1 Reported in 242 N.W. 392.
This is an appeal by the defendants from a judgment entered against them upon the findings which were before the court in the case of Barrett v. Smith, 183 Minn. 431, 237 N.W. 15. This is a minority stockholders' suit to recover in behalf of the corporation excess salaries paid to defendants as officers, expenditures by defendant Ellison from corporate funds for what are referred to in the record as political contributions, and certain bonuses paid to the defendant Smith. On the three matters mentioned the trial court found in favor of the plaintiffs, and judgment was entered against the defendants therefor. Recovery on the other grounds was sought but relief was denied. Both sides moved for a new trial as well as for amended findings. From the order denying plaintiffs' motion for a new trial they appealed, and the issues which they presented were disposed of by this court in the case cited. The defendants' appeal from the order denying their motion for a new trial was dismissed upon procedural grounds. Barrett v. Smith, 183 Minn. 431, 237 N.W. 15. After the case was remanded
to the district court the defendants unsuccessfully sought leave for a renewal of their motion for a new trial. Judgment was entered against them, and they have appealed.
We do not regard the action of the trial court upon the defendants' application for leave to renew their motion for new trial as at all fatal to any of the questions which they seek to review on this appeal. If there had been no motion for a new trial, the defendants might still review the sufficiency of the evidence to support the findings attacked and the sufficiency of the findings of fact to support the conclusions of law, Pittsburgh P. G. Co. v. Brown, 152 Minn. 325, 326,188 N.W. 569; Cincinnati T. R. Co. v. Lowe, 152 Minn. 374,188 N.W. 1011; Potvin v. Potvin, 177 Minn. 53, 224 N.W. 461.
Plaintiffs failed of reelection to the board of directors at the annual stockholders' meeting held in January, 1929. Defendants and their associates then secured control. Smith and Ellison, holding large blocks of stock, saw to it that persons friendly to their interests were elected directors. Immediately following the stockholders' meeting mentioned, the board of directors met and by one resolution increased the salary of Smith as treasurer and general manager from $15,000 to $21,000, Ellison's as president from $4,500 to $7,500, and also increased the salary of the secretary. All these parties whose salaries were thus increased were directors and voted for the resolution. The trial court found this resolution null and Void. At least it was prima facie voidable. Jones v. Morrison,31 Minn. 140, 16 N.W. 854. There is no finding that the board as such passed the resolution in good faith believing it for the best interests of the stockholders.
After this litigation started and in September, 1929, the board of directors met and passed three resolutions ratifying and adopting the salaries attempted to be fixed by the previous January resolution. One of these resolutions pertained to the treasurer and general manager's salary, one to the salary of the president, and one to the salary of the secretary. When each resolution was adopted the official whose salary was involved therein absented
himself from the room wherein the board meeting was held. Had there been a finding sustained by the evidence that these resolutions were adopted in good faith believing them to be for the best interests of the stockholders, the law would declare the resolution of the previous January ratified and validated. Wickersham v. Crittenden, 110 Cal. 332, 42 P. 893. But there is no such finding. The memorandum made a part of the finding speaks of the good faith of Smith and Ellison, but we do not interpret that as ascribing good faith to the actions of the board of directors either in fixing the salaries at the January meeting or in ratifying them at the September meeting. There were many acts of defendants involved in the litigation, some of which were decided in their favor, and we think the memorandum does not go farther than to say that when Smith and Ellison drew their increased salaries they deemed themselves entitled thereto. Nor do we think the facts would justify such finding.
Plaintiffs and their associates held a large proportion of the stock of the defendant corporation, and they had just been ousted from having the share in its management they theretofore had when the board met in January. Appellants Smith and Ellison held and controlled a majority of the stock. The feeling between the two factions was bitter. There can be little doubt that Smith and Ellison, the chief beneficiaries of the salary raise, selected the directors who in September voted to ratify the salary raise of the January meeting. Nor can there be any doubt that in so doing these directors voiced Smith's and Ellison's wishes. The net earnings for 1928 exceeded $100,000, and for that year Smith was paid the salary of $15,000, the largest salary paid him up to that time, and Ellison $4,500. However, during the year 1929 the earnings dropped so that there was a net loss of over $24,000. This, notwithstanding that in September, when the board of directors must have been aware of the fact that the corporation was operating at a loss, the very generous salary of Smith is increased 40 per cent and that of Ellison 60 per cent. As said in Backus v. Finkelstein (D.C.) 23 F.2d 531, 537:
"The taking of these high salaries by these defendants was merely a convenient method for absorbing the profits, instead of simply making payment for actual services performed."
Judge Booth in that case also calls attention to the fiduciary relation in which a board of directors of a corporation stands to its minority stockholders, and that salaries paid should be considered in connection with the ability of the corporation to pay.
In Fillebrown v. Hayward, 190 Mass. 472, 77 N.E. 45, cited by appellants, in addition to the finding that the directors had acted in good faith in increasing a salary, was the one that though the salary was somewhat large the corporation's business was profitable and growing. Where, as in the instant case, at the January meeting the board of directors of six members undertook to increase the salaries of three of the six who constituted the chief officers of the corporation, courts have termed the action a fraud upon the stockholders.
