Opinion
No. 36388.
March 24, 1947.
1. CORPORATIONS.
Action of board of directors in fixing president's salary on a three to two vote, president casting deciding vote, was not void, but was voidable at suit of minority stockholders on a cogent showing by them that salary fixed was clearly excessive and wasteful as against minority.
2. CORPORATIONS.
Where president's salary was fixed by a three to two vote of board of directors, president casting the deciding vote, resolution of stockholders' meeting affirming action of directors added nothing to force of order of directors, where resolution was passed by the vote of the shares owned by president, which constituted a majority.
3. CORPORATIONS.
Corporate salary awards may not, over objections of minority stockholders, be based on services already concluded, unless at time of their rendition there was an agreement with corporation or its owners or authorized representative that compensation should be paid therefor.
4. CORPORATIONS.
Where president of hotel corporation was an unusually capable and highly trained man and court, at suit of minority stockholders, determined a reasonable salary for president for specified work which he was doing, such salary determination was not binding upon minority stockholders with reference to any successor in the office of president.
5. CORPORATIONS.
Corporations must be allowed to function under majority control so long as majority does no actual wrong to minority or to others.
6. CORPORATIONS.
Courts will not control corporations except where such interference is essential to justice, and in interfering with what majority has done in a given case, courts will exercise caution.
7. CORPORATIONS.
Where majority of board of directors and stockholders fixed salary of president of hotel corporation at $5,000 per year and on suit of minority stockholders court determined that such amount was excessive because of president's limited duties while another corporation was operating hotel property, salary was reduced to $150 per month, but president was not required to refund the sum of $2,400 paid to him under original salary schedule in excess of new salary schedule.
APPEAL from the chancery court of Lauderdale county. HON. GEO. B. NEVILLE, Chancellor.
Wells, Wells, Newman Thomas, of Jackson, for appellants.
The action of the board of directors at the meeting on May 14, 1945, in voting President Landstreet a salary of $5,000 per annum, even if irregular or unauthorized, was validated by the stockholders at the meeting on January 5, 1946, and there being no substantial proof of abuse of discretion or that said salary was excessive or exorbitant, the bill of complaint herein should have been dismissed.
Courts will not ordinarily interfere with the management of corporations.
Seitz v. Union Brass Metal Mfg. Co., (Minn.), 189 N.W. 586, 27 A.L.R. 203; McQuillen v. National Cash Register Co., 112 F.2d 877; Putnam v. Juvenile Shoe Corporation et al., 269 S.W. 593, 40 A.L.R. 1412; 19 C.J.S. 203-204, Sec. 806.
The act of the board of directors in fixing the president's salary at $5,000 per annum on May 14, 1945, was not void, but, in the worst aspect, only voidable.
Fillebrown v. Haywood, 77 N.E. 45; Kirn v. Plumbing Co., 12 Ohio App. 55; Hedges v. Paquett et al., 3 Or. 77; 13 Am. Jur. 980-981, Sec. 1035; 5 Fletcher Cyclopedia Corporations, Sec. 2120; 3 Thompson on Corporations 448, 449, Sec. 1859, p. 451-452, Sec. 1860.
Action of the board of directors fixing the president's salary at $5,000, considered in its worst aspect, being, at most, voidable, could be and was validated by and at the stockholders' meeting on January 5, 1946.
Lillard v. Oil, Paint Drug Co. et al., 70 N.J. Eq. 197; Bates Street Shirt Co. v. Waite et al., 156 A. 293; Standard Furniture Co. v. Hotel Butler Co. et al., 296 P. 153; Putnam v. Juvenile Shoe Corporation et al., 269 S.W. 593, 40 A.L.R. 1412; 5 Fletcher Cyclopedia Corporations, Sec. 2139.
