Brief Fact Summary.
Heller (Plaintiff) and six other stockholders in American Tobacco Company claimed that the bonuses top executives officers were paid were not related to the services for which they were given.
Synopsis of Rule of Law.
Majority stockholders have no power to give away corporate property against the protest of the minority if a bonus payment has no relation to the value of services for which it is given, whereby, it is a gift in part.
If the officers, acting as they do in a fiduciary capacity, fix exorbitant and unreasonable salaries so as to absorb earnings which should go in dividends or remain with the company as surplus, they are not exercising the fidelity which the law requires and a court of equity will give relief at the suit of a minority stockholder by compelling restoration.View Full Point of Law
Heller (Plaintiff) and six other stockholders out of the 62,000 holding shares in the American Tobacco Company brought a derivative action challenging the high bonuses top officers were paid under a concededly legal bylaw passed in 1912.Â The company president alone received salary and bonus payments topping $1,000,000 annually in 1930 and 1931 and averaged $400,000 per year from 1929 to 1939.Â Plaintiff argued that the payments were not related to the value of the services for which they were given and therefore, in reality, they were a gift in part and that the majority stockholders committed waste and spoliation in giving away corporate property against the minority’s protest.Â In a prior suit, Rogers v. Hill, 289 U.S. 582, 88 A.L.R. 744 (1933), in which the same bylaw was challenged, a compromise judgment was entered into thereby reducing the bonus payments.Â However, Plaintiff argued that the judgment should be set aside because Rogers, the successful plaintiff received a $525,000 fee for his efforts, the fee in effect being a bribe.
If a bonus payment has no relation to the value of services for which it is given, is it in reality a gift in part?
(Collins, J.)Â Yes.Â Majority stockholders have no power to give away corporate property against the protest of the minority if a bonus payment has no relation to the value of services for which it is given, whereby, it is a gift in part.Â In this case, Heller (Plaintiff) offered no testimony in support of his charge of waste.Â He argued that the figures spoke for themselves.Â Without any evidence, the court is left with no guide for reducing the payments.Â â€œTo act out of whimsy or caprice or arbitrariness would be more than inexactâ€”it would be the precise antithesis of justice; it would be a farce.â€Â It was not clear by which standard the payments should be measured.Â Society does not always fully compensate merit while it often rewards commercial mediocrity.Â While the court does not necessarily approve the large payments, it has no valid ground for disapproving what this great majority of stockholders have approved.
In a general comment on the nature of the object of the type of suit brought by Heller (Plaintiff), the court noted: â€œCourts are ill-equipped to solve or even grapple with these entangled economic problems.Â Indeed, their solution is not within judicial province.Â Courts are concerned that corporations be honestly and fairly operated by its [sic] directors, with the observance of the formal requirements of the law; but what is reasonable compensation for its officers is primarily for its stockholders to decide.Â This does not mean that fiduciaries are to commit waste, or misuse or abuse trust property, with impunity.Â A just case will find the courts at guard and implemented to grant redress.Â But the stockholder must project a less amorphous plaint than is here presented.â€