UP Law F2021 129 Mackin vs.

Nicollet Hotel
Corporation Voting trust agreements are not 1928 Kennedy (District
illegal per se Judge)
SUMMARY
Defendant Nicollet Hotel was to build a new hotel in the state of Minneapolis. To raise funds, it would apply for loan
and sell preferred stocks. The granting of loan and the issuance of license to sell preferred stocks were subject to a
condition that a voting trust agreement would be executed wherein all the common stocks of Nicollet Hotel would be
deposited in three voting trustees who in turn, would manage the hotel company. The voting trust agreement was
executed and the trustees now had the responsibility to fully carry out and perform the terms and conditions in the
trust agreement. Plaintiffs Mackin and Cooper, owners of some of the shares of stock deposited to the trustees, were
claiming that the trustees mismanaged the company and that the trust agreement was void by reason of public policy
– that the beneficial ownership of the shares is in the original stockholders while the voting right is with the trustees.
The Court held that voting trust agreements are not illegal per se. The validity of a trust agreement is dependent upon
the legality of its purpose or object, not the form of the agreement.

FACTS
 Defendant Nicollet Hotel, Incorporated was a Delaware corporation, organized by a group of men interested
in the commercial welfare of Minneapolis for the purpose of adding to the hotel accommodations of that city.
Defendant company was to build a new Nicollet Hotel on a land in which Glen S. Dixson had a leasehold right.
In exchange of Dixson’s leasehold right, Nicollet Hotel would give him 2,500 shares of its common stock.

 The hotel to be built would cost about $3,000,000. Such amount was planned to be raised by selling
$1,800,000 of first mortgage bonds and $1,250,000 worth of preferred stock.

 PROCURING OF LOAN: In February 1923, Nicollet Hotel applied for a loan of $1,800,000 to be secured by first
mortgage bonds and a trust deed covering the hotel property with three trust companies from Minneapolis:
the Minnesota Loan & Trust Company, the Minneapolis Trust Company, and the Wells-Dickey Trust Company.
This loan application would be accepted on the condition that “the borrower [Nicollet Hotel] agrees that a
voting trust agreement covering all of the common stock of the borrower will be executed…”

 ISSUANCE OF PREFERRED STOCKS: Also in February 1923, Nicollet Hotel applied with the State Securities
Commission of Minnesota for a license to sell its preferred stock. This application contained a condition that
“the common stock of the corporation is to be trusted with three trustees for a period of 10 years…” In
the same month, the commission issued to Nicollet Hotel the license to sell its preferred stocks.

 EXECUTION OF THE VOTING TRUST AGREEMENT: In compliance with the conditions set in the loan
application and the issuance of license to sell the preferred stocks, in March 1923, a voting trust agreement
was made by Nicollet Hotel with A.E. Zonne, Glen S. Dixson, and Joseph Chapman as voting trustees. A portion
of the recitals of the said voting trust agreement states that:
“…the common stock should be assigned to Zonne, Dixson, and Chapman as trustees; that
they should issue trustees’ certificates therefor, which might be sold on condition that
the purchasers or assignees accepted the provisions of the voting trust.”

The trust agreement provided that the trust would continue for ten years or until all outstanding preferred
stocks shall be retired.

The common stock owners deposited their shares upon the execution of the trust agreement: Dixson – 2,500
shares, Haglin & Sons Company – 1,600 shares, and Holabird & Roach – 400 shares. That constituted all the
common stocks of Nicollet Hotel. On the other hand, the preferred stocks worth $1,250,000 were also sold
and the $1.8M loan was also granted by the Minnesota Loan & Trust Company.

Article IV of the trust deed states that the three voting trustees (Zonne, Dixson, and Chapman) would cause
said voting trusting agreement to be fully carried out and performed, in accordance with the terms thereof.

 Plaintiff Mackin and Cooper were the owners of trust certificates representing 80 and 1,520 common
shares, respectively, which were held by the defendant trustees (Zonne, Dixson, and Chapman). Their claim
was that the voting trust was void and that the trustees and the directors appointed by the latter have
mismanaged the company and have caused large losses. The plaintiffs also contended that during
stockholder’s meetings, the trustees would exercise the voting rights of the common stock. They also alleged
that they had been denied the right to inspect the books.
 RATIO
[SIDE ISSUE]
What laws would apply in the present case, that of Delaware or that of Minnesota?
None. At the time of the commencement of the action, neither of the two states had statute upon the subject of
voting trust agreements in corporate management.

