Barrett v. Smith

I dissent from the majority opinion in the matter of salaries. On the other points I concur.

The plaintiffs failed of reëelection to the board of directors at the annual stockholders' meeting held in January, 1929. Defendants and their associates then had control, but there is no finding or evidence, as indicated by the majority, that defendants Smith and Ellison caused the election of directors who were their instruments. At the meeting of the board immediately following the stockholders' annual meeting, the salary of the defendant Smith was increased from $15,000 a year to $21,000, and that of the defendant Ellison from $4,500 a year to $7,500. The salary of the secretary of the corporation was also raised. All this was done in one resolution for which these officers as directors had voted, and hence this action was voidable. Jones v. Morrison, 31 Minn. 140,16 N.W. 854. The following September the board of directors by separate resolution as to each officer confirmed and ratified the salaries attempted to be fixed in January. Each officer whose salary was being voted upon absented himself from the room where the board was in session, and the remainder of the board acted upon the resolution in his absence. The trial court took the view that the action taken in January was voidable at the election of minority stockholders *Page 604 regardless of the good faith with which the action may have been taken. It did not take into consideration the action taken in September. Based principally upon the testimony of Meyers, the apparent moving spirit of this litigation, it found that the reasonable value of Smith's services to the corporation in 1929 was $15,000, and of Ellison's services $4,500, and ordered judgment against them on these items for $6,000 and $3,000, respectively. In the court's memorandum, which it made a part of its findings, it specifically found that both Smith and Ellison believed they were entitled to receive the higher sums as salary and that "they did not intend to defraud the company or the plaintiffs." There is also a general statement in the memorandum that the court was of the opinion that the officers of the company worked diligently and efficiently and with honesty of purpose. The majority opinion makes the point that these findings of honesty relate to Smith and Ellison alone and not to the board as such. While I think the trial court used "officers" in a sense which included directors, I cannot follow the reasoning which assumes the other directors to be under the control of Smith and Ellison, whose personal motives are found to be proper, and then finds as a matter of law that the board so composed acted from fraudulent motives. A fair construction of the trial court's findings as to motives or purpose must acquit the board of any purpose to oppress. This court is assuming to make a finding of wrongdoing solely on the ground that under the circumstances the raise in salaries was of itself conclusive evidence of fraud, and this against the trial court's informal finding of good faith. Had the trial court found fraud based on excessiveness alone, we might have readily sustained it. But to hold on this record that such excessiveness is conclusive of fraud against a finding of good faith is, in my opinion, unwarranted. The same may properly be said of the expression by the majority that the board fixing the salaries was composed of dummies. There is no such finding, and the evidence neither compels nor supports one. We are therefore confronted with a situation which should be viewed as if the board had fixed larger salaries for the officers than the court has *Page 605 found to be reasonable, but where the action so taken is specifically found to have been honest and in good faith without intent to defraud.

In matters not ultra vires courts of equity do not assume to review the acts of officers or directors of corporations for mere improvidence or for mistakes of judgment. The question was fully gone into by this court in Seitz v. Union B. M. Mfg. Co. 152 Minn. 460, 189 N.W. 586, 27 A.L.R. 293. If salaries are fixed at an excessive figure for the purpose of preventing minority stockholders from participating in the profits or to depress stock values or otherwise to oppress or defraud such stockholders and violate the fiduciary obligations of the directors, equity will interfere. But where, as here, we have a specific finding which negatives any such wrongful purpose and affirmatively establishes good faith and honesty of purpose, the courts will not interfere and substitute their judgment for that of the directors. Seitz v. Union B. M. Mfg. Co. 152 Minn. 460, 189 N.W. 586, 27 A.L.R. 293; Poutch v. National F. M. Co. 147 Ky. 242, 245, 143 S.W. 1003, and cases cited. In Fillebrown v. Hayward, 190 Mass. 472,77 N.E. 45, the court had before it a case where the salary allowed by the board to the treasurer was contended to be excessive. The court held that inasmuch as there was no evidence of any purpose to appropriate corporate profits unlawfully under the guise of salary there could be no recovery. It is true that there was a finding that the corporation was prosperous, but that is not the ultimate point in issue. The issue is one of fraud. There are cases where the language used indicates that mere unreasonableness is sufficient to justify relief, but usually some element is present which indicates fraud, bad faith, or oppression. Of course the salary may be so excessive as of itself to be sufficient evidence to support a finding of fraud, but here we have no such finding.

In the case at bar we have a finding of unreasonableness supported only by the opinion of a lawyer whose motives are quite apparent. A finding of reasonableness would have been amply sustained. It may require more skill, more ability, and more business *Page 606 acumen to steer a corporation through the shoals of adversity than upon the high seas of success, and services in so doing may save the corporation from the rocks of disaster. The action of the board in raising salaries may have found warrant in the very situation which the majority assume made it "close to criminality." It should be borne in mind that these salaries are to be measured by the standards of the business world, not by the meager pay of public officials.

Courts will usually be found to have keen eyes for fraud or oppression practiced upon minority stockholders, but it would be intolerable to open the doors of equity to review the judgment of corporate boards where no fraud, actual or constructive, is found. In the case of Seitz v. Union B. M. Mfg. Co. 152 Minn. 460, 464, 189 N.W. 586, 27 A.L.R. 293, cited by the majority, this court said:

"The dissenting stockholder should come into court with proof of wrongdoing or oppression and should have more than a claim based on mere differences of opinion upon the question whether equal services could have been procured for somewhat less."

In 5 Fletcher, Cyc. Corp. (Perm. ed.) § 2171, p. 494, it is stated that the better view seems to be that the action of the directors will not be set aside unless the result is an oppression of the minority. I regard it as the most practical as well as the most logical rule, and the majority seem to concede that it is the law in this state.

The action taken in September is undisputed and was legal under the decision in Seitz v. Union B. M. Mfg. Co. 152 Minn. 460,189 N.W. 586, 27 A.L.R. 293. That it occurred after The commencement of the litigation does not invalidate it. Of such action the supreme court of California said:

"This resolution had the effect to validate the original resolution, and, for the purpose of justifying the action of the defendant in taking the salary, is to be construed with the same effect as if the original resolution had been properly adopted." Wickersham v. Crittenden, 110 Cal. 332, 334,42 P. 893, 894. *Page 607

I think there should be a reversal of judgment as to salaries.

UPON APPLICATION FOR REARGUMENT. On April 29, 1932, the following opinion was filed: