Opinion ID: 1216412
Heading Depth: 1
Heading Rank: 6

Heading: Executive Compensation and Directors' Fees

Text: The Wyoming Business Corporation Act permits the board of directors to set directors' fees [3] and to elect or appoint officers to manage the corporate business. [4] Although courts hesitate to inquire into the reasonableness of executive compensation fixed by a disinterested board, a stricter standard prevails when the recipient has set his own compensation. Wilderman v. Wilderman, Del. Ch., 315 A.2d 610, 615 (1974). In such cases, the burden falls on the director to prove the reasonableness of the challenged compensation. Wilderman v. Wilderman, supra; Goldman v. Jameson, 290 Ala. 160, 275 So.2d 108, 114 (1973); Fendelman v. Fenco Handbag Manufacturing Co., Mo., 482 S.W.2d 461, 463, 53 A.L.R.3d 347 (1972). This requirement, as in the previously discussed cases involving contracts with interested directors, stems from the fiduciary position which directors hold towards their corporation and its stockholders. Wilderman v. Wilderman, supra. Courts have established factors to consider in determining whether a defendant has met his burden with respect to the reasonableness of his fee or salary. These criteria include the recipient's ability, services and time devoted to the company, the size and complexities of the business, success achieved, corporate earnings and profits, increase in volume or quality of business, the prevailing general economic conditions, a comparison of salaries with distributions to stockholders, compensation for comparable positions in comparable concerns, and the amount previously received as a salary. Wilderman v. Wilderman, supra; Goldman v. Jameson, supra; Fendelman v. Fenco Handbag Manufacturing Co., supra. In the instant case, the minutes of the board meeting held February 28, 1981, and testimony presented at trial establish that the directors believed that Birl Lynch and R.C. Lynch were entitled to double their salaries as a result of increased responsibilities due to Patterson's resignation. The defendants did not specify what these additional responsibilities entailed; they presented no evidence of increased earnings which justified the extra compensation; neither did they attempt to establish how their salaries compared with those of executives in similar businesses. They offered no explanation for increasing the salaries of two officers, while refusing to declare a dividend so that nonexecutive stockholders could share in the company profits. The evidence supports the trial court's conclusion that the defendants failed to establish the reasonableness of executive salaries in excess of $4,000 per month each. We will not disturb on appeal this factual finding supported by the evidence. Pine Creek Canal No. 1 v. Stadler, Wyo., 685 P.2d 13, 19 (1984). The Lynches contend that Patterson should not be allowed to recover for excessive executive salaries because he did not claim for such damages in his complaint. However, Paragraph 5 of the complaint alleges that the defendants had conspired to divert assets from the corporation: 5. Each of the above-named defendants became members and agents of an illegal and fraudulent conspiracy, the purpose of which was to divert to themselves or to persons with whom they were or are associated, the assets of Lynch Consultants, Inc., and wrongfully, legally and fraudulently to the use of the assets of Lynch Consultants, Inc. for their own selfish personal interest, advantage and profit, and for the personal interest, advantage and profit of persons and associates with whom they were or are interested to the financial loss and contrary to the interest of the plaintiff as a stockholder of said corporation. In furtherance of this conspiracy and to serve their own wrongful purposes, Defendants took certain steps as alleged herein and pursuant of the conspiracy. Although the complaint does not specify excessive salaries, the allegations in Paragraph 5 were sufficient to give notice to the defendants that the plaintiff contested the removal of assets from the corporation, whether in the form of salary increases or otherwise. A complaint which gives fair notice to the opposing party of the claims against him satisfies the specificity standard of notice pleading under our rules of civil procedure. [5] Guggenmos v. Tom Searl-Frank McCue, Inc., Wyo., 481 P.2d 48, 51-52 (1971). Allegations of particular acts or omissions of the defendant are unnecessary where the duty owed by the defendants appears to exist and to have been breached. Harris v. Grizzle, Wyo., 599 P.2d 580, 583 (1979). This rule holds especially where the facts lie more properly in the knowledge of the adverse party and details of the breach are available through discovery. Harris v. Grizzle, supra. In the instant case, the fact that the defendants had voted themselves salary increases as well as the reasonableness of such compensation lay more properly within the knowledge of the directors of LCS. Patterson complained that the directors had breached their fiduciary obligations by diverting funds from the corporation to its detriment. This allegation sufficed to inform the defendants that an issue existed as to the reasonableness of the executive salaries and we will not overturn the award for excessive compensation on the ground of a defective complaint. With respect to the reasonableness of the directors' fees paid to Birl Lynch and R.C. Lynch beginning in January, 1982, the minutes of the board meeting reflect that the fees were intended to compensate the Lynches for holding monthly meetings. The defendants offered no explanation as to why such fees were reasonable in the face of a depressed economy and rapidly declining revenues, or why Eunice Lynch, the third director, received no fees for attending directors' meetings. The evidence supports the trial court's conclusion that the defendants failed to establish the reasonableness of paying Birl Lynch and R.C. Lynch $1,300 per month each in directors' fees. We will, therefore, sustain the court's finding on appeal. Pine Creek Canal No. 1 v. Stadler, supra.