It is to be noted that the defendant Nicollet Hotel was organized under the laws of Delaware, while its principal
business is conducted and the transactions challenged by plaintiffs Mackin and Cooper took place in the state of
Minnesota. The determination of which state law would apply would matter if it were alleged at the time of the
commencement of action that there was a statute in either of the state on voting trust agreements. In this case,
however, no statute of such nature was found in both states.

The counsel for the plaintiffs Mackin and Cooper alleged that after the commencement of the present action, the state
of Delawate passed a law authorizing voting trust agreements. The counsel was suggesting that prior to Delaware’s
passing of such law, the established rule of that state was that the voting trust agreements were illegal.

The Court would not accept this reasoning because legislation must be considered as addressed to the future and not
to the past.

[SIDE ISSUE]
W/N the trust agreement was violative of the Minnesota statute in relation to a stockholder voting his stock
by proxy
NO.

Section 7461 of the Minnesota General Statutes 1923 provides:

"Unless otherwise provided in the certificate or by-laws, at every meeting each stockholder or
member, resident or non-resident, shall be entitled to one vote in person, or by proxy
made within one year or other times specially limited by law, for each share or other lawful
unit of representation held by him in his individual, corporate, or representative capacity."

However, Nicollet Hotel’s by-laws provides that:

"At each meeting of the stockholders every stockholder having the right to vote shall be entitled
to vote in person, or by proxy appointed by an instrument in writing subscribed by such
stockholder and bearing a date not more than three years prior to said meeting, unless said
instrument provides for a longer period."

The by-laws of Nicollet Hotel provides for a longer period of appointment of proxy which is allowed in the
Minnesota statute.

[MAIN ISSUE]
W/N the trust agreement is valid
YES.

[It is the contention of the trust certificate holders that this voting trust agreement, in reliance upon which the preferred
stock and bonds of this corporation were sold, is void, as against public policy, because it separates the voting power from
the owners of the beneficial interest in the common stock, takes away from the common stock holders their duties and
responsibilities to the corporation, and puts them in the hands of men who may or may not have a financial interest in the
corporation.]

The Court held that voting trust agreements are not illegal per se. It is saying that the validity of a trust agreement is
dependent upon the legality of its purpose or object, not the form of the agreement. The Court also noted that where
the trust is voluntarily created as a condition precedent to a loan to protect those who have furnished the money that
has put the life into a corporation, the courts should not seek further for a consideration.

The Court stated that the following circumstances would generally render a trust agreement valid and binding:
1. If based upon a sufficient consideration;
2. If they do not contravene public policy or a positive prohibitory statute; and
3. If they do not sound in fraud or wrong against the stockholders.
In the present case, there is no want of consideration or fraud alleged or shown. The voting power in the three
trustees is coupled with an interest because one of the trustees (Dixson) is a substantial owner of common stock of
the corporation, and all are charged with the duty of protecting and conserving the property for the benefit of those
who became purchasers of preferred stock and bonds upon the strength of the trust agreement itself. And the
purpose of the agreement was and is legitimate and wholesome. The plan was originally conceived as a matter of civic
pride by enterprising citizens of Minneapolis to have an outstanding hostelry commensurate with the generally
progressive character of the city.

Moreover, it would be a manifest injustice to the large number of holders of bonds and preferred stocks to adjudge
and hold illegal a trust agreement upon the strength of which they had invested their money in the enterprise.

FALLO

For the reasons stated, the decree of the trial court should be and is affirmed.

NOTES:

 Voting trust agreement - A contractual agreement in which shareholders with voting rights transfer their
shares to a trustee, in return for a voting trust certificate. This gives the voting trustees temporary control of
the corporation.

The purpose of such arrangement is to control the voting of the shares and to empower the trustee to vote the
shares. The original stockholder retains a beneficial interest in the stock, and usually the trust agreement
requires all dividends and distributions to be paid to the equitable owners.