The tortuous, five-year legal battle between the Hellman brothers, Bruce and Glenn, over control of their jointly owned electric supply business came to its dénouement earlier this year when Monroe County Commercial Division Justice Kenneth R. Fisher, after conducting a trial ordered by the Appellate Division, re-affirmed his prior decision upholding Bruce’s authority as president to enter into a new lease relocating the business over Glenn’s objection and without getting pre-approval by the company’s board consisting of the two brothers. Hellman v. Hellman, 2010 NY Slip Op 20443 (Sup Ct Monroe County Feb. 11, 2010).
The focus of the fraternal fracas is Maynards Electric Supply, Inc., a Rochester-based wholesale distributor of electrical supplies founded in the 1950s by the brothers’ father, the late Maynard Hellman, who retired in the 1980s whereupon Bruce became the company’s President and Glenn its Vice-President. The brothers also subsequently became the company’s sole, 50-50 shareholders and directors. The litigation ignited in 2005 shortly after Maynard’s death, when Bruce, over his brother Glenn’s objection and without board approval, signed a lease with a third-party landlord to relocate the business out of a building co-owned by the Hellman family siblings.
Bruce won the first round of litigation in a March 2008 summary judgment decision about which I reported here. In that decision, Justice Fisher dismissed Glenn’s claims that Bruce lacked authority to enter into the lease on behalf of the company without prior board approval and that the third-party lease constituted corporate waste. In upholding Bruce’s “presumptive implied authority to execute the lease . . . without pre-approval from the board of directors, and even when he knew that Glenn Hellman would object at a duly convened board meeting if one were scheduled,” Justice Fisher relied on:
- the absence in the by-laws of any restrictions on the president’s authority to manage the business;
- the prior history of the company’s two, successive presidents, Maynard and Bruce, entering into leases and making other major decisions without board pre-approval; and
- Glenn’s failure to make any effort to convene a meeting of the board of directors for the purpose of restricting Bruce’s authority as president to enter into the lease.
As to the corporate waste claim, Justice Fisher held that the business judgment rule immunized from judicial scrutiny Bruce’s decision to enter into the lease.
Round two went to Glenn. In a May 2009 decision on his appeal, the Appellate Division, Fourth Department, reversed the summary judgment and reinstated Glenn’s complaint, finding that Glenn had raised a triable issue of fact based on evidence “that the previous leases signed by [Bruce] were the subject of Board resolutions granting [Bruce] the authority to sign them, or they were signed by [Bruce] ‘by authority of the Board of Directors of [the] corporation.'”
The third and final round was won by Bruce following a bench trial at which, as Justice Fisher summarized in his written decision,
[Glenn] failed to carry his burden of presenting preponderant proof that the past practices of the corporation circumscribed Bruce Hellman’s presumptive power to bind the corporation to the [third-party] lease. Nor did [Glenn] adduce preponderant proof that past practices revealed that the president did not have in practice, at least with respect to leases of this kind for corporate business, what otherwise would be described as the full measure of presidential power conferred on him by the by-laws and existing case law.
The scope of officer authority to act without board approval is a difficult and recurrent issue in litigation involving close corporations whose principals generally ignore corporate formalities until after disputes arise. Justice Fisher’s scholarly review of the guiding principles and case authorities is must reading for attorneys who practice in this area of the law. Following are some of the most important observations made by Justice Fisher:
- Absent express limitations in the by-laws, past practices can circumscribe the president’s otherwise presumptive power to engage in transactions in the ordinary course of business only if (1) the practice “was developed by the corporate actors as a means of curtailing the president’s presumptive power,” or (2) the practice “was established by the corporate actors for the purpose of making clear that the president had no such actual, implied power” to engage in such transactions in the first place.
- Both under Maynard’s and later Bruce’s stewardship as president, the several instances in which board minutes were prepared approving real estate development and leasing transactions did not evidence an intent to limit the president’s powers but, rather, were done “to satisfy Maynard’s fastidious desire to paper transactions after the fact with corporate board minutes” or for the benefit of outside lenders “which demanded [they] be covered by board resolutions complying with the [Business Corporation Law].”
- “In other words,” Justice Fisher explained, “the mere existence of board resolutions supporting the prior leases may as the Appellate Division held create a question of fact whether past practice circumscribed the inherent authority of the president, but they would only carry plaintiff’s burden at trial on the ultimate issue if they were shown to have intended to circumscribe the president’s otherwise inherent authority.”
- Glenn’s inability under the by-laws to call a board meeting is not material because “he made no effort to convene the board and did not learn of his powerlessness to do so until litigation was well underway.” Glenn also made no effort to dissolve the corporation on grounds of deadlock or breach of fiduciary duty. Justice Fisher also cites case precedent holding that the president’s anticipation of board deadlock on a particular matter, and his consequent deliberate failure to call a board meeting, does not limit the president’s otherwise presumptive power to act.
- Justice Fisher draws a sharp distinction between rulings by New York’s highest court in Sterling Industries, Inc. v. Ball, 298 NY 483 (1949), where the court invalidated officer action following a board meeting at which the board did not authorize the specific action as a result of a deadlocked vote, versus Rothman & Schneider v. Beckerman, 2 NY2d 493 (1957), where the court upheld the disputed officer action in the absence of any formal board consideration. Justice Fisher likens the circumstances in Hellman to Rothman and rejects Glenn’s reliance on Sterling.
Justice Fisher lastly revisits and readily disposes of Glenn’s claim of corporate waste, finding that Bruce’s decision to relocate “was reasonable given the economic realities” of the two competing sites, “was made in good faith despite his short-lived plan to compete with Maynards,” and is “protected by the business judgment rule for the reasons stated in the court’s earlier Decision and Order.”
Hellman is a classic example of the turmoil that can and often does result when the founder of a family business fails to design and implement a plan of succession that addresses the predictable personality tensions and conflicts of interest among the second generation manager-owners. A carefully considered, well drafted shareholders agreement may not guarantee perpetual family harmony, but it certainly can reduce substantially the potential for a damaging and expensive courtroom battle.
Update January 3, 2010: In a decision handed down on December 30, 2010 (2010 NY Slip Op 09813), the Appellate Division, Fourth Department, rejected Glenn’s appeal and summarily affirmed Justice Fisher’s ruling discussed in this post.