Roland Park Shopping Center, Inc. v. Hendler

Hammond, J., delivered the opinion of the Court. The primary question to be determined in this case is the meaning and effect of the provision in the 1951 revision of the corporation law that certain limitations and restrictions, permissible in the by-laws under the prior law, be transferred to the charter within three years from June 1, 1951, if they are to continue to be effective. In 1945, three business men, Smith, Hendler—the appellee, and Chertkof—an appellant, associated themselves in order to buy and operate jointly a shopping center in Baltimore. Chosen as the vehicle for the venture was a close corporation, in substance an incorporated partnership.

Two-thirds of the purchase price was to be borrowed on a mortgage by the corporation and the other third was to be loaned to it by the three, in the proportion of their ownership, which was to be two-fifths, two-fifths, and one-fifth. To protect each against the combined voting power of the other two, it was agreed that a quorum of the stockholders would be eighty-five per cent of the outstanding stock, and that concurrence of the same percentage of the stock would be necessary to pass any motion or resolution, or to elect or remove a director, or to take any other action at any meeting of stockholders, or to amend or repeal the by-laws. It was agreed also that the number of directors would be three, all being required to constitute a quorum, as well as that the affirmative vote of all three would be ¹⁵ necessary to pass any motion or resolution or to take any action at any meeting of the board of directors. The charter, by-laws and minutes of the first meeting of the incorporators were drawn by a lawyer employed by Chertkof.

At the meeting, by-laws precisely in the form agreed on, were adopted and ordered inserted in the minutes. The three entrepreneurs were then elected directors to succeed the incorporators, who were employees of Chertkof, and next, Smith and Hendler each subscribed to four shares of stock and Chertkof to two shares, at a price of ten dollars a share. The corporation has since operated the shopping center, and has prospered mightily. Smith died in 1948 and Chertkof acquired his interest, so that he owned sixty per cent of the outstanding stock and Hendler forty per cent.

Chertkof’s wife succeeded Smith as a director, and Chertkof replaced him as president, Hendler becoming vice president and treasurer, and Hendler’s niece, Naomi Levin, secretary. Resolutions were passed requiring the joint signatures of Chertkof and Hendler for the withdrawing of funds from banks. As time went on, Chertkof arrogated to himself more and more of the management of the corporation without consulting Hendler. This led to friction between them, and finally, in 1952, Chertkof decided that he must do away with the by-law provisions as to the eighty-five per cent votes and the unanimous action of the three directors, which, until then, had always been given scrupulous respect.

He sought legal advice and was told that under the 1951 revision of the corporation law, a majority of the stock could act until such time as the by-laws requiring a greater proportion of stock for action, were put in the charter. At the annual meeting of stockholders held on March 13, 1952, Chertkof followed the advice of his counsel and voted his six of the outstanding ten shares, to elect a board of three directors, which did not include Hendler and did include Chertkof’s son and John McC. Mowbray, each an appellant. He voted also to delete ¹⁶ from the by-laws each of the provisions requiring the vote of eighty-five per cent of the stock and the requirement of concurrence of all three directors in actions of the board of directors.

Hendler, who was at the meeting, protested vigorously that the actions were all contrary to the original agreement and the by-laws, and were illegal and void. The newly elected board then elected as officers, Chertkof, president, his son, vice president and secretary, and Hendler, treasurer. Chertkof and his son were authorized to sign the checks of the corporation jointly, Hendler being given no power in this regard. The effect of the actions of the stockholders and directors was to vest complete control of the corporation in Chertkof and his nominees.

Hendler filed a bill of complaint against the corporation, Chertkof, the two newly elected directors and a trust company in which were deposited the corporate funds. He set forth all that has been recited, as well as additional facts concerning the operation of the corporation by Chertkof and the handling of the corporate funds, and prayed that the amendments to the bylaws “purportedly adopted at a meeting of the stockholders of Roland Park Shopping Center, Inc. held on March 13, 1952 be declared void and of no effect unless and until adopted by the vote of 85% of the issued and outstanding stock of said corporation”; that the purported election of Jack O. Chertkof and John McC. Mowbray as directors be declared void; that the meeting of the directors be declared illegal, void and of no effect; that the depository of the corporation be restrained from honoring checks of the corporation unless signed by David W. Chertkof and Bernard R. Hendler; that the directors elected on March 13, 1952 be ordered to account to the corporation for all corporate funds drawn from the depository on the joint signatures of David and Jack Chertkof; and, finally, that David W. Chertkof, Bernard R. Hendler, and Annie Chertkof be declared to be the present directors of the corporation. Demurrers ¹⁷ were over-ruled and after the filing of answers and the taking of testimony, the Chancellor granted relief substantially as prayed.

