Wadman v. McBirney

Gilbert, C. J., delivered the opinion of the Court. THE ISSUE Ordinarily "proxy fights” are thought of as occurring in large corporations when one individual or group endeavors to oust incumbent management and, thus, to take over and control the corporate direction. The instant appeal is a battle over the validity of a proxy and is illustrative of the fact that such corporate combat is not limited to conglomerates but also occurs in small corporations. The specific question put to us is whether a ten-year "irrevocable proxy” given to one stockholder by another constitutes a "sale” of that stock within the meaning of a covenant restricting transferability of stock.

The underlying issue is whether the appellants will emerge in control of the operation of the corporation or whether Lawrence B. Marsh, one of the appellees, will continue to run the company. THE FACTS Our review of the record discloses that Thomas R. McBirney, Lawrence B. Marsh, and Alton Wadman were the ³⁸⁷ stockholders in a corporation known as "Marsh-McBirney, Inc.” The entity was formed in 1971. Initially each of the three stockholders owned 5,000 shares of Class A common stock and 818 shares of Class B, non-voting common stock. The charter provided for 99,900 shares of common stock, 19,900 shares of which were Class A. Only 15,000 shares of Class A stock were issued.

The charter contains the following alienation of transferability article: 1 "SEVENTH: (a) No stockholder shall sell, assign, convey, transfer or dispose of the Class A capital stock of this Corporation, either to another stockholder of the Corporation or an outsider, unless and until he shall have first offered the said share or shares of Class A stock in writing to the board of directors for the benefit of the remaining Class A stockholders of the Corporation. (b) Said remaining Class A stockholders, within thirty days from the notice in writing to the board of directors of intention by the selling Class A stockholder, shall have the right to purchase the said share or shares of stock at the same price at which the selling Class A stockholder has obtained a bona fíde offer to purchase. (c) A Class A stockholder shall initially have the right to purchase shares offered for sale in the same proportion that the number of Class A shares already owned by him bears to the total Class A stock issued; provided, that a Class A stockholder shall have the right to purchase a greater proportion than aforesaid, at such time as another Class A stockholder has failed or refused to purchase his proportionate part of the shares offered for sale. ³⁸⁸ (d) No transfer, other than by death, of the Class A shares of the Corporation shall be valid or binding on the Corporation unless the foregoing requirements have been met.” At some point in time, Marsh sold 534 shares of his Class A common stock to Irving Hill. 2 We infer that particular transaction complied with Article Seven of the corporate charter. Wadman died and his shares became the property of a testamentary trust with Rose Mary Wadman as Trustee.

Mrs. Wadman was elected a director of the corporation. Apparently some discord arose because of the fact that Marsh and McBirney were salaried employees of the company, and received certain "perks,” such as the use of motor vehicles leased by the corporation. In addition, Marsh and McBirney were awarded periodical bonuses. Mrs. Wadman, even though a director, received no income from the corporation.

Dividends have never been paid to the stockholders, and while the company has shown a profit, salary increases and bonuses for Marsh and McBirney have apparently precluded the declaring of dividends. Suggestions by Wadman and Hill pertaining to the operation of the business were generally rejected by the majority vote of the Board of Directors. Marsh became disenchanted with his remuneration in light of the fact that he considered himself to be the major contributor to the corporate well-being. He expressed his dissatisfaction to McBirney and talked of leaving the company.

McBirney said that he feared that if Marsh left, the company would fail, so McBirney decided to seek other employment, thus leaving Marsh with the Company. Under date of February 15,1980, McBirney notified stockholders in writing; of his intent to sell 3,500 shares of his Class A common stock at and for the sum of $28 per share. 3 The stock ³⁸⁹ was purchased by each Class A stockholder in the manner prescribed by the corporate charter. After the sale by McBirney, the Class A common stock was owned as follows: McBirney 1,500 " Marsh 6,029 " Mrs. Wadman as Trustee 6,750 " Total 15,000 " Contemporaneously with the notice to sell the 3,500 shares of Class A common stock, McBirney sold his entire 818 shares of Class B non-voting common stock to Marsh for $2.50 per share or a total of $2,045. 4 McBirney agreed with Marsh that he, McBirney, would execute a ten-year "Irrevocable Proxy” of McBirney’s remaining 1,500 shares of Class A common stock. There is no provision in the charter against proxies.

