Goldman v. Jameson

Decision Date22 March 1973
PartiesDavid W. GOLDMAN v. W. G. JAMESON et al. SC 67.
CourtAlabama Supreme Court

Markstein & Morris, and Daniel H. Markstein III, Birmingham, for appellant.

Lanier, Shaver & Herring and John R. Wynn, Huntsville, for appellees.

McCALL, Justice.

This is a stockholders' derivative suit, brought in equity by David W. Goldman, a minority shareholder in and former director of Fabric World, Inc., a corporation, on behalf of himself and the corporation against its remaining six corporate directors. The corporation, which is a rapidly expanding fabric goods retail corporate chain, is also made a party respondent. After the complainant rested his case, the respondents offered no evidence, and submitted upon their amended answer to the bill of complaint and their oral motion to exclude the evidence.

The respondents' oral motion, found in the record, was to exclude the evidence on the grounds (1) that the evidence adduced has been of no sufficient probative force to make a prima facie case, and (2) the absence of any proof that the complainant made demand upon the directors of respondent Fabric World, Inc., that they institute suit on its behalf against the individual respondents. After the motion to exclude was made the court expressed its concern as to whether or not a prima facie case had been made out by the complainant against the respondents and then took the motion under advisement. The chancellor made the further remark that in case he overruled the motion to exclude, he would permit additional testimony on the respondents' behalf and allow complainant the right of rebuttal, thus clearly demonstrating that the submission was grounded on the motion to exclude and the motion to dismiss the case.

After noting that the cause had been submitted on the respondents' 'Motion To Exclude Testimony' and 'Motion To Dismiss Bill of Complaint,' made orally in open court, the court decreed that the law and the evidence in the cause rendered the bill of complaint to be without merit and subject to an order of dismissal. Whereupon, the court dismissed the bill of complaint. From this final decree dismissing the suit the appeal is brought by Goldman.

Substantially, the bill of complaint avers that the complainant Goldman was wrongfully removed from the board of directors of Fabric World, Inc.; that fees paid the directors were in fact disguised dividends based on their stock investments rather than consideration for services rendered; that the individual respondents caused Fabric World, Inc., to pay its officers, respondents Jameson, Edmonsond and McMahan, compensation so excessive as to bear no reasonable relation to the value of their services; that the respondents have wasted corporate assets by leasing and providing for the personal use of its said officers luxury automobiles, hospital insurance, and other fringe benefits; that respondent Jameson has furnished stockholders a balance sheet showing liability for accrued income tax that bears no reasonable relation to taxable income reported by it; that there was a significant discrepancy between the corporate inventory reported on the tax return and that reported to stockholders; that the dissipation of corporate assets in the unprofitable operation of the Greensboro, North Carolina store should be stopped; that the individual respondents have wrongfully caused Fabric World, Inc., to purchase excessive amounts of insurance on the lives of the respondent officers of the corporation; and that the individual respondents have wrongfully caused the corporation to purchase fixtures through the subterfuge of selling them to a lease-back corporation all to the detriment of the corporation.

The primary aspect of the prayer to the bill is that the court ascertain what would have been reasonable compensation and fringe benefits to its officer-directors Jameson, Edmonsond and McMahan for the duration of their employment, and that judgment in favor of Fabric World, Inc., be rendered against said officer-directors for any amount in excess of reasonable compensation.

The contention of the complainant Goldman, the minority stockholder, is that the officer-directors Jameson, Edmonsond and McMahan acting for the board of directors, fixed their own salaries and compensation, in amounts so excessive as to bear no reasonable relation to the value of the services performed by any of them for the corporation. The complainant also contends that the same three officers authorized payment of disguised dividends in the form of director's fees to the respondents, Robins and Pope, all of which were excessive and to the exclusion of dividends to the complainant. These alleged wrongs of management, shareholder Goldman insists, are being carried on at the expense of the minority stockholders in depriving them of dividends, though the complainant was the only stockholder who complained.

