Kensington Publishing Corporation, founded in 1974 by the late Walter Zacharius, is the largest independent publisher of mass-market books in the United States. When Zacharius died in 2011 at the age of 87, his obituary in the New York Times described Kensington as “a leading purveyor of bodice-rippers and other romance genres.”
Zacharius left behind his second wife, Suzanne, and two children from his first marriage, Steven and Judith. The three of them are now locked in a legal battle for control of Kensington, with Suzanne, who inherited 59% of the voting shares, pitted against her two stepchildren who own most of the remaining voting shares.
Why the battle for control when Suzanne owns a clear majority of the voting equity? The answer lies in a 2005 voting agreement made by Walter and his two children which effectively gave Steven and Judith the power, following Walter’s death, to vote his shares in any election of Kensington’s directors. The children subsequently have used their board control to frustrate Suzanne’s stated goal, to sell her majority interest in Kensington to a “major publishing house,” and allegedly to withhold distributions as part of a squeeze-out plan.
A voting agreement is pretty much what it sounds like. Section 620(a) of the Business Corporation Law provides:
An agreement between two or more shareholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, determined in accordance with a procedure agreed upon by them.
In its simplest form, a voting agreement such as the ones commonly found in shareholder agreements requires the shareholders of a closely held corporation to vote to elect each other to the board of directors so long as they remain shareholders. Another type of voting agreement, requiring authorization in the certificate of incorporation and governed by subsections (b) through (g) of BCL § 620, allows shareholders to restrict or delegate board authority to manage the corporation.
The 2005 voting agreement among Walter and his two children (read here) is of the simpler variety, that is, while all three are alive it requires their unanimous agreement for the election of directors and, after the first to die, the unanimous agreement of the remaining two. It also includes a provision making the voting agreement binding upon anyone who acquires the voting shares of any of the three.
In July 2012, after her late husband’s shares were distributed to her, Suzanne filed suit in Manhattan Supreme Court against Kensington and her two stepchildren, one of whom — Steven — has served as Kensington’s President and CEO since 2005. The amended complaint (read here) mounts a multi-pronged attack on the voting agreement in an attempt to have it declared void on the following grounds summarized in the complaint’s introductory section:
(1) Walter did not execute the Purported Voting Agreement;
(2) if the Court finds that Walter did execute the Purported Voting Agreement, the Purported Voting Agreement is null and void for lack of consideration;
(3) if the Court finds that the Purported Voting Agreement is not null and void for lack of consideration, it is null and void as a result of the Individual Defendants’ material breach of the Purported Voting Agreement; or
(4) if the Court finds that the Purported Voting Agreement is not null and void as a result of its material breach by the Individual Defendants, it has nevertheless been terminated as set forth by the express terms of the Purported Voting Agreement, the Company By-laws, and/or New York law.
Further, if the Court finds that the Purported Voting Agreement has not been terminated and is binding on the Plaintiff, Plaintiff seeks to have this Court declare that the Purported Voting Agreement will not be binding on any person to whom Plaintiff transfers the shares of Class A Voting stock.
The defendants filed a pre-answer motion defending the voting agreement and seeking dismissal of the amended complaint primarily for failure to state a valid claim for relief. Read here the defendants’ opening memorandum of law in support of their motion and here the plaintiff’s memorandum of law in opposition to the motion. The parties’ memoranda make little effort to hide the bad blood between Suzanne and her stepchildren.
Earlier this month, Manhattan Commercial Division Justice Eileen Bransten issued a ruling in Zacharius v. Kensington Publishing Corp., 2014 NY Slip Op 50011(U) (Sup Ct NY County Jan. 6, 2014), granting the defendants’ dismissal motion as to all claims save Suzanne’s claim challenging the genuineness of Walter’s signature on the voting agreement as well as the authenticity of the entire voting agreement. As to that claim, Justice Bransten held adequate for pleading purposes the complaint’s allegations that Walter was not physically present to sign the document on the date indicated; that the voting agreement has cross-references to non-existent section numbers; and that the signature block “is isolated on the final page of the document, while there was ample space to fit the signature block on the preceding page.”
Justice Bransten rejected Suzanne’s claim that the voting agreement fails for lack of consideration, finding that the agreement’s recital of consideration based on the parties’ “mutual promises” was adequate and that allowing Walter “to execute his estate plan as he saw fit,” by ensuring that upon his death company management remained with Steven and Judith, “certainly serves as ‘sufficient’ consideration.”
Justice Bransten also rejected Suzanne’s several arguments in support of her claims that the voting agreement, even if validly executed for adequate consideration, had been terminated due to Walter’s subsequent lifetime transfer of his shares into a trust for Suzanne’s benefit; due to the voting agreement’s supposed conflict with the company’s by-laws; and due to Steven’s and Judith’s alleged breach of the voting agreement by entering into a voting trust agreement that gave Steven the power to vote Judith’s shares.
Justice Bransten also dismissed Suzanne’s derivative claim against Steven and Judith alleging various financial and management abuses. Among other shortcomings, the complaint failed to identify or even allege the number of the Kensington directors other than Steven and Judith. The court’s ruling finds that Suzanne failed to plead demand futility with the required particularity, and that the complaint
does not show the requisite ‘domination and control’ by Steven or Judith Zacharius, such that the board could not have exercised its business judgment and put the interests of Kensington before that of Steven and Judith.
In its last major decision on the subject, in Ronnen v. Ajax Electric Motor Corp., 88 NY2d 582 (1996), New York’s highest court enforced a voting agreement in a family-owned corporation, the recited purpose of which was “to provide for continuity in the control and management of [the company].” In Ronnen, as in Zacharius, a bitter legal battle for board control took place between surviving family members following the death of the company’s founding owner. Unlike in Ronnen, there appears to be no shareholders’ agreement, binding upon all the Zacharius family members who own shares in Kensington, containing a buy-sell mechanism designed to provide liquidity at fair value while maintaining family ownership of the enterprise.
The absence of a buy-sell mechanism for Suzanne’s shares was bound to create tension with the severance of voting rights from otherwise fully-alienable shares. In this respect, Zacharius tells a cautionary tale of the damage to the family fabric that can occur when the founder sets in motion a succession plan that has within it the seeds of dissension fertilized by foreseeable divergence of shareholder interests.
Update September 9, 2015: Suzanne Zacharius’s case suffered a non-fatal setback in a decision by Justice Bransten dated September 1, 2015 (read here) partially granting the defendants’ motion for spoliation sanctions based on Suzanne’s admitted deletion of thousands of emails from her Yahoo account notwithstanding having been served with a litigation hold demand. Justice Bransten ordered Suzanne to pay certain expenses and legal fees incurred by defendants in pursuing the spoliation claim, but denied their request to dismiss Suzanne’s remaining claim to invalidate the voting agreement.
Update December 21, 2018: Earlier this month, the Appellate Division affirmed a sanctions award over $100,000 against Ms. Zacharius and also affirmed Justice Bransten’s separate order denying her motion to amend her complaint to add new claims challenging the validity of the voting agreement (read here). The latter ruling appears to clear the way for a trial of the sole remaining claim based on Walter’s alleged non-execution of the voting agreement subject, however, to the defendants’ summary judgment motion which remains undecided as of this date.