Case #25

Topic: Interlocking Directors

121 N.E. 378 (1918)

Globe Woolen Co. v. Utica Gas & Electric Co.
1918,224 N.Y. 483
(Solis)

Facts: John Maynard was both president and a director of Globe Woolen Co. (Globe), an
operator of two textile mills. Maynard was also on the board of directors and had been a
chairman of the executive committee of the local electric power company, Utica Gas & Electric
Co. (Utica), though he held no stock in Utica.

Maynard wished to convert the mills from steam power to electric power but was concerned that
the cost of conversion would be too high. An investigation of the power and a written report of its
condition plant were made by Greenidge the general manager of Utica. For his services, though
he was still in Utica’s employ, he was paid by Mr. Maynard.

Greenidge, engaged in negotiations with Maynard that resulted in two contracts to provide
electricity to the mills. The contracts included a guarantee that the monthly cost of electricity
would be at least $300 less than Globe’s prior steam expenses. After Greenidge and Maynard
had agreed to the terms, the contracts were presented to Utica’s board for ratification in
December 1906 and February 1907. Greenidge presented the contracts and vouched for them.
Maynard was silent at the meetings and did not vote on either contract. They were both
approved by the board.

It soon became clear that Greenidge had miscalculated and that the contracts would generate
huge losses for Utica. Globe increased production and power usage significantly, but Utica was
still required to provide cost savings based on prior production levels. Maynard had not warned
Utica of the changes.

Predicting losses up to $300,000 if it held to the terms, Utica gave notice of rescission in
February 1911. Globe sued for specific performance, Utica contended that the contract was
unfair to it and said contract was obtained through the strong influence of Maynard. The trial
court ruled for Utica, finding the contracts unenforceable because they were unfair, oppressive,
and made under the dominating influence of a common director. The appellate court affirmed.
Globe appealed to this court, arguing that since Maynard had abstained from voting on the
contracts, he and Globe were shielded from these claims.

Issue: WON Maynard and Globe are immune from the claims filed against them.

Held: No. By refusing to vote, he shifted the responsibility to his associates, and derived a
profit from their errors. The trustee is free to stand aloof, while others act, if all is equitable
and fair. He cannot rid himself of the duty to warn and to denounce, if there is
improvidence or oppression, either apparent on the surface, or lurking beneath the surface,
but visible to his practised eye. A trustee should not divest himself so readily of his duties. The
great rule of law holds a trustee to the duty of constant and unqualified fidelity.
Maynard’s refusal to vote, gave to the transaction the form and presumption of propriety.
However, a dominating influence may be exerted in other ways than by a vote.

Mr. Maynard exerted influence from the beginning to the end of transactions. In all the stages
of preliminary treaty, he dealt with a subordinate (general manager), who looked up to him
as to a superior (board of director), and was alert to serve his pleasure. There was no
clean-cut delineation in the stages of the negotiation between his conflicting offices and
agencies – as a president of the plaintiff (Globe) and a chairman of the defendant (Utica). No
label identified the request of Mr. Maynard, Globe's president, as something separate from the
advice of Mr. Maynard, Utica’s chairman.

Furthermore, in the ratification of the contract the members of the committee, hearing the
contract for the first time, knew that it had been framed by the chairman (Maynard) of the
meeting. They were assured in his presence that it was just and equitable. Faith in his
loyalty disarmed suspicion.

There was, then, a relation of trust reposed, influence exerted, and superior knowledge on the
one side and legitimate dependence on the other. A trustee may not cling to contracts thus
won, unless their terms are fair and just. There must be candor and equity in the
transaction, and some reasonable proportion between benefits and burdens.

The contracts between Globe and Utica do not survive these tests. The unfairness is startling,
and the consequences have been disastrous. The pledge included in the contract resulted to
Utica supplying Globe with electric current for nothing, and owes, if the contract stands, about
$11,000 for the privilege. These elements of unfairness, Mr. Maynard must have known, if
indeed his knowledge be material. He may have trusted to the superior technical skill of Mr.
Greenidge to compute the comparative cost of steam and electricity. But he cannot have failed
to know that he held a one-sided contract, which left the defendant at his mercy. He was
not blind to the likelihood that in a term of ten years there would be changes in the
business. The swiftness, with which some of the changes followed – e.g. the significant
increase in Globe’s production, permits the inference that they were premeditated.

Court held that the refusal to vote does not nullify an influence and predominance exerted
without a vote. A trustee has a constant duty to seek no harsh advantage to the detriment of his
trust, but rather to protest and renounce if through the blindness of those who treat with him he
gains what is unfair. And because there is evidence that in the making of these contracts, that
duty was ignored, the lower courts made a fitting decision to end them.