In McConnell v. Combination M. M. Co. 31 Mont. 563, 567,79 P. 248, 249, it is said of such conduct on the part of directors:
"Their good faith in doing this is altogether immaterial. The law characterizes such action as fraudulent."
In McKey v. Swenson, 232 Mich. 505,
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1 Reported in 242 N.W. 392.
This is an appeal by the defendants from a judgment entered against them upon the findings which were before the court in the case of Barrett v. Smith, 183 Minn. 431, 237 N.W. 15. This is a minority stockholders' suit to recover in behalf of the corporation excess salaries paid to defendants as officers, expenditures by defendant Ellison from corporate funds for what are referred to in the record as political contributions, and certain bonuses paid to the defendant Smith. On the three matters mentioned the trial court found in favor of the plaintiffs, and judgment was entered against the defendants therefor. Recovery on the other grounds was sought but relief was denied. Both sides moved for a new trial as well as for amended findings. From the order denying plaintiffs' motion for a new trial they appealed, and the issues which they presented were disposed of by this court in the case cited. The defendants' appeal from the order denying their motion for a new trial was dismissed upon procedural grounds. Barrett v. Smith, 183 Minn. 431, 237 N.W. 15. After the case was remanded
to the district court the defendants unsuccessfully sought leave for a renewal of their motion for a new trial. Judgment was entered against them, and they have appealed.
We do not regard the action of the trial court upon the defendants' application for leave to renew their motion for new trial as at all fatal to any of the questions which they seek to review on this appeal. If there had been no motion for a new trial, the defendants might still review the sufficiency of the evidence to support the findings attacked and the sufficiency of the findings of fact to support the conclusions of law, Pittsburgh P. G. Co. v. Brown, 152 Minn. 325, 326,188 N.W. 569; Cincinnati T. R. Co. v. Lowe, 152 Minn. 374,188 N.W. 1011; Potvin v. Potvin, 177 Minn. 53, 224 N.W. 461.
Plaintiffs failed of reelection to the board of directors at the annual stockholders' meeting held in January, 1929. Defendants and their associates then secured control. Smith and Ellison, holding large blocks of stock, saw to it that persons friendly to their interests were elected directors. Immediately following the stockholders' meeting mentioned, the board of directors met and by one resolution increased the salary of Smith as treasurer and general manager from $15,000 to $21,000, Ellison's as president from $4,500 to $7,500, and also increased the salary of the secretary. All these parties whose salaries were thus increased were directors and voted for the resolution. The trial court found this resolution null and Void. At least it was prima facie voidable. Jones v. Morrison,31 Minn. 140, 16 N.W. 854. There is no finding that the board as such passed the resolution in good faith believing it for the best interests of the stockholders.
After this litigation started and in September, 1929, the board of directors met and passed three resolutions ratifying and adopting the salaries attempted to be fixed by the previous January resolution. One of these resolutions pertained to the treasurer and general manager's salary, one to the salary of the president, and one to the salary of the secretary. When each resolution was adopted the official whose salary was involved therein absented
himself from the room wherein the board meeting was held. Had there been a finding sustained by the evidence that these resolutions were adopted in good faith believing them to be for the best interests of the stockholders, the law would declare the resolution of the previous January ratified and validated. Wickersham v. Crittenden, 110 Cal. 332, 42 P. 893. But there is no such finding. The memorandum made a part of the finding speaks of the good faith of Smith and Ellison, but we do not interpret that as ascribing good faith to the actions of the board of directors either in fixing the salaries at the January meeting or in ratifying them at the September meeting. There were many acts of defendants involved in the litigation, some of which were decided in their favor, and we think the memorandum does not go farther than to say that when Smith and Ellison drew their increased salaries they deemed themselves entitled thereto. Nor do we think the facts would justify such finding.
Plaintiffs and their associates held a large proportion of the stock of the defendant corporation, and they had just been ousted from having the share in its management they theretofore had when the board met in January. Appellants Smith and Ellison held and controlled a majority of the stock. The feeling between the two factions was bitter. There can be little doubt that Smith and Ellison, the chief beneficiaries of the salary raise, selected the directors who in September voted to ratify the salary raise of the January meeting. Nor can there be any doubt that in so doing these directors voiced Smith's and Ellison's wishes. The net earnings for 1928 exceeded $100,000, and for that year Smith was paid the salary of $15,000, the largest salary paid him up to that time, and Ellison $4,500. However, during the year 1929 the earnings dropped so that there was a net loss of over $24,000. This, notwithstanding that in September, when the board of directors must have been aware of the fact that the corporation was operating at a loss, the very generous salary of Smith is increased 40 per cent and that of Ellison 60 per cent. As said in Backus v. Finkelstein (D.C.) 23 F.2d 531, 537:
"The taking of these high salaries by these defendants was merely a convenient method for absorbing the profits, instead of simply making payment for actual services performed."
Judge Booth in that case also calls attention to the fiduciary relation in which a board of directors of a corporation stands to its minority stockholders, and that salaries paid should be considered in connection with the ability of the corporation to pay.
