Seitz v. Union Brass & Metal Manufacturing Co.
| Decision Date | 30 June 1922 |
| Docket Number | 22,951 |
| Parties | ERNEST J. SEITZ v. UNION BRASS & METAL MANUFACTURING COMPANY AND OTHERS |
| Court | Minnesota Supreme Court |
Action in the district court for Ramsey county for an accounting and for the appointment of a receiver to compel defendants to pay over to the company all profits or income received by them by way of investment, profit, income or otherwise, and to disallow any compensation to Theodore Michel for his services as managing director or president and that he should pay interest on all funds or property diverted. The case was tried before Haupt, J., who made findings and as conclusion of law ordered that plaintiff be decreed to be the owner of 466 shares of the capital stock of the corporation and that the company out of its surplus held in government bonds pay a special dividend of ten per cent on its capital stock. From an order denying his motion for a new trial, plaintiff appealed. Affirmed.
Duty of directors toward minority stockholder in matter of dividends -- when at his suit court will direct payment of dividend.
1. Directors and officers of a corporation owe stockholders the active duty of honesty and good faith in the transaction of the business of the corporation and in their dealings with it. If earnings are made from which dividends should be paid they will not be permitted to carry them into surplus so as to prevent a minority stockholder from sharing corporate gains or so as to depress his stock; and in the event of their so doing a court of equity at the suit of a minority stockholder will direct the payment of a dividend. The court did not err in refusing to order a larger special dividend than 10 per cent.
Burden of proof on plaintiff to prove salaries of officers are excessive -- restoration compelled.
2. The board of directors voted salaries to the officers before the performance of their services. The by-laws authorized the board to fix compensation. No officer participated in the fixing of his compensation, nor was his presence necessary to constitute a quorum of the board. If a board allows unreasonable and excessive salaries so as to absorb earnings which should go in dividends or remain with the company as surplus, a court of equity at the suit of a minority stockholder will compel restoration. A court will not lightly interfere with the judgment of the board, and the plaintiff in such an action, as commonly in other cases, has the burden of proving his case, including his claim that the salaries fixed are unreasonable and excessive.
Findings as to salaries construed.
3. The findings of the trial court do not bear the construction that a recovery can be had by a minority stockholder only upon a finding of actual fraud, or a construction that the salaries paid were unreasonable and excessive. In its original findings the court said nothing about the amount of the salaries. In its amended findings it found that the "salaries paid to said officers and managing heads of said corporation are not so unreasonable and excessive under the circumstances as to be deemed fraudulent and requiring restoration thereof, or any part of the same, to the corporate treasurer." It denied findings requested by the plaintiff to the effect that the salaries paid were "unreasonable and excessive." The findings are construed as holding that the salaries paid were not under the circumstances unreasonable or excessive.
Decision sustained by evidence.
4. The finding that the salaries were not unreasonable or excessive is sustained by the evidence.
H. E Fryberger and O'Brien, Stone, Horn & Stringer, for appellant.
O. E. Holman, for respondent.
This is an action by the plaintiff, a minority stockholder, to compel the defendant corporation to declare a dividend and to compel certain officers to pay into the corporate treasury money alleged to have been wrongfully paid and received as excessive salaries. There were findings requiring the corporation to declare a special dividend of 10 per cent, but refusing to compel the individual defendants to restore salaries received. The plaintiff appeals from the order denying his motion for a new trial.
The trouble between the plaintiff and the defendant Theodore Michel, or between the plaintiff and the corporations in which the two were interested, is of some years' standing. Its history, so far as shown by prior litigation reaching this court, is preserved in Seitz v. Michel, 141 Minn. 244, 170 N.W. 197; Seitz v. Michel, 148 Minn. 80, 181 N.W. 102, 12 A.L.R. 1060; Seitz v. Michel, 148 Minn. 474, 181 N.W. 106; Seitz v. Frey, supra, page 170. With the case now under consideration is decided Seitz v. Elite Laundry Co. infra, page 469.
