Miller v. Magline, Inc.

• Decision Date: 20 June 1977
• Docket Number: Docket No. 25812
• Citation: 256 N.W.2d 761,76 Mich.App. 284
• Parties: Raymond V. MILLER and John R. Thorpe, Plaintiffs-Appellees-Cross Appellants, v. MAGLINE, INC., a Michigan Corp., Defendant-Appellant-Cross Appellee, and Stanley See, Don C. Law, George Monroe, Ramond Graves, Carl F. Schilling and Carl N. Mortenson, Defendants. 76 Mich.App. 284, 256 N.W.2d 761
• Court: Court of Appeal of Michigan — District of US

Page 761

256 N.W.2d 761

Raymond V. MILLER and John R. Thorpe Plaintiffs-Appellees-Cross Appellants, v. MAGLINE, INC., a Michigan Corp., Defendant-Appellant-Cross Appellee and Stanley See, Don C. Law, George Monroe, Ramond Graves, Carl F. Schilling and Carl N. Mortenson, Defendants.

Docket No. 25812.

76 Mich.App. 284, 256 N.W.2d 761

Court of Appeals of Michigan.

June 20, 1977.

Released for Publication Aug. 18, 1977.

[76 MICHAPP 288] Law, Weathers, Richardson & Dutcher by Niel A. Weathers and William F. Hunting, Jr., Grand Rapids, for defendant-appellant-cross appellee.

Lynch, Gallagher & Lynch by Byron P. Gallagher, Mount Pleasant, Milton Y. Zussman, Southfield, for Miller & Thorpe.

Kenneth E. Ralph, Standish, for Graves.

Douglas W. Hillman, Grand Rapids, for defendants.

Before DANHOF, C. J., and BASHARA and MAHER, JJ.

DANHOF, Chief Judge.

On December 27, 1967, plaintiffs, minority shareholders, brought this action to compel the declaration and payment of dividends and to recover allegedly excessive compensation paid to named corporate officers. Trial was completed on April 29, 1970 and, in an opinion dated June 23, 1973, the chancellor concluded that a dividend should be declared, but denied the excess compensation claim, finding the compensation paid to [76 MICHAPP 289] defendant officers to have been reasonable. The amended judgment, dated September 15, 1975, ordered defendant Magline's directors to declare and pay a dividend of $75 per share for the period of July 1, 1963 to June 30, 1968, dismissed plaintiffs' excessive compensation claim, and retained jurisdiction to determine whether dividends should be awarded for the period from July 1, 1968 to June 30, 1973. Magline has appealed from the dividend award and the chancellor's retention of jurisdiction. Plaintiffs have taken a cross-appeal from dismissal of their excessive compensation claim.

Plaintiff Miller and defendant Law incorporated Magline. Law has served as president to the present, but Miller is no longer a corporate officer. Within a few months after Magline's incorporation, plaintiff Thorpe joined the company as an officer and director. By 1959 defendants Schilling, Graves, Monroe, Mortenson, and See had joined the company. The board presently consists of plaintiffs Miller and Thorpe, Raymond G. Miller (plaintiff Miller's son), and the individual defendants Law, Schilling, See, Graves and Monroe.

Plaintiffs own approximately 41% of the 4,138 shares of Magline stock issued and outstanding; defendants own the remaining 59%. ¹ By virtue of their majority holdings and executive offices, defendants control all aspects of corporate activity. ²

[76 MICHAPP 290] Magline has experienced considerable success in the field of commercial and defense related applications of magnesium and related light metals. Up to the time of trial Magline had consistently shown a profit on its overall operations, but it had never paid a dividend. Instead, the board has adhered to the policy adopted in 1950 by Law, Miller, and Thorpe of compensating corporate managers by means of a low base salary coupled with an incentive bonus plan based on a percentage of earnings, with the remaining profits being retained by the corporation to be used as working capital. This policy was satisfactory to all concerned so long as the principal shareholders were actively participating in management and sharing in the incentive bonus compensation plan.

In 1962, however, important changes occurred. Plaintiff Miller was seriously injured and thereafter ceased to play an active role in corporate management. In the same year, plaintiff Thorpe resigned as vice-president of Magline. Both Thorpe and Miller continued as directors and shareholders of Magline, however.

On November 10, 1962, the board adopted resolutions confirming defendants Law, Monroe, See, Schilling, and Graves in their respective offices of president and general manager, vice-president in charge of engineering, vice-president in charge of sales, secretary, and treasurer and assistant secretary. Whereas previous resolutions had provided for employment "during the fiscal year", the 1962 resolutions provided for employment "during the fiscal year ending June 30, 1963 and until his successor be duly elected and qualify", thereby rendering annual resolutions unnecessary. The [76 MICHAPP 291] employment resolutions provided for low base salaries and fixed the incentive bonuses for Law, Monroe, See, and Graves at an aggregate of 23% of net earnings before taxes and profit-sharing. ³ Because Miller and Thorpe were no longer officers, they were excluded from the incentive bonus program.