The evidence tended to show that the incorporation of Fabric World, Inc., was in October, 1968. It began business in late November of that year. About the end of September or early October, 1968, prior to incorporation, all of the contemplated stockholders, who were also to become directors of Fabric World, Inc., including the complainant Goldman, agreed that whatever Jameson and Edmonsond decided the business could pay, as their officer salaries to start it out, would be agreeable to all the shareholders. Jameson testified that he and Edmonsond with approval of all stockholders, set their salaries based on the business done by the corporation. So, it was left entirely in the discretion of these two officer-directors as to what their salaries as corporate officers were to be. On this authority Jameson and Edmonsond fixed their salaries at $16,133.37, each for the period beginning in November of 1968 through December 3, 1969. In addition they fixed the fees of directors other than corporate officers who received no director fees, first at $150 per meeting, and later at $500 per meeting for Goldman and Robin, and $1000 for Pope who owned twice as much stock as the others and because his knowledge was more valuable to the corporation. Goldman expressed no objection so long as he remained a director. For 1970 and 1971, these same two officer-directors again fixed their compensation, pursuant to authorization by the stockholders given at a meeting held in the fall of 1969, which directors Goldman, Pope, Robins, Edmonsond and Jameson attended. The specific authorization was to pay whatever was fair to the corporation as their salaries. For these two years they fixed their salaries by separately written employment contracts made by themselves with the corporation. By the terms of these contracts, if total sales volume exceeded 2.5 million, Jameson was to be compensated at the rate of $5,000 per month for a total annual salary of $60,000 and Edmonsond at the rate of $3,600 per month, for a total annual salary of $43,000. In 1970, salary drawn down constituted one part of the total annual compensation, while the additional amounts to make up the total $60,000 and $43,000, respectively, were called bonuses. No such bonuses were paid for 1971 to Jameson and Edmonsond. These contracts also provided that should the total volume of sales exceed five million dollars for 1971, Jameson would be increased to $6,000 per month or $72,000 for 1972, and Edmonsond to $4,200 per month, for a total of $50,400 for 1972. The contracts provided they were revocable only on the vote of the majority of stockholders. Neither the contracts nor the salaries paid thereon were expressly ratified by the directors. There was some question as to whether any one else even knew of their existence.

The respondent, Denton O. McMahan, became a stockholder in Fabric World, Inc., early in 1971 by exchanging his shares in Fabric World of Kentucky for shares in the former corporation. In March, 1971, Jameson and Edmonsond elected McMahan secretary and vice-president, and named him a director of Fabric World, Inc. The three of them, Jameson, Edmonsond and McMahan, together fixed his salary and bonuses, according to McMahan's testimony. For 1971, he received $2,000 a month, or an annual salary of $24,000 with provision for additional compensation of $10,000 payable March 10, 1972, should total sales volume exceed five million dollars in 1971. For 1972, his salary was fixed at $3,000 per month, or $36,000, per year, should total sales volume exceed five million dollars for the year. As will be observed, the compensation of these three officers, Jameson, Edmonsond and McMahan, was based on total volume of sales alone, and while the amount of total sales continued to rise annually--$660,784.89 in 1969, $2,641,377 in 1970, $5,000,000 in 1971, and an estimated $10,000,000 in 1972, the net income for tax purposes was relatively small--in 1969, it was $19,893.77; for 1970, $4,188; for 1971, approximately $26,000. During the same years, profits for expenditures for the purpose of expansion, as for compensation, increased. In 1970 and 1971, $464,000 was reinvested on capital development. Thus, while the corporation has turned large amounts of its profits back into the business, expanding the number of its retail outlets from one to ten, with still further expansion and increased salaries contemplated, no dividends have been paid to its shareholders.

Jameson and Edmonsond own some eighty percent of the shares of stock in Fabric World, Inc., and exercise full control over management and operation of the corporation, claiming their majority stock ownership as their right to do so. It is quite clear from the evidence that what these two stockholders thought ought to be the rule, became the rule, and the assertion of objection was considered by them as antagonism and ground for removal of Goldman as a director.

It further appears that all other decisions with respect to calling directors' meetings, fixing their fees, travel...

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11 cases
  • Newton v. Hornblower, Inc.
    • United States
    • Kansas Supreme Court
    • 21 Julio 1978
    ...315 A.2d 610 (Del.Ch.1974). The same rule applies to officer-directors who are also the majority stockholders. Goldman v. Jameson, 290 Ala. 160, 275 So.2d 108 (1973); Knepper, supra, § 4.10, at 21 Defendants, having the burden of showing the reasonableness of the salaries and the management......
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    ...Richards v. Henderson, 589 So.2d 709 (Ala.1991); Owens v. National Sec. of Alabama, Inc., 454 So.2d 1387 (Ala.1984); Goldman v. Jameson, 290 Ala. 160, 275 So.2d 108 (1973); Rayborn v. Housing Auth. of Washington County, 276 Ala. 498, 164 So.2d 494 (1964); American Life Ins. Co. v. Powell, 2......
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    ...thereof are shown to have been under the control of the alleged wrongdoers." Thigpen, supra, § 11:8, at 537 (citing Goldman v. Jameson, 290 Ala. 160, 275 So.2d 108 (1973)). Because the evidence, viewed in the light most favorable to Davis, is that Dorsey controlled the corporation entirely ......
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