Monthly Archives: March 2013

This guest post was written by Craig Messing, an attorney from New York, who contacted us with this excellent idea for a post.  If you are a legal professional (e.g. an attorney, judge, or law professor) or a comic book professional (e.g. an author, editor, or illustrator) and  you have an idea for a post that would be a good fit for Law and the Multiverse, feel free to contact us!  

Introduction

“Future Stock“ is the 21st episode of the third season of Futurama.  While somewhat outside this blog’s normal purview of comic-related media (even if there are Futurama comics), the episode touches on some unique, obscure, and even speculative issues of corporate governance and probate law.  As most of the series takes place in “New New York,” we will assume New York law applies, albeit 1000 years into the future.  It should go without saying, but spoilers to follow.

I. Background

In the episode, a shareholder meeting of Planet Express leads to an “80’s guy” (referred to throughout the episode only as “That Guy”) being named chairman of the corporation.  This eventually leads to That Guy trying to sell the company and gut it for profit, and a shareholder vote over the sale.  That Guy wins the shareholder vote, but then dies (fairly gruesomely) before the transaction is concluded.  Control of his shares passes to Fry, as vice-chairman of Planet Express, who votes down the sale.  (This ignores the fact that the vote had already been cast and approved by both companies, and thus should be binding, even after That Guy’s death.)  The issues here are multiple, but we will look at two.  First, we will examine what recourse the other shareholders of Planet Express might have had to block the sale, and the likelihood of success of those efforts.  Second, we will look at whether control of That Guy’s shares should have passed to Fry, and the potential consequences if they had not.

II. Oppressed Shareholders

In the episode, That Guy purchases 51 percent of the voting rights from Zoidberg (“The shares were worthless, and he kept asking for toilet paper!”), and imposes his will on the other shareholders, all of whom vote against the sale.  The remaining shareholders are outraged, but are powerless to affect the situation.  At face value, this would seem to be textbook shareholder oppression, in which the majority shareholder(s) imposes his will, to the detriment of the other minority shareholders.  Oppression can be especially prevalent in close corporations, where there are only a limited number of shareholders – as appears to be the case with Planet Express.  (Note: after the sale is completed, all outstanding shares of Planet Express are said to be purchased “at the current market price.”  But as a close corporation, there would not be a “market” price.  This is likely an oversight of convenience by the writers, however.) 

Oppressed minority shareholders may sue to prevent the oppressive actions of majority shareholder(s).  However, New York courts have defined “oppression” as “conduct that substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise,” and held that oppression exists “only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture.”  In re Matter of Kemp & Beatley, Inc., 473 N.E.2d 1173, 1179 (N.Y. 1984) (internal quotations omitted).   In other words, shareholder oppression will be found only if a “reasonable person” in the shareholders’ situation would be unhappy.

In this case, a “reasonable” Planet Express shareholder would likely be ecstatic at the results of the sale.  In the initial shareholder meeting, where That Guy is named chairman of Planet Express, the company’s dismal financial state is firmly established: a pie chart is shown, illustrating the company’s revenues; a minority of the pie accounts for revenue from business operations, while the majority is made up by “an eight-dollar bank error in our favor.”  After the vote on the sale is finalized, however, the market (“purchase”) price of Planet Express is given as $107.  It would be very difficult to argue that a “reasonable” minority shareholder would disapprove of a transaction that so drastically increased shareholder value, and thus the oppression argument would likely fail.

III. Descendability, Intestacy, and Escheat

Almost immediately after the vote approving the sale, That Guy dies, Fry takes control of his voting shares as vice-chairman, and negates the sale.  However, the corporation could only assert control of these shares if there was some sort of repurchase agreement with Planet Express, under which it could buy back the shares upon That Guy’s death.  Further, even if such an agreement did exist, That Guy’s shares would be either retired or turned into treasury stock; in either case, the shares would no longer have any voting rights, and if the sale of Planet Express had not already been finalized, the minority shareholder votes against the deal would carry the day without Fry’s last-minute heroics.  However, there is no mention of such an agreement in the episode, and thus there is no reason why That Guy’s shares couldn’t pass under his will, or failing that, under the law of intestacy … except that, again, there is no mention of That Guy having a will, nor any heirs, – nor is there any indication of That Guy having a family in the 1980s that might have propagated and survived into the year 3000.

More importantly, New York law might not allow for such distant relations to inherit through intestacy, even if they did exist.  Article 4 of the New York Estates, Powers and Trusts Law (EPT) governs intestate estates, and section 4-1.1 of the EPT enumerates the various classes of individuals who can take under New York law, allowing only for the decedent’s spouse, issue, parents, “issue of parents” (i.e. brothers and sisters of the decedent), grandparents (as well as “the issue of grandparents,” i.e. aunts and uncles), and “great-grandchildren of grandparents” (i.e. nieces and nephews) to take.  There is no provision for an individual outside of that closed list to take under intestacy, and as such, even if an heir does exist, it would be a very distant relation, well outside the purview of the EPT.  Apparently, New York has yet to account for time-travel and cryogenics (both of which appear to be fairly common in the future) in its probate code.  Quite the oversight.

