Rogers v. Hill
1933 U.S. LEXIS 194, 53 S. Ct. 731, 289 U.S. 582 (1933)
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Rule of Law:
Courts may review stockholder-approved executive compensation plans to determine if the payments are so disproportionately large in relation to the services rendered that they constitute corporate waste or spoliation of assets.
Facts:
- In 1912, the stockholders of The American Tobacco Company adopted by-law XII, which provided for annual payments to its president and vice-presidents based on a percentage of the company's net profits.
- The by-law specified that the president would receive 2.5% of net profits exceeding a certain threshold, with vice-presidents receiving smaller percentages.
- Richard Reid Rogers acquired common stock in the company in 1916 and was a shareholder at the time of the dispute.
- Due to an enormous increase in the company's profits in the late 1920s, the payments under the by-law became very large; for example, President Hill received $842,507.72 in 1930 in addition to his salary.
- In March 1931, Rogers demanded that the company sue its officers to recover what he alleged were excessive payments made under the by-law.
- The American Tobacco Company refused Rogers' demand, insisting the payments were legal and proper.
Procedural Posture:
- Rogers (plaintiff) initiated a shareholder derivative suit in the Supreme Court of New York against company executives (defendants).
- The case was removed to the U.S. District Court for the Southern District of New York.
- The district court granted Rogers' motion for a temporary injunction to stop the payments pendente lite.
- The executives (appellants) appealed the interlocutory order to the U.S. Circuit Court of Appeals.
- The Circuit Court of Appeals reversed the district court's order granting the injunction.
- On remand, the district court vacated the injunction and dismissed Rogers' complaint on the merits.
- Rogers (appellant) appealed the dismissal to the Circuit Court of Appeals, which affirmed the district court's decision.
- The U.S. Supreme Court granted Rogers' petition for a writ of certiorari.
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Issue:
Does a court have the authority to review the reasonableness of executive compensation paid under a valid, stockholder-approved by-law when the amounts become exceptionally large due to increased company profits?
Opinions:
Majority - Mr. Justice Butler
Yes. A court has the authority to review the reasonableness of executive compensation paid under a valid, stockholder-approved by-law. Although the by-law itself was validly adopted and is supported by a presumption of regularity, its application cannot be used to justify payments so large that they amount to spoliation or waste of corporate property. The court reasoned that while stockholders have the power to enact such by-laws, and compensation based on profits is not per se unreasonable, there is a limit. If a bonus payment has no relation to the value of the services for which it is given, it is in reality a gift, and a majority of stockholders have no power to give away corporate property against the protest of the minority. Therefore, the facts alleged by Rogers were sufficient to require the district court to investigate whether the payments constituted a misuse and waste of corporate funds.
Analysis:
This decision establishes the 'corporate waste' doctrine as a basis for judicial review of executive compensation. It empowers minority shareholders to challenge compensation plans, even those approved by a majority, if the resulting payments are so excessive that they lack any reasonable relationship to the value of the services performed. The case serves as a crucial check on corporate power, ensuring that executive pay is not entirely shielded from scrutiny simply by shareholder ratification. It affirmed that fiduciary duties owed to the corporation and its shareholders can be breached by awarding compensation that effectively amounts to a gift of corporate assets.