Prior to 1962 the board met annually to vote on management compensation and to fix corporate policy for the ensuing year. Because the board authorized the formation of an executive committee to supervise corporate affairs, at the 1962 meeting, and because the employment resolutions specified open-ended terms of office, the board did not meet again until February 19, 1966, when it met at plaintiffs' request. As a result, the employment resolutions adopted at the 1962 meeting remained in effect until February, 1966. During that time corporate earnings, and hence incentive bonuses, increased dramatically. ⁴ These increases stemmed primarily from Magline's increased production under government defense procurement contracts during the Viet Nam War years.

At the February 19, 1966, meeting the board reduced the percentages by which the incentive bonuses of Law, Monroe, See, Graves, Mortenson, [76 MICHAPP 292] and Schilling were computed to an aggregate of 14 1/2% of net earnings before profit-sharing and taxes. ⁵ At the October 22, 1966, meeting the board adopted essentially identical compensation resolutions for the fiscal year ending June 30, 1967, with plaintiffs abstaining from voting, as at the February, 1966 meeting. The board rejected plaintiffs' motion to declare a $10 dividend at the October, 1966 meeting, and like motions at the 1967 and 1968 board meetings were also defeated.

Law testified that the fiscal years from 1964 through 1969 were the most profitable in Magline's history. In 1963 Magline had net income of $55,760 on gross sales of $2,024,901 with earned surplus of $226,620. In 1968, Magline had net income of $569,670 on gross sales of $10,429,988 with earned surplus of $2,492,156.

I

The plaintiffs' claim to recover, for the corporation, excessive compensation allegedly paid to the individual defendants is a classic example of a shareholder's derivative suit. See Dean v. Kellogg, 294 Mich. 200, 207, 292 N.W. 704 (1940). Such derivative suits are equitable in nature, Bachelder [76 MICHAPP 293] v. Brentwood Lanes, Inc., 369 Mich. 155, 164, 119 N.W.2d 630 (1963); Dean v. Kellogg, supra; Burch v. Norton Hotel Co., 261 Mich. 311, 314, 246 N.W. 131 (1933), and consequently our review is de novo on the record. Dozier v. Automobile Club of Michigan, 69 Mich.App. 114, 123, 244 N.W.2d 376 (1976). Notwithstanding defendant's contention to the contrary, a shareholder's action to compel a dividend is heard on the equity side. Dodge v. Ford Motor Co., 204 Mich. 459, 500, 501, 170 N.W. 668 (1919); Miner v. Belle Isle Ice Co., 93 Mich. 97, 113, 115, 117, 53 N.W. 218 (1892); Hunter v. Roberts, Throp & Co., 83 Mich. 63, 71, 47 N.W. 131 (1890). Therefore, our review of the chancellor's decree relating to the dividend claim is de novo on the record as well. Stachnik v. Winkel, 394 Mich. 375, 383, 230 N.W.2d 529 (1975).

Although our review of chancery cases is de novo, the chancellor's factual findings will not be set aside unless they are clearly erroneous. GCR 1963, 517.1; Ford v. Howard, 59 Mich.App. 548, 552, 229 N.W.2d 841 (1975). A finding is clearly erroneous "when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed". Tuttle v. Department of State Highways, 397 Mich. 44, 46, 243 N.W.2d 244, 245 (1976), quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746, 766 (1948). The chancellor's determinations based upon his findings of fact will be set aside only for abuse of discretion, and "to have an 'abuse' in reaching such determination, the result must be so palpably and grossly violative of fact and logic that it evidences not the exercise of will but perversity of will, not the exercise of judgment but defiance thereof, not the [76 MICHAPP 294] exercise of reason but rather of passion or bias". Spalding v. Spalding, 355 Mich. 382, 384-385, 94 N.W.2d 810, 812 (1959).

II

Plaintiffs raise three closely-related claims in their cross-appeal from dismissal of their excessive compensation claim. Plaintiffs claim that the chancellor erred in failing to find that the board breached their fiduciary duty to the stockholders and the corporation by failing to call a director's meeting during the period from November 10, 1962 to February 19, 1966, for the purpose of reducing the incentive bonuses payable to the individual defendants, once it became apparent that Magline's spectacular earnings during that period would result in large windfalls to the individual defendants. Plaintiffs also contend that the chancellor erred in countenancing the continuation of the incentive bonus program after 1964 because plaintiffs were excluded from both the benefits of the program and corporate management by virtue of their status as minority stockholders. They contend that the chancellor should have determined the reasonable compensation for each individual defendant and decreed their compensation in the form of fixed salaries. Further, plaintiffs contend that the burden was on defendants to establish that the compensation received by them was reasonable, and that defendants failed to carry that burden.

The chancellor concluded that "plaintiffs have not demonstrated their right to bring an action...