In Fillebrown v. Hayward, 190 Mass. 472, 77 N.E. 45, cited by appellants, in addition to the finding that the directors had acted in good faith in increasing a salary, was the one that though the salary was somewhat large the corporation's business was profitable and growing. Where, as in the instant case, at the January meeting the board of directors of six members undertook to increase the salaries of three of the six who constituted the chief officers of the corporation, courts have termed the action a fraud upon the stockholders.
In McConnell v. Combination M. M. Co. 31 Mont. 563, 567,79 P. 248, 249, it is said of such conduct on the part of directors:
"Their good faith in doing this is altogether immaterial. The law characterizes such action as fraudulent."
In McKey v. Swenson, 232 Mich. 505, 514, 205 N.W. 583, 586, the court holds the fixing of salaries as was done in the case at bar in January, 1929, not voidable but "wholly void," and "required refund thereof or, at least, casts upon the officers the burden of showing the salaries were reasonable or to give the court information upon which reasonable compensation could be fixed." It was there also held that, since the officers receiving the salary held the majority of the stock of the corporation, the action of the directors in fixing such salaries could not be ratified at a stockholders' meeting.
Under the circumstances, the January attempt to increase the salaries was more than voidable. And this is confirmed and good faith negatived by the attempted ratification in September. The members of the board, and certainly the officers concerned, then
knew that the corporation was operating at a loss. Under such circumstances it was close to criminality for the board, dominated by the chief beneficiaries of the action, to attempt to ratify a previous voidable 40 to 60 per cent increase of salaries. The case of Atwater v. Elkhorn Valley C. L. Co.184 App. Div. 253, 171 N.Y. S. 552 (affirmed in appellate court) is also in point, that where the increase of salary is grossly excessive the court will grant minority stockholders relief despite ratification, it being a constructive fraud upon them to permit the chief officers to absorb the earnings. We conclude the court rightly determined that Smith and Ellison were liable for the salaries drawn in excess of $15,000 and $4,500. In so doing we do not depart from the doctrine that courts do not meddle with the internal government of corporations except to protect the minority stockholders against fraud or oppression practiced by the board of directors or the majority. But 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 fiduciary obligations of the directors, equity will interfere. The fact that salaries voted are higher than the court would fix is not enough. However, the salaries may be set at such excessive amount as to evidence fraud and oppression on the minority. The question is fully gone into by this court in Seitz v. Union B. M. Mfg. Co. 152 Minn. 460, 464,189 N.W. 586, 588, 27 A.L.R. 293, where it is 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."
5 Fletcher, Cyc. Corp. (Perm. ed.) § 2171, p. 494, states that the better view seems to be that the action of directors will not be set aside unless the result is oppression of the minority. But we conclude that under the circumstances disclosed by this record the increase of salaries to the officers owning or controlling the majority stock resulted in unjustifiable oppression and loss to the minority
stockholders. The court directed judgment for the void increase received.
Defendant Ellison made contributions to political parties and candidates with funds which were voted to his expense account with the knowledge of Smith and Mitchell. They candidly admit that they knew the purpose of the appropriation. Plaintiffs deny knowledge. The court found that Ellison alone should repay these contributions, placing its decisions partly on the statutory violation and partly on the fact that other innocent but unnamed stockholders were interested in the result. On the plaintiffs' appeal they earnestly contended that Smith and Mitchell as well as Ellison should be held. We then held because the practice had continued coextensively with plaintiffs' service upon the board of directors from 1921 and 1922 to 1929 that they could not successfully plead ignorance. They were barred from recovery from Smith and Mitchell by acquiescence in a long established practice. It was then said [183 Minn. 442]:
"Accurate and complete knowledge of such things is sometimes avoided. It was available here. When such knowledge is so available, but escaped as plaintiffs insist it was here, responsibility follows as surely as though it had been actually gained."
We might stop here in the theory that our former decision is the law of the case, but we reiterate the principle that directors cannot successfully plead ignorance of a long continued practice and policy which it was their duty as directors to know and to stop or at least to protest against.
That there are other stockholders who may not be barred but who are not parties by name does not permit a recovery. 6 Fletcher, Cyc. Corp. (not in Perm. ed.) § 4073, p. 6955. We hold that the plaintiffs are precluded from recovering these contributions from Ellison. In doing so we must not be understood as condoning any alleged violation of the law by defendants. We hold as we do solely on the ground that plaintiffs were themselves guilty of permitting the practice and are estopped from now seeking a recovery in behalf of the corporation or its stockholders.
The defendant Smith is charged with the receipt of two bonuses, one for $1,500 in 1924 and one for $750 in 1928. The latter was authorized by the board of directors, these plaintiffs voting for it. They are therefore not in a position to recover this for the corporation. They acquiesced. The $1,500 bonus in 1924 stands on a different footing. It was not authorized, although the trial court finds that Smith thought it was. On the findings Smith must repay this to the corporation.
The judgment is reversed with instruction to modify the conclusions of law in conformity to this opinion and enter judgment accordingly with a provision therein to protect the rights of the corporation in and to the recovery.
The judgment is reversed.