Whether there was any formal valid act of the board of directors in fixing the president's salary, or valid ratification by the stockholders of the act of the board or not, there was an understanding, actual or implied, that Landstreet as president would be entitled to compensation and the proof overwhelmingly showed that the amount received by Landstreet as president to the date of the decree, to-wit: $3,750, being based upon a $5,000 per year salary, was reasonable and was properly and justly earned by Landstreet as president.
Wilson v. Blanton, 130 Miss. 390, 94 So. 214; Church v. Harnit et al., 35 F.2d 537; Venus Oil Corporation v. Gardner, 50 S.W.2d 537; 32 C.J.S. 318-321, Sec. 545; 19 C.J.S. 190, Sec. 803; 3 Thompson on Corporations 432-433, Sec. 1849.
J.C. Floyd and A.B. Amis, Sr., both of Meridian, for appellee.
As a matter of law, a resolution of the board of directors of a corporation fixing the salary of the president, who is a member of the board, is illegal and wholly void, where the president casts the deciding vote in favor of the resolution. It is void, (1) because he cannot contract or trade with himself; (2) because as a director he is an agent of the corporation, and as such agent cannot do anything which would entitle him to lawfully take any of the corporate funds or give him title to any of its property; and (3) because public policy, and the law, forbids corporate officers or agents from using their position or power to acquire for their own benefit the property of the shareholders of the corporation.
Holcomb v. Forsyth (Ala.), 113 So. 516; Crichton v. Webb (La.), 36 So. 926; Code of 1942, Sec. 2115; 13 Am. Jur. 477, Sec. 425, p. 925, Sec. 1002, p. 981, Sec. 1036; 14-A C.J. 143, Sec. 1908; 19 C.J.S. 199, Sec. 805.
The by-laws of the corporation do not authorize the president, as a member of the board of directors, to cast the deciding vote on a resolution fixing his own salary.
The action of a former board of directors declaring that the chairman of the board was "entitled to vote on any question coming before the board," did not authorize the president, as a member of the board, to cast the deciding vote on a resolution fixing his own salary.
The resolution, adopted at the special stockholders' meeting held January 5, 1946, ratifying the action of the board of directors, fixing the salary of Landstreet as president, was void, (1) because Landstreet called the meeting, after the bill was filed, for the purpose of having the action of the board of directors ratified by the stockholders; (2) because when the resolution ratifying the action of the board of directors was put to a vote Landstreet voted 2197.941 shares of stock owned by him in favor of the adoption thereof; (3) because Landstreet cast the deciding vote in his own favor, in the stockholders' meeting as well as the meeting of the board of directors; and (4) because the salary of $5,000 a year, so voted by Landstreet to himself, was grossly excessive.
The law is that where the salary of the president of a corporation, who is one of the directors, is fixed by the board by his deciding vote, such action of the board of directors may not be ratified at a stockholders' meeting, by a majority vote of the stock, where the president, as the owner of a majority of the stock, votes for the ratification. His vote as a majority stockholder, in his own favor, has no more binding effect than his vote as a director, especially so where the salary he votes to himself, as director and stockholder, is grossly excessive. He cannot, by merely changing his coat, ride roughshod over the rights of the minority stockholders.
Farwell v. Headlight Co., 124 U.S. 449, 10 A.L.R. 363; Crichton v. Webb, supra; 14-A C.J. 145; 19 C.J.S. 202; 13 Am. Jur. 475, Secs. 423, 932.
Since it appears that Landstreet owned a majority of all the stock, and that he cast the deciding vote of the board of directors, in his own favor, and also voted all his stock for ratification at the stockholders' meeting, then the only question remaining is whether or not the salary of $5,000 a year, which he voted to himself, was grossly excessive. If so, the action of the board of directors and also of the stockholders' meeting were both wholly void, because both acts were, in effect, the acts of Landstreet — for his own benefit. But he who seeks equity must do equity, and the bill of complaint concedes the right of the court to award to Landstreet such a sum as will be fair and just compensation for services rendered after the adoption of the resolution by the board of directors on May 14, 1945.
But nothing can be awarded to him for services rendered prior thereto, because the law is that bonuses cannot be granted to officers or directors — at least as against the protest of any stockholder — by way of compensation for services already rendered gratuitously, or by way of increased compensation for services already rendered for a prescribed compensation.
Crichton v. Webb, supra; Felsenheld v. Block Bros. Tobacco Co., 123 A.L.R. 343; 40 A.L.R. 1432-1440 inc.; 14-A C.J. 142; 19 C.J.S. 198; 13 Am. Jur. 975.
Practically all the testimony in the case was concerning whether or not the $5,000 salary, which Landstreet had voted to himself, both as a director and stockholder, was grossly excessive. The chancellor found that it was grossly excessive and the court so adjudged in its decree, fixing the reasonable value of Landstreet's services, as president, at $1,800 per year, and rendered a personal decree against him for $2,400 excess salary received by him, for the sole benefit of Lamar Hotel Corporation. This Court will not disturb that decree unless it be of the opinion, from all the evidence, that it is manifestly wrong.
The Lamar Hotel in Meridian is one of the larger and better hotels in the State, its property having a value at the time of the hearing of about $450,000. It is owned by the Lamar Hotel Company, a corporation, there being approximately 3,900 shares of stock, of which, during the times hereinafter mentioned, appellant Landstreet owned 2,200 shares. The hotel is operated by Interstate Hotel Company, a corporation, under a ten-year contract made on September 29, 1937, under which arrangement the annual amount paid to the owner corporation, above all property and operating expenses and income taxes, is about $22,000. Landstreet acquired his stock in July, 1944, and on the 27th day of that month was elected president of the corporation. At that time the property was encumbered by first mortgage bonds in the sum of $217,000, bearing interest at 5% per annum.
Mr. Landstreet is a hotel executive of wide experience, of good connections, and of far more than ordinary ability. The presidents of the owner company theretofore had not been men who devoted themselves to hotel work, and they had done little more than to function formally. Landstreet, upon his election as president, proceeded with vigor to place the affairs of the owner corporation in a better and more business-like shape, and first he succeeded in rearranging the bonded indebtedness so as to make the principal sum of the indebtedness $175,000, instead of $217,000, and the interest 4% instead of 5%. This he accomplished and completed before the end of that year.
Thereafter he continued actively in the direction of putting the business of the owner corporation in the best possible condition consistently with the encumbrance of the operating contract heretofore mentioned, and at the time of the hearing and decree herein he had completed the main features of the work, leaving thereafter to be done by the president substantially about as follows: (1) To carefully examine the monthly and annual statements of the operating company, the statements being furnished by the auditors of the latter company; (2) to act upon any feature wherein he found that the operating contract was not being performed and all funds properly accounted for; (3) to pay the income and franchise taxes of the owner company; and (4) to pay the salaries of its auditors. Mr. Landstreet, who lives in Memphis, and has three other hotels under his executive care, visited the Meridian hotel property making a careful inspection thereof, about once a month or sometimes a little oftener. One of his other hotels is at Laurel, in the same general territory.
Up to the time next to be mentioned none of the presidents of the owner corporation had been paid any salary. At the annual stockholders' meeting on May 14, 1945 Landstreet and four others were elected directors, and thereafter on the same day the board of directors met, re-elected Landstreet as president, and on a vote of three to two the president's salary was fixed at $5,000 per annum, Landstreet casting the deciding vote in favor thereof. On January 5, 1946, after suit herein was filed, a special meeting of the stockholders was held when a resolution was adopted ratifying the aforementioned action of the directors in the matter of the president's salary. This resolution was adopted by the vote of Landstreet's majority in stock over the opposition and protest of the minority stockholders.
On November 13, 1945, the minority stockholders filed their bill charging that the salary order mentioned in the foregoing paragraph was void, and praying an injunction against the payment of the salary to Mr. Landstreet, conceding, however, that in seeking equity they must be willing to see equity done, and that the court could and should award to Landstreet such a sum as salary as would be fair and just compensation to him for services rendered after May 14, 1945.
