Mountain Manor Realty, Inc. v. Buccheri

Wilner, J., delivered the opinion of the Court. Employing tactics worthy of the princes of the Italian Renaissance, two factions battled for control of Mountain Manor, Inc., a'Maryland corporation that operates an alcoholic rehabilitation facility in Emmitsburg. Through secret (and partly improper) stock purchases, appellees appeared to have victory within reach, only to find themselves outmaneuvered by appellants. Appellants’ ploy, however, was, in proper legal language, declared "tacky” by the Circuit Court for Frederick County; and the effect of that was to restore appellees to their position of dominance.

Aggrieved at their loss of corporate control, appellants have brought this appeal. ¹⁸⁷ The underlying facts are not in dispute. We may summarize them as follows. Mountain Manor, Inc. (MMI) was incorporated in 1974. The charter authorized 10,000 shares of $10 par common stock, but only 56 shares of that stock were initially issued.

One of the original stockholders was Charles W. Roby, who acquired 12 shares. Minutes of a special meeting of directors held on August 19, 1974, reveal that an agreement was executed on behalf of the corporation and by the then-current stockholders which, among other things, precluded those stockholders from selling any of their stock without first offering it to the corporation. The corporation was given the option of matching any bona fide offer from a third party or paying book value, whichever was less. In 1976, efforts of some sort were made to interest appellant, John V. Conway, in investing in MMI.

In December of that year, a corporation owned and controlled by C'onway, Mountain Manor Realty, Inc. (Realty), purchased the property upon which MMI operated the rehabilitation center, and on June 10, 1977, it entered into a ten-year lease with MMI. At that time, Conway had no financial interest in MMI and was not connected with its management. On July 6, 1977, Conway was elected a director of MMI. In June, 1978, he and one E. Gordon Leatherman assumed control of the company by buying out all of the stockholders except Roby.

As a result of those purchases, the MMI stock was owned as follows: Conway, 22 shares; Leatherman, 22 shares; Roby, 12 shares. Leatherman managed the day-to-day affairs of the company until May, 1980, when Conway was elected president and assumed active command. Conway, Leatherman, and Roby constituted the Board of Directors. At some point — perhaps because of the way Leatherman had been managing the company — Conway became disenchanted with his investment and began to look for someone to buy his stock.

In January, 1980, he signed a letter promising Roby a five percent commission if he (Roby) obtained a buyer. Through Roby, Conway was introduced to ¹⁸⁸ Jean Buccheri and Joseph Francus. In September, 1980, Conway agreed to sell his stock to them for $5,400 a share; but, because of the failure of certain conditions, the sale was not consummated. Buccheri and Conway continued their discussions, but never came to terms.

Unknown to Conway, Buccheri was also negotiating with Roby and Leatherman, who previously had declined to sell their stock. On September 15, 1981 — about a year after the aborted sale of Conway’s stock — Buccheri bought Leatherman’s 22 shares and Roby’s 12 shares. This bit of news was communicated to Conway in a letter from Buccheri’s counsel. The letter was accompanied by the resignations of Leatherman and Roby as directors and included a request that the corporate records be changed to reflect the sale and that a special meeting of stockholders be called.

Conway challenged the sale of Roby’s 12 shares, contending that it was in contravention of the 1974 stockholders’ agreement, to which Roby was a party. He dutifully called a special stockholders meeting for October 23,1981, however, stating in the notice that the meeting was called "for the purpose of electing directors of the Corporation and such other business as may properly come before the meeting, it being understood that the matter of ownership of the stock of the corporation will be addressed at such special meeting.” In an effort to retain control of the corporation, which control he was likely to lose on October 23, Conway, without notice to Buccheri, Leatherman, or Roby, called a special meeting of directors for October 22, 1981, in Easton, Maryland. 1 At the time, of course, by reason of the resignations of Leatherman and Roby, he was the only remaining director. He invited to this meeting his attorney and two acquaintances — Margaret Faulstich, who had been one of MMI’s initial stockholders, and William C. Widman, an insurance agent who had placed some insurance for MMI. ¹⁸⁹ The minutes of that meeting show that Conway made a long and detailed presentation about the history, the affairs, and the current condition of the company, and about the importance of directors exercising independent judgment. The "upshot” of the meeting was that (1) Conway, as sole surviving director, elected Faulstich and Widman as directors to fill the vacancies created by the resignations of Leatherman and Roby; (2) Conway then presented to this newly constituted board an offer by Realty to purchase 13 shares of MMI stock at a price of $7,000 a share, the purchase price to be paid by means of a credit of $91,000 against the arrearage of rent due by MMI to Realty on the lease.

The price was subject to upward adjustment to match the price paid by Buccheri for Roby’s stock if that price was more than $7,000 a share; (3) The board accepted the offer and authorized the issuance of the 13 shares to Realty; and (4) Realty executed a "Credit Toward Rent,” which was delivered to MMI, and MMI issued stock certificate no. 14, evidencing 13 shares to Realty. At the stockholders meeting the next day, which was attended by Buccheri and Roby, Conway announced first that the company did not recognize the sale of Roby’s 12 shares. He then distributed copies of the minutes of the October 22 directors meeting showing the sale of the 13 shares to Realty. Purporting to vote 35 shares (his 22 and Realty’s 13), Conway thereupon nominated himself, Faulstich, and Widman as directors.

Counsel for Buccheri, who was also in attendance, disputed the validity of Realty’s 13 shares; and, on the authority of the 34 shares owned by Buccheri, or by Buccheri and Roby, Buccheri nominated a different slate. The vote was either 35-34 in favor of Conway’s slate or 34-22 in favor of the Buccheri slate, depending upon the validity of the 13 shares sold to Realty. 2 ¹⁹⁰ Upon the assumption that he had won, Conway declared the meeting adjourned. Conway’s confidence in his victory was apparently not complete. On November 5, 1981, he filed an action in the Circuit Court for Frederick County seeking a declaratory judgment that (1) because it contravened the 1974 stockholders agreement, the sale of Roby’s 12 shares to Buccheri was invalid and Buccheri was therefore not the lawful owner of those 12 shares, (2) 13 shares of MMI stock were validly issued to Realty on October 22,1981, and (3) the corporate directors were Conway, Faulstich, and Widman.

On August 3,1982, the court gave Conway a meaningless partial victory. It declared that Roby had in fact signed the 1974 stockholders agreement, that his 12 shares were subject to it, that the sale of those shares to Buccheri was not in accordance with the agreement, and that Buccheri therefore did not own those shares. The court also declared, however, that the 13 shares "were not legally issued to the Realty Company on October 22, 1981, because the transaction of [Conway] at the meeting of October 22,1981, was completely illegal.” It explained: "Sec. 2-408B of the Corporations and Associations Article of the Annotated Code of Maryland provides as follows: 'b. Quorum — (1) Unless the By-Laws of the corporation provide otherwise, majority of the entire board of directors constitutes a forum for transaction of business.

(2) Notwithstanding any provision of the By-Laws to the contrary, a quorum may not be less than: (i) One-third of the entire board of directors or (ii) Two directors.’ ¹⁹¹ Dr. Conway individually could not transact any business of the corporation as a sole stockholder because he would be in violation of the above statute. Furthermore, Dr. Conway’s action at the meeting on October 22, 1981, was not in the best interest of the corporation for the reason that the control of the corporation was manipulated by sale of the stock to himself without regard of [sic] a stockholders meeting to be held in a couple of days for the purpose of electing new directors. It is inconceivable to this Court that such action would be orchestrated and then ask the Court to apply its stamp of approval.” From that conclusion, the court declared that Conway, Faulstich, and Widman did not constitute the directors of MMI. Conway’s appeal attacks both reasons advanced by the court for declaring the October 22 transaction invalid.

He argues: "I. Conway, as the sole remaining director of Mountain Manor, had the right to elect two directors to fill the vacancies on the Mountain Manor Board of Directors.

II

The transaction by which Realty acquired 13 shares of Mountain Manor stock complied with Md. Corp. & Ass’ns Code Ann. § 2-419 which governs interested director transactions, and thus the stock was validly issued to Realty.” Although we do not necessarily recommend the procedures employed by Conway to retain control of the company (any more than we recommend the secret double-dealing between Roby and Buccheri), we think, for the reasons that follow, that the court may have erred in declaring the October 22 transaction to be invalid. 3 ¹⁹² The court’s action with respect to the 13 shares issued to Realty rested, as we have seen, on two bases: (1) that Conway "could not transact any business of the corporation as a sole stockholder” because of the quorum requirements of Md. Code Ann. Corp. and Ass’ns art., § 2-408 (b); 4 and (2) that the transaction was not in the best interest of MMI because "control of the corporation was manipulated by sale of the stock to himself without regard of [sic] a stockholders meeting to be held in a couple days....” As to the first of these reasons, we note initially that Conway did not purport to act as "a sole stockholder,” which, of course, he was not, but rather as the sole surviving director, which, of course, he was. More important, § 2-408 (b) is not the only relevant statute. Section 2-402 (a) requires that a corporation "shall have at least three directors at all times.” The number of directors may be greater than three, as established in the charter or the by-laws, but it may not be less than three. MMI, it was agreed, had three directors. 5 As the court correctly observed, § 2-408 (b) provides that, absent a contrary provision in the by-laws, a majority of the entire board of directors constitutes a quorum for the transaction of business, but that in no event may a quorum be less than "(i) One third of the entire board of directors; or (ii) Two directors.” What the court omitted to consider, however, was § 2-407 (a) (2) (i), dealing with vacancies on the board of directors.

That subsection states: "Unless the bylaws provide otherwise:... [a] majority of the remaining directors, whether or not sufficient to constitute a quorum, may fill a vacancy on ¹⁹³ the board of directors which results from any cause except an increase in the number of directors.” (Emphasis supplied.) 6 MMI’s by-laws are not contrary to that provision; indeed, they track it. Article II, § 9, dealing with vacancies on the board of directors, provides, in relevant part, that, "If any director shall die or resign ... a majority of the remaining directors (although such majority is less than a quorum) may elect a successor to hold office for the unexpired portion of the term of the director whose place shall so become vacant, and until his successor shall have been fully chosen and qualified.” (Emphasis supplied.) With the resignations of Roby and Leatherman, Conway, being the only remaining director and thus necessarily "a majority of the remaining directors,” had the authority under § 2-407 (a) (2) (i) and art. II, § 9 of the by-laws to fill the two vacancies, notwithstanding that under § 2-408 (b) there was the lack of a quorum. There being no challenge here to the qualifications of Faulstich and Widman, or otherwise to the procedure of their election, we perceive no legal impropriety in their election on October 22 as successor directors.

With regard to the second stage — the issuance of the stock — the matter is not so clear. We think that the court applied the wrong standard in judging that issue, and we therefore cannot affirm its judgment. We recognize, however, that the same ultimate conclusion might properly flow from application of the correct standard; and so neither shall we reverse. We shall, instead, remand under Md. Rule 1071.

To put the matter in its proper perspective, we note first the general rule that, with but limited exceptions, a court may not interfere with or second-guess the business deci ¹⁹⁴ sions made by the directors of a corporation in their management of the corporation. As stated in Parish v. Milk Producers Assn., 250 Md. 24, 74 (1968),