Rosenfeld v. Fairchild Engine & Airplane Corp.

Majority - Murphy, J.

Yes, a corporation may lawfully reimburse the expenses of both incumbent management and successful insurgent directors incurred during a proxy contest, provided the contest concerns disputes over corporate policy and the reimbursement of the insurgent group is subsequently ratified by a majority of the stockholders. The court reasoned that where a proxy contest involves a serious and substantial difference of opinion regarding corporate policy, incumbent management is entitled to use corporate funds to present its interpretation of the struggle and advocate its position to stockholders, as this serves the legitimate corporate purpose of informing stockholders. This distinguished the case from Lawyers' Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co., which involved unauthorized expenses without stockholder approval. Drawing upon cases like Hall v. Trans-Lux Daylight Picture Screen Corp. and Steinberg v. Adams, the court extended this principle to successful insurgent groups ('outs'). It held that if incumbent directors may use corporate funds in policy contests, those who advocate a contrary policy and succeed in securing stockholder approval should also be eligible for reimbursement, especially when approved by both the new board and a majority of stockholders, explicitly rejecting a distinction between 'ins' and successful 'outs' in policy contests with ratification. For the reimbursement of the Fairchild group's expenses, the court found the overwhelming majority stockholder ratification (better than fourteen to one) to be a decisive factor, stating that a majority vote is sufficient for approval of any irregular or voidable act, not requiring unanimity for what the plaintiff alleged was a 'gift.' The court also found the notice of the meeting sufficiently apprised stockholders of the scope of the reimbursement. Regarding the plaintiff's claims against specific directors (McComas, Wilson, Fairchild, Allis), the court dismissed the complaint due to the plaintiff's failure to segregate unwarranted from reasonable expenses and the effect of stockholder ratification. Furthermore, directors who vote for expenses resulting in unwarranted gain for others but do not personally profit and act in good faith are generally absolved from liability, citing Matter of Horowitz. Fairchild and Allis were found to have acted in good faith and without personal profit when authorizing the payment of the old board's remaining expenses.