Much of the debate has been upon the question whether the order of the board of directors in which the president cast the deciding vote in his own favor was (1) valid, or was (2) void, or was (3) voidable. There are authorities apparently on both sides of the issue under numerals (1) and (2), but we think the weight of the cases will support the conclusion that the order of the board was not void, but was voidable at the suit of minority stockholders on a cogent showing by them that the salary fixed, under circumstances such as above set out, was clearly excessive and wasteful as against the minority. And that a resolution of the stockholders, carried in the manner above stated, adds nothing to the force of the order of the board. The authorities will appear in the reporter's abstracts of the briefs.
Debate has been focused, also, upon the question whether in fixing a salary, such as this, there may be taken into account any valuable service rendered by the officer before the date of order or resolution fixing the salary, it being manifest from the record that the board, in fixing the president's salary, took into consideration the services of Mr. Landstreet in securing the very advantageous rearrangement of the bonded indebtedness, but which, as already mentioned, had been done and completed before May 14, 1945. If this completed service could have been taken into consideration it would have justified the salary as fixed, at least for the first year after May 14, 1945.
By the clear weight of authority, and upon sound reasons of practical policy, corporate salary awards may not, over the objections of the minority, be based on services already rendered and concluded, unless at the time of their rendition there was an agreement, express or implied, with the corporation or its owners or authorized representatives that compensation should be paid therefor. Numerous cases to this effect are annotated in 40 A.L.R. pp. 1432-1440, and see 3 Thompson on Corporations, Sec. 1849 (1736). Admittedly there was no express agreement in this case before May 14, 1945, and the record is searched in vain for anything upon which it may be dependably said that there was any implied agreement or understanding with the corporation.
If, then, the services in refinancing the bond mortgage were the only services rendered by Mr. Landstreet other than those set out in the third paragraph of this opinion we would be entirely satisfied with the action of the Chancellor in cutting down the salary to $150 per month, and this all the way back to May 14, 1945, including therein the president's traveling expenses, and we may add, to prevail only so long as Mr. Landstreet himself is the president, bringing to it as he does the high qualifications which admittedly he possesses. The minority stockholders are not to be bound to the salary mentioned in this paragraph if and when some other person should succeed to the executive position.
But the services mentioned in the foregoing paragraphs were not all that were rendered by Mr. Landstreet after May 14, 1945, and before the date of the decree herein on March 6, 1946. Within the dates last aforesaid he was further devoting largely of his time and efforts to the task of putting the entire corporate business into a better shape, and to the development of a set-up which thereafter would go forward with some permanence to the substantial advantage of the corporation, two of which we may mention without going into any detail: The final working out of what is called the "Predecessor's Base" for the computation of the income taxes of the corporation and by which it saved for that year and will save for the years to follow about $3,000 annually, and the working out and establishment of a better basis for the administration of, and the accounting for, the Maintenance Reserve between the hotel company and the operating company, by which that fund was increased to the extent of about $8,400; and there were other items of some aggregate importance. These, as we have already observed, had all been about concluded at the date of the decree, as best we can make out from the record.
Corporations must be allowed to function under majority control, as do most institutions in this country, so long as the majority does no actual wrong to the minority or to others. Courts are not to be called on to operate or control them except in cases wherein such interference is essential to justice; and in interfering with what majority has done in such a case as this, real caution must be taken not to work a wrong in striving towards the right. Upon a searching review of this record we think the risk of doing a wrong is too great in requiring that what was paid to Mr. Landstreet between the dates mentioned in the foregoing paragraph shall be in any part refunded by him. We therefore modify the decree by striking therefrom the requirement that he shall refund the sum of $2,400, but in all other respects the decree will be affirmed.
Affirmed in part, reversed in part, and modified decree here.