The proxy, which was signed on March 19, 1980, provided, inter alia: "KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned a stockholder of MARSHMcBIRNEY, INC. a corporation organized and existing under the laws of the State of Maryland (hereinafter sometimes call [sic] the "Corporation”), do hereby irrevocably make, constitute and appoint Lawrence B. Marsh, 12842 Littleton Street, Silver Spring, Maryland 20906, with full power of substitution, my true and lawful attorney and proxy, for and in my name, place and stead, for a period of ten (10) years from the date hereof to vote upon the fifteen hundred (1,500) shares of "Class A Voting Common Stock” owned by me or standing in my name on the books of the Corporation as my proxy, at any and all meetings of the stockholders of MARSH-McBIRNEY, INC. held within the aforesaid period, upon any and all ³⁹⁰ matters of any kind of nature whatsoever which may be presented, considered, and voted upon at any annual or special meeting of stockholders, or any adjournments thereof, of the said Corporation, including the signing of my name as such stockholder to any waiver or consent certificate which the laws of the State of Maryland may require or permit, as fully and with like effect as I might or could have done if personally present, hereby ratifying and confirming all that my said attorney and proxy may do in my name, place and stead. The instrument shall not be deemed to be a general power of attorney and does not authorize any action which would require the undersigned to be personally responsible for any debt or obligation of the Corporation.” The proxy which was made binding on the McBirney’s heirs and personal representative was conditioned in part on Marsh’s remaining as President of Marsh-McBirney, Inc. 5 Wadman and Hill filed a polychotomous bill for declaratory judgment in the Circuit Court for Montgomery County in which they alleged that McBirney and Marsh had, under the circumstances, effected a sale in violation of Article VII ³⁹¹ of the charter; that the "sale” violated the "rights” of the plaintiff-appellant "to purchase their respective proportionate shares” of the 1,500 shares of stock over which Marsh was granted McBirney’s proxy. Additionally, the declaration alleged that McBirney and Marsh "breached the contract” created by Article VII of the corporate charter; that Marsh "intentionally and with actual malice” induced McBirney to "breach his contractual obligation” under Article VII so that Marsh would "obtain control” of the corporation; that McBirney and Marsh conspired to give Marsh control of the corporation and, thus, "defraud” Wadman and Hill; and that McBirney and Marsh were guilty of "fraudulent conduct.” Wadman and Hill asked that the proxy be declared null and void, that they be entitled to "their proportionate shares” of the McBirney’s retained 1,500 shares, and that the plaintiffs-appellants be awarded compensatory and punitive damages totaling $4,250,000 together with attorney’s fees. McBirney and Marsh answered the count pertaining to the validity of the irrevocable proxy and demurred to each of the other four counts.

At the same time, the defendant-appellees moved for summary judgment as to the validity of the irrevocable proxy. Wadman and Hill then filed for summary judgment as to the same count. Judge Stanley B. Frosh denied Wadman’s and Hill’s motion for summary judgment, granted that of McBirney and Marsh, caused judgment to be entered thereon, and sustained the demurrer as to the remaining counts, with leave to amend. Wadman and Hill elected to stand on their declaration as pleaded and appealed all rulings to this Court.

If we hold the proxy to be valid, the other counts of the declaration will fall of their own weight. Persons do not "conspire” to do a legal act by lawful means; if the proxy is valid, it does not constitute a "sale” in violation of appellants’ "rights.” Admittedly, McBirney did not want to see Wadman and Hill in control of the corporation because he feared that Marsh would leave the company, thereby causing its demise. ³⁹² From the record before us, we glean that Marsh was the major contributor to the corporation growth. We, however, do not intimate, since we have no knowledge, whether Marsh’s departure from the company would materially affect its operation and vitality. I. Appellants have cited us to a number of cases, but they are all concerned with restrictions on the transfer of stock or the meaning of "sale” within the scope of the Securities Exchange Act.

None are apposite to the instant case. Indeed, we have not been directed, by either party, to any case directly on point, and we have found none. 6 Maryland Corp. & Assn’s Code Ann. § 2-506 permits shareholder voting by proxy unless otherwise proscribed by the corporate charter. Needless to say, the charter of McBirney-Marsh, Inc. did not prohibit proxy voting else there would be no case before us. Section 2-507 of the Corp. and Assn.

Art. provides: "(a) Each share entitled to one vote. — Unless the charter provides for a greater or lesser number of votes per share or limits or denies voting rights, each outstanding share of stock, regardless of class, is entitled to one vote on each matter submitted to a vote at a meeting of stockholders. However, a share is not entitled to be voted if any installment payable on it is overdue and unpaid. (b) Manner of voting; proxies. — (1) a stockholder may vote the stock he owns of record either: (i) in person; or ³⁹³ (ii) By written proxy signed by the stockholder or by his duly authorized attorney in fact. (2) Unless a proxy provides otherwise, it is not valid more than 11 months after its date.

(3) Unless otherwise agreed in writing, the holder of record of