Presuming that New New York law has not yet corrected this oversight, then That Guy’s apparent lack of both a will and eligible intestate heirs would cause the doctrine of escheat to come into effect.  Under escheat, a state acts as a sort of heir of last resort, and may take property if no other heir can be ascertained, or if property is abandoned.  See, e.g. N.Y. ABP § 102 (“It is hereby declared to be the policy of the state … to utilize escheated lands and unclaimed property for the benefit of all the people of the state, and this chapter shall be liberally construed to accomplish such purpose”).  It is not unheard of for a state to take corporate stock under escheat; in fact, such an action was expressly upheld in Standard Oil Co. v. New Jersey, 341 U.S. 428 (1951).

Escheat in New York is governed by the New York Abandoned Property Law; escheat of securities is specifically addressed in Article 5.  However, for a security to be “abandoned” – which was an implicit requirement under the Standard Oil case –  payments due to the security holder have been unclaimed by, and no written communication received from, the rightful holder, for a period of three years.  N.Y. ABP § 501(2)(a).  Only after the security has been found to be abandoned is it to be delivered to the state.  N.Y. ABP § 502.  Therefore, for purposes of the sale of Planet Express, it would seem that the 51 percent shares owned by That Guy would be in limbo for a three year period, while eligible heirs were searched for (likely in vain).  During this time, as they could not be voted, the minority shareholders would have been able to defeat the merger of their own accord.

IV. Escheat of a Majority Stake, and the Public Policy of the Future

Unfortunately, even THIS is not the end of the matter, because if escheat is exercised in this case, it would effectively transfer a majority interest in a private corporation to the state of New New York, as That Guy controlled 51 percent of Planet Express’s stock.  While seizure and nationalization of private businesses by the federal government is not unheard of, seizure is usually predicated on great turmoil, such as a World War – though even war is not always sufficient cause for nationalization, see Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579 (1952), which held that President Truman’s attempted nationalization of the steel industry during the Korean War, by executive order, was authorized neither by the Constitution, nor by Congress, and was thus illegal – but no such circumstance is present here.  There is precedent of the nationalization of a private business due to severe financial hardship (most recently General Motors), and it is undisputed that there were severe hardships facing Planet Express; however, it would be very difficult to argue (despite the many dealings the company has had with the President of Earth), that Planet Express was such a vital cog in the economy as compared with GM.

For fairly obvious reasons – it is rare for any individual to die both intestate and without any heirs to take under intestacy, and it is borderline inconceivable that an individual who is intellectually capable of obtaining majority control of a company would also die intestate – there is no precedent for a state obtaining a majority share of a company via escheat.  As such, any analysis here will be speculative.  However, I believe that the guidance of the Supreme Court in Youngstown Sheet & Tube, and Standard Oil v. New Jersey, allows us a fairly clear indication as to the public policy rationale that might guide a New New York court in rendering a decision in this matter.  Youngstown provides that nationalization (or, in a more general sense, public takeover of a private business) can occur only when expressly provided for, either by the Constitution or under the law, and Standard Oil allows for corporate stock to be taken by the state under escheat, but provides only for the delivery of the securities, and for the payment of moneys due the holder of the securities.  Similarly, Article 5 of the ABP appears more concerned with obtaining payments due under the securities than with voting rights, and in fact no mention is made in the law of the state’s exercise of voting rights.  Moreover, much like the federal government under Youngstown, it would appear that a state can only take control of a private company under specific conditions provided for under the law, such as a state banking regulator taking control of a struggling bank.  Therefore, I believe that New New York would be able to take possession of That Guy’s 51 percent stake in Planet Express under escheat, but only for purposes of taking any dividends due (or, in the event the sale did go through, its share of the proceeds from the sale).  However, as no law expressly allows the exercise of voting control on securities taken under escheat, an attempt to do so would be illegal.

V. Conclusion

While “Future Stock” does not address the option of minority shareholders to enjoin a majority action, the episode does address the reasonableness standard fairly well.  When the minority shareholders realize how much their shares have appreciated due to the impending sale, each of them (except Fry) immediately voice happiness over their being overruled, thus acting “reasonably” and defeating any notion of an oppression suit.  The episode handles the issue of That Guy’s estate (namely his 51 percent stake in Planet Express) less well.  The episode ignores both the securities and estates law on point, instead assuming that control of the shares would pass from chairman to vice-chairman.  Even if the shares were repurchased by Planet Express, regardless of how the corporation chose to treat them, they would not be voting shares unless and until they were re-issued by the corporation.  And if they passed into That Guy’s estate … as discussed at length above, that opens up a considerable can of worms, to say the least.

That said, while this particular episode might not have handled the law exceptionally well, there are at least two instances from Futurama’s current run where the show has addressed novel legal implications of its futuristic setting, in a serious, thought-provoking manner.  And besides, Futurama is a spectacular show.  You should watch it.  The hypnotoad commands you.  All glory to the hypnotoad.