Brief Fact Summary. This is a derivative action brought by 7 out of a total of 62,000 stockholders, (Plaintiffs) holding under 1000 out of a total of over 5 million shares of the American Tobacco Company seeking recovery for the corporation from its directors, (Defendants) for alleged improper payments to certain of its officers.
Synopsis of Rule of Law. The duty of the director executives participating in the bonus seems plain â€“ they should be the first to consider unselfishly whether under all the circumstances their bonus allowances are fair and reasonable.
A by-law of the American Tobacco Company which was virtually unanimously approved by the stockholders in 1912, created a bonus structure for the company’s president and vice-presidents. The bonus structure distributed 10 percent of the profits over the earnings to the president and each vice president in addition to their salaries. The bonuses were quite obese aggregating to $11,672,920.27 in addition to the $ 3,784,999.69 salaries. The stockholders who thought the compensation grandiose, offered a resolution to restrict the bonuses to a maximum of $100,000. This resolution was defeated 2,193,418 to 74,571. Plaintiffs maintain these large bonuses bore no relation to the value of the services for which they were given and therefore they were a gift and that the majority stockholders committed waste and spoliation in giving away corporate property against the protest of the minority.
Issue. Whether and to what extent payments to the individual defendants under the bylaws constitute a misuse and waste of the money of the corporation.
Held. No. The payments to the individual defendants do not constitute a waste and misuse of the corporation’s money.
Discussion. Points of Law - for Law School Success
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
Plaintiffs proffered no testimony in support of their charge of waste. It cannot be said by any reliable standard that these bonuses are waste or spoliation. There is no valid ground for disapproving what a great majority of stockholders have approved. The stockholders who built and are responsible for the bonuses must be responsible for creating a ceiling for these bonuses if they so desire.