Court Opinion

ID: 9650448
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:37:48.518986+00
Date Added: 2024-06-11T18:12:21.680017
License: Public Domain

SWAN, Circuit Judge
(dissenting).
In 1012 the stockholders of the appellant adopted a by-law which provided that 10 per cent, of the annual “net profits” be distributed, 2% per cent, to the president and 1% per cent, to each, of the five vice presidents “in addition to the fixed salary of each of said officers.” The by-law does not expressly say that the payments provided for are by way of additional compensation to the officers, and tho notice of the meeting at which the bylaw was adopted referred to the proposed resolution as one for the distribution of profits. If it was really a distribution of profits rather than a method of compensation, the majority stockholders had no power to vote it. I shall assume, however, that the by-law was valid when passed. But it does not follow that it will remain valid for all time regardless of the amount payable under it. If a bonus payment has no relation to tho value of services for which it is given, it is in reality a gift *114in part, and the majority stockholders have no power to give away corporate property against the protest of the minority. See Endicott v. Marvel, 81 N. J. Eq. 378, 384, 87 A. 230; Collins v. Hite, 109 W. Va. 79, 153 S. E. 240.
The present suits attack payments made under the by-law since 1921, totaling more than $10,000,000, and seek an injunction against further payments. The bonuses paid to the president increased from $90,000' in 1921 to $840,000 in 1930'. In the latter year his additional emoluments included a fixed salary of $168,000 and “special cash credits” of $270,000. Bonuses paid four of-the vice presidents for. that year totaled $1,830,000, in addition to which they received fixed salaries and special crédito totaling $700,000. Apparently these sums were thought insufficient, for in that same year the board of directors initiated a plan which resulted in the distribution to these five officers and directors of almost 30,000' shares of stock at $87 per share less than its then market value. The court below thought that a sufficient showing of invalidity had been made to justify a temporary injunction against future payments under the by-law. In my opinion a bonus of $840,000' to an officer receiving a fixed salary of $168,000 is presumptively so much beyond fair compensation for services as to make a prima facie showing that the corporation is giving away money,' and a by-law which sanctions this is prima facie unreasonable, and hence unlawful. This is all we need to hold to support the injunction pendente lite.
The determination of fair compensation for services is primarily for the directors. Courts hesitate to overrule the discretion of directors fairly exercised. Here the directors have exercised no discretion; they rely upon a by-law to relieve them of that duty, and the by-law, as it now operates, results in so large a payment that the trial court thought it probably invalid as. applied to future earnings. Under such circumstances the courts do not and should not refuse to consider whether a bonus plan is fair or oppressive. See Sotter v. Coatesville Boiler Works, 257 Pa. 411, 101 A. 744; Collins v. Hite, 109 W. Va. 79, 153 S. E. 249; Wight v. Heublein, 238 F. 321 (C. C. A. 4); Nichols v. Olympia Veneer Co., 139 Wash. 305, 246 P. 941, 48 A. L. R. 504; McKey v. Swenson, 232 Mich. 505, 205 N. W. 583, 586; Lowman v. Harvey R. Pierce Co., 276 Pa. 382, 120 A. 404; Scott v. P. Lorillard Co., 108 N. J. Eq. 153, 154 A. 515, affirmed 109 N. J. Eq. 417, 157 A. 388; Berendt v. Bethlehem Steel Corp., 108 N. J. Eq. 148, 154 A. 321; Stratis v. Andreson, 254 Mass. 536, 150 N. E. 832, 44 A. L. R. 567; Ransome Concrete Machinery Co. v. Moody, 282 F. 29, 32 (C. C. A. 2); Church v. Harnit, 35 F.(2d) 499, 502 (C. C. A. 6); Booth v. Beattie, 95 N. J. Eq. 776, 118 A. 257, affirmed 95 N. J. Eq. 776, 123 A. 925; Putnam v. Juvenile Shoe Corp., 307 Mo. 74, 269 S. W. 593, 40 A. L. R. 1412. I think the injunction pendente lite should be affirmed.