Matter of Elias v. Serota, 24 N.Y.2d 68 (1969)
When a specific corporate by-law addresses filling board vacancies, it takes precedence over general by-laws requiring a supermajority for transacting business, especially when applying the general rule would paralyze corporate functions.
Summary
This case concerns a dispute over the validity of an election to fill a vacancy on a corporate board of directors. The petitioner challenged the election, arguing that a supermajority vote was required under the corporation’s general by-laws. The Court of Appeals held that a specific by-law addressing the filling of vacancies controlled over the general quorum and voting requirements. The Court reasoned that applying the general rules would lead to corporate paralysis, and the specific by-law was designed to ensure the corporation’s continued functioning. The court emphasized that the specific by-law complemented statutory provisions regarding filling vacancies, and should prevail over the general by-laws.
Facts
The corporation had five authorized directors. Two directors resigned, leaving three directors in office: the petitioner and the respondents, Moskowitz and Barrakette. A meeting was held where respondents Moskowitz and Barrakette voted to elect respondent Brody to fill one of the vacant positions. The petitioner objected, arguing that the election required a unanimous vote of the existing three directors.
Procedural History
The petitioner sued under Section 619 of the Business Corporation Law to invalidate the election. Special Term found the election valid and denied the application. The Appellate Division affirmed. The Court of Appeals granted leave to appeal.
Issue(s)
Whether a specific corporate by-law allowing “the directors in office” to fill vacancies on the board takes precedence over general by-laws requiring a 75% quorum and 75% vote for transacting business when those general rules would prevent the filling of vacancies.
Holding
Yes, because the specific by-law addressing the filling of vacancies is designed to ensure the continued functioning of the corporation and complements statutory provisions regarding filling vacancies, and thus prevails over general by-laws that, if applied, would paralyze the corporation.
Court’s Reasoning
The Court emphasized the specific language of by-law 14, which granted “the directors in office” the power to choose successors to fill vacancies. This by-law was authorized by Business Corporation Law § 705(a), which allows directors to fill vacancies even if less than a quorum exists, unless the certificate of incorporation or by-laws provide otherwise. The Court distinguished this specific provision from the general quorum and voting requirements in the certificate of incorporation and by-laws, which required 75% of the directors for any business transaction. The Court reasoned that applying the general rules would make it impossible to fill vacancies when the board was reduced to three members, as 75% of the original five directors would be four, an unattainable number. The Court stated: “Rather, it seems to us, the vitality of the corporation was to be preserved and the paralysis of its functions and its mandatory dissolution were to be avoided by the specific, exclusive and practical procedure enacted as by-law 14, complementing, as it does, section 705 (subd. [a]) of the Business Corporation Law. By-laws 20 and 21 apply to the company’s ‘business’, in general; by-law 14 to its special and vital function of succession.” Therefore, the specific by-law regarding filling vacancies controlled over the general quorum and voting requirements, ensuring the corporation’s continued operation.