Smith v. Dunlap

• Citation: 269 Ala. 97,111 So.2d 1
• Decision Date: 09 April 1959
• Docket Number: 1 Div. 777
• Parties: Harry H. SMITH v. D. R. DUNLAP et al.
• Court: Alabama Supreme Court

Page 1

111 So.2d 1

269 Ala. 97

Harry H. SMITH v. D. R. DUNLAP et al.

1 Div. 777.

Supreme Court of Alabama.

April 9, 1959.

Cunningham & Wilkins and Harry H. Smith, Mobile, for appellant.

Chas. B. Arendall, Jr., T. E. Twitty, Jos. M. Hocklander, Hand, Arendall, Bedsole, Greaves & Johnston, Inge & Twitty and D. R. Coley, Jr., Mobile, for appellees.

SIMPSON, Justice.

This is a derivative stockholder's suit; the appeal is taken by complainant below from the ruling of the trial court sustaining the demurrer to the bill of complaint as amended. Complainant, a minority stockholder in the respondent corporation, Alabama Dry Docks and Shipbuilding Company, Inc., seeks to recover, on behalf of the corporation, certain funds allegedly due said corporation and misappropriated by the individual respondents, officer-directors of said corporation. It appears from the bill that complainant has made demands on the directors and stockholders to take the necessary steps to recover for the corporation the sums allegedly due but that they have failed and refused.

Some of the wrongs complained of for which complainant seeks relief are the payment of compensation to the individual respondents as officers of the corporation, which sums were allegedly so excessive that they bore no reasonable relation to the value of the services rendered by said respondents and the payment of certain sums of money from the earnings of the corporation into an incentive or bonus fund for employees of said corporation, from the distribution of which fund the individual respondents benefited. We treat these propositions in order.

Compensation to Officers.

It appears from the averments of the bill that the directors of the respondent corporation in June, 1948 adopted a bouns or incentive plan providing for additional compensation to officers and certain other employees based upon a percentage of the corporation's earnings. Complainant questions the reasonableness of the total compensation, that is, salary and bonus, paid to the individual respondents.

In the leading case of Rogers v. Hill, 289 U.S. 582, 53 S.Ct. 731, 77 L.Ed. 1385, cited by this Court in Edmonson v. First National Bank of Birmingham, 256 Ala. 449, 55 So.2d 338, the rule was enunciated that where the amount of a bonus payment to officers of a corporation has no reasonable relation to the value of service for which it is given, it is in reality a gift and the majority stockholders have no power to give away corporate property against the protest of a minority stockholder.

A long line of Alabama cases recognizes the general rule that where officers of a corporation appropriate assets of the corporation to their own use, equity will intervene on behalf of a minority stockholder who is unable to obtain relief within the corporation. See Decatur Mineral & Land Co. v. Palm, 113 Ala. 531, 21 So. 315; Donald v. Manufacturers' Export Co., 142 Ala. 578, 38 So. 841; Glass v. Stamps, 213 Ala. 95, 104 So. 237; Holcomb v. Forsyth, 216 Ala. 486, 113 So. 516; Gettinger v. Heaney, 220 Ala. 613, 127 So. 195; First Nat. Bank of Birmingham v. Forman, 230 Ala. 185, 160 So. 109. See also Edmonson v. First Nat. Bank of Birmingham, supra. The foregoing cases are illustrative of the principle that the receipt of excessive compensation by the officers of a corporation is manifestly an appropriation of corporate assets by said officers to their own use. See also Textile Mills v. Colpack, 264 Ala. 669, 89 So.2d 187; Bronaugh v. Evans, 204 Ala. 153, 85 So. 556.

The question of whether the compensation is so excessive that it bears no reasonable relation to the value of services rendered is a question of fact to be resolved on final hearing. It was observed in Gallin v. National City Bank of New York, 152 Misc. 679, 273 N.Y.S. 87, 114; 155 Misc. 880, 281 N.Y.S. 795, that 'To come within the rule of reason the compensation must be in proportion to the executive's ability, services and time devoted to the company, difficulties involved, responsibilities assumed, success achieved, amounts under jurisdiction, corporate earnings, profits and prosperity, increase in volume or quality of business or both and all other relevant facts and circumstances; nor should it be unfair to stockholders in unduly diminishing dividends properly payable.' See also Decatur Mineral & Land Co. v. Palm, supra; Clamitz v. Thatcher Mfg. Co., 2 Cir., 158 F.2d 687, 692, certiorari denied 331 U.S. 825, 67 S.Ct. 1316, 91 L.Ed. 1841; Winkelman v. General Motors Corp., D.C., 44 F.Supp. 960, 969; 5 Fletcher Cyc. of Corporations, §§ 2133, 2143; 13 Am.Jur. Corporations, §§ 1037, 1039; 27 A.L.R. 300; 40 A.L.R. 1438; 88 A.L.R. 755; 164 A.L.R. 1125.

