone
 1921: Written agreement between Dodge and Clark
- Dodge, during his lifetime and by trustee after his death, should vote Clark as director of Bell
and have him continue to be a general manager as long as he should be faithful, efficient,
and competent
- Clark should receive ¼ of the net income of both corporations; no unreasonable salaries
should be paid to others to the prejudice of Clark’s share
- Clark should share his knowledge of the formula with Dodge’s son
- Clark would, at the end of his life, bequeath his stock to the wife and children of Dodge
 Complaint: Specific Performance
- Dodge failed to use his stock to continue Clark as director and general manager, prevented
him from receiving is portion of the income, and causing the employment of incompetent
persons at excessive salaries
- Prayed for reinstatement as director and general manager and an accounting

ISSUE: W/N contract is illegal (vis-à-vis standing case law) – NO

1. McQuade case: doctrine allowed for no variation where salaries or policies or retention of
individuals in office are concerned in the case of agreements.
2. However, if the enforcement of a particular contract damages nobody, there is no reason to
hold it illegal; where the directors are the sole stockholders, there would seem to be no
objection to enforcing an agreement among them to vote for certain people as officers.
- Where the public is not affected, parties in interest in corporate contracts might, by their
original agreement of incorporation, limit their respective rights and powers.
3. The agreement in the present case is legal, and presents a valid cause of action. No attempt to
sterilize the Board of Directors.
a. Restrictions requiring Dodge to vote in Clark as director and general manager are perfectly
legal.
b. Agreement on proportion of the net-income may be construed as relating to the amount
left for distribution after directors set aside whatever they deemed wise.
c. Provision on not allowing unreasonable salaries to officers is beneficial.
4. If there was an invasion on the powers of the directorate, it is so slight as to be negligible; no
damage was suffered by or threatened to anybody.