The two ultimate questions presented are whether the court should have required the payment of a dividend larger than 10 per cent and whether it should have required the restoration of salaries to the corporate treasury.
1. Corporate officers owe the corporation and its stockholders the active duty of honesty and good faith. This court has continually insisted upon the recognition of the fiduciary relation between officers and directors and stockholders and has been active in protecting in a proper case the interests of minority holders against the oppression of the majority. Tasler v. Peerless Tire Co. 144 Minn. 150, 174 N.W. 731; Lake Harriet State Bank v. Venie, 138 Minn. 339, 165 N.W. 225; and cases cited; Green v. National A. & A. Co. 137 Minn. 65, 162 N.W. 1056, L.R.A. 1917E. 784; Minnesota L. & T. Co. v. Peteler Car Co. 132 Minn. 277, 156 N.W. 255; Ekberg v. Swedish-American Pub. Co. 114 Minn. 196, 130 N.W. 1029; Williams v. Little Falls W.P. Co. 99 Minn. 4, 108 N.W. 289; Jones v. Morrison, 31 Minn. 140, 16 N.W. 854. The directors may not exclude a minority from participation in profits which should be distributed. If earnings are made from which dividends should be paid, and they are carried into surplus for the purpose of preventing a participation in profits, and to depress stock values, a court of equity will in a proper case require their application at the suit of a minority stockholder. Anderson v. W. J. Dyer & Bro. 94 Minn. 30, 101 N.W. 1061. The court found facts justifying interference and directed the payment of a special dividend of 10 per cent. This was additional to the 6 per cent dividend paid from 1917. The defendants acquiesce. The plaintiff claims that it should have been larger. We sustain the trial court's view.
The years of 1919 and 1920 were years of abnormal profits. They could not be expected to continue and ought not to continue. The findings were made on May 27, 1921. The court might well conclude that though the accumulated surplus stood at $78,000 in 1919, and at $107,000 in 1920, the situation was such that conservative management required the keeping of an ample surplus. Profits for 1921 were not assured. The company had in its surplus $24,800 in liberty bonds. They were pledged as security for a note of $49,840 borrowed from a bank with which to purchase copper. Out of these bonds, which in due course of business would be released from the pledge in July, the court directed the dividend on the issued stock of $189,100 to be paid. There was still left a large surplus. In view of the uncertainty of business conditions in 1921, the consequent uncertainty as to earnings, and the trouble pending with a minority stockholder, quite possibly affecting the credit of the corporation, the court could hold that a no larger dividend should be paid.
2. The articles of incorporation provided for the election of officers by the board of directors. The by-laws provided that the directors, as such, should not have compensation, but for special services might have; and the directors were authorized to appoint and remove all appointive officers, managers, etc., and fix their compensation. The salaries were regularly voted by the board of directors. No officer participated in the fixing of his salary nor was his presence necessary to constitute a quorum when it was fixed. The voting of the salaries was just as valid in form as any voting of salaries by a board of directors of a closely owned and singly controlled corporation to officers who are directors can be. It was not a voting of salaries to directors or officers as an incident of their offices. It was a voting of salaries for actual work necessary to be done in the conduct of the business.
There is no reason why a corporation may not use the services of its directors and pay for them. Commonly in the case of small corporations like this, where the stock is closely held, the capital is invested with the intent that the majority shall have the responsibility of management, and it would not be invested otherwise; and the intention is that the owner who risks his capital and assumes management shall work out the business project for a number of years and have employment and adequate compensation. He would not invest except upon the condition that he have control and compensation. He would not entrust his money to another, nor would he invest it unless in connection with its use he was getting an opportunity to engage his activities and receive compensation. This is the practical fact commonly met in small corporations.
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. In determining whether salaries are excessive and unreasonable so that there should be a restoration courts proceed with...
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