In the case at bar, there are twelve directors of the respondent corporation, four of whom were also officers of the corporation during the period complained of. These four officer-directors are made parties respondent.

After careful study and analysis of the leading cases, text writers, and student comment in law reviews, and after reconciling some of the inconsistencies therein, we conclude that the following principles govern cases of this nature: The amount of compensation is, in the first instance, officer of a corporation is, in the first instance, stance, within the business discretion of the corporation's board of directors and with this discretion the courts are loath to interfere; generally the decision of the directors as to the amount of such compensation is final; where it appears, however, that the directors have not acted in good faith or that the compensation fixed by them is so excessive that it bears no reasonable relation to the services for which it is given, courts of equity have the power to inquire whether and to what extent payment to the officers constitutes misuse and waste of corporate assets; the power to inquire will, therefore, be exercised by the courts upon a clear showing of excessiveness of compensation or bad faith on the part of the directors; but courts are reluctant and will proceed with great caution in exercising the power to 'prune' the payments since it is not intended that a court should be called upon to make a yearly audit and adjust salaries; nor is such an inquiry merely to substitute the court's discretion for the discretion of the directors if that has been honestly and fairly exercised. Rogers v. Hill, supra; Winkelman v. General Motors Corp., supra; Gallin v. National City Bank of New York, supra; McQuillen v. National Cash Register Co., D.C., 27 F.Supp. 639, affirmed 4 Cir., 112 F.2d 877; Heller v. Boylan, Sup., 29 N.Y.S.2d 653, affirmed 263 App.Div. 815, 32 N.Y.S.2d 131, appeal denied 263 App.Div. 852, 32 N.Y.S.2d 1011; Diamond v. Davis, Sup., 38 N.Y.S. 103; Darmana v. New Orleans Stock Yard, Inc., 226 La. 897, 77 So.2d 528; 5 Fletcher Cyc. of Corporations, §§ 2122, 2133, 2138, 2143; 13 Am.Jur. Corporations, §§ 1027, 1039; 27 A.L.R. 300; Washington, 'Executive's Living Wage', 54 Harvard L.Rev. 733; Washington, 'The Corporate Executive and His Profit Sharing Contract', 50 Yale L.J. 35; 38 Cal.L.Rev. 906; see also Alabama cases, supra.

We conclude that complainant, a minority stockholder, has sufficiently stated a case for the intervention of equity on behalf of the corporation to inquire as to whether the compensation received by the individual respondents is so excessive that it bears no reasonable relation to the value of the services performed by them. This does not mean, however, that the compensation is per se so excessive; it is a question of fact and the compensation having been regularly fixed by the directors, the burden of proving that it is so excessive is on complainant. Darmana v. New Orleans Stock Yards, Inc., supra; 5 Fletcher Cyc. of Corporations, § 2181; 13 Am.Jur. Corporations, § 1039.

Ratification.

Respondents contend that the action of the board of directors and the majority stockholders in refusing to sue precludes or bars complainant, a minority stockholder, from bringing this action.

It is a universal rule that neither the board of directors nor the majority stockholders can, over the protest of a minority stockholder, give away corporate property. Textile Mills v. Colpack, supra; Bronaugh v. Evans, supra; McQuillen v. National Cash Register Co., supra; Heller v. Boylan, supra. And where the amount of compensation paid to an officer of a corporation has no reasonable relation to the value of the services rendered therefor, it is in reality a gift. Diamond v. Davis, and other cases, supra. It follows that the action of the majority stockholders and the directors in refusing to bring suit or in ratifying the alleged excessive compensation cannot, on proper allegations, preclude intervention by a court of equity to inquire into the reasonableness, vel non, of said compensation at the instance of a minority stockholder. Rogers v. Hill, supra; Collins v. Hite, 109 W.Va. 79, 153 S.E. 240; Toebelman v. Missouri- Kansas Pipe Line Co., 3 Cir., 130 F.2d 1016; Darmana v. New Orleans Stock Yard, Inc., supra; Decatur Mineral & Land Co. v. Palm, supra; Gettinger v. Heaney, supra; First Nat. Bank of Birmingham v. Forman, supra; Fletcher, Cyc. of Corporations, Vols. 5 and 13, §§ 2122, 2143, 5832.

American Life Ins. Co. v. Powell, 262 Ala. 560, 80 So.2d 487 should not be interpreted as holding that majority stockholders by refusing to bring for or by ratifying a gift of corporate assets by the officers thereof can preclude a minority stockholder from seeking on behalf of the corporation, the recovery of said assets from the recipient officers. The holding of the American Life Ins. Co. v. Powell case, supra, was that the complainant, a minority stockholder, should have made an appeal to the stockholders before resorting to equity and that such an appeal was necessary without regard to the nature of the acts complained of.

In Continental Securities Co. v. Belmont, 206 N.Y. 7, 99 N.E. 138, 51 L.R.A., N.S., 112, 113, cited by the...