The appellants place their reliance on three points: first, that under Code (1951) Art. 23, Sec. 11(f), as enacted by Chapter 135 of the Acts of 1951, a by-law requiring concurrence of a greater proportion of the stock than that required by the corporation article, for corporate action or the presence of a quorum, is inoperative, is in a state of suspended animation, until the time, within three years from June 1, 1951, that its provisions are transferred to the charter. From this follows, they say, that until this is done, the normal provisions of the corporation article apply and a majority vote is enough to amend by-laws, elect directors or take other corporate action; second, that the by-laws, as originally agreed to, drawn and worked under for seven years, were always contrary to law and void because unreasonable; and third, that equity had no jurisdiction of the matters alleged and the relief sought in the bill of complaint. We find no substance in any of the contentions. Sec. 11(f) reads as follows: “At any time within three years after June 1, 1951, the board of directors of any corporation of this State may, and upon request of any stockholder shall, file with the Commission articles of amendment setting forth any by-laws of the corporation in effect on May 31, 1951, providing (1) for cumulative voting, (2) that any action may be taken or authorized upon the concurrence of a proportion of votes of all classes or of any class of stock other than that required by this Article for such action, or (3) that the presence of stockholders entitled to cast a proportion other than a majority of votes thereat shall constitute a quorum at any stockholders meeting.

Upon the acceptance of such articles of amendment for record by the Commission, the by-law or by-laws set forth therein shall constitute a part of the charter of such corporation, and may at any time thereafter be amended or re ¹⁸ pealed in the manner provided in any by-law of such corporation in effect on May 31, 1951, if such by-law is set forth in said articles of amendment, or, in the absence of such by-law in the articles, by majority vote of the stockholders.” Code (1951) Art. 23, Sec. 1, which was Sec. 1 of Chapter 135 of the Acts of 1951, explains in paragraph (b) : “Nothing in this Article shall be taken or construed * * * as affecting or impairing the validity of any corporate act done or performed within three years after June 1, 1951, if done or performed pursuant to charter or by-law provisions legally made prior to said date.” The inference which arises from the mere reading of Section 11(f), with such fortification as is given by Section 1 that by-laws continue to be in force and effective for a period of three years from June 1, 1951, is challenged directly by the appellants. They argue that the express and explicit statement of Code (1951) Art. 23, Sec. 38, that a majority of the votes cast by the stockholders shall be sufficient to take or authorize action upon any matter “unless more than a majority of votes cast is required by this Article or by the charter”, renders nugatory and without effect any such by-law provision after June 1, 1951 unless and until it is transferred to the charter. As we think they must, the appellants concede, albeit reluctantly, that if such by-law provisions are transferred to the charter within three years from June 1, 1951 they are effective and binding. Their argument leads them to the anomalous position that the stage is set for a race of diligence.

If the controlling interest of the corporation can manage to take corporate action by majority vote when the by-laws require more, before some stockholder forces the insertion of the by-law provisions in the charter, then such action will be valid, although as soon as the provision is in the charter, it will again be effective as to all future actions. Even if the language of the statute seemed to us ambiguous, we would be reluctant to adopt a construction leading ¹⁹ to such a strange result. We find, however, that the language is unambiguous and clear, and that provisions in by-laws requiring a greater proportion of the votes cast than a majority, if valid under the law as it stood prior to 1951, continue to be valid and effective for a period of three years from June 1, 1951, if not transferred to the charter within that time, and would continue to be valid and effective after the time they are transferred to the charter. The instances in Maryland in which there is actual evidence of legislative intent are rare.

This is one of the instances and here there is abundant evidence. The revision of the corporation Article was prepared for and recommended to the General Assembly of 1951 by a commission of experienced lawyers appointed by the Governor pursuant to a resolution of the Legislature. The report of this commission and the explanatory notes of its reporter were submitted with a proposed bill to the Legislative Council, which forwarded to the Legislature the bill, the report of the commission and the notes, and recommended passage of the bill. See Report of the Commission to the General Assembly of 1951 of the Maryland, Legislative Council, Vol. 1, p. V following p. 150.

The final report of the commission said: “A new sub-section (f) has been added to Section 11. Certain important provisions, which under present law may be included in the by-laws, are required by the revision to be included in the charter. Any such provisions now included in by-laws will become unenforceable, if not transferred to the charter by charter amendment within three years after the effective date of the Act. Because it was felt that there may be cases in which rights of minority interests now protected by