Rogers v. Hill289 U.S. 582 (1933)
Facts: In 1912, in an almost unanimous vote, the shareholders of the American Tobacco Company voted to approve a by-law authorizing the payment of large sums of money to the the president and vice presidents in addition to fixed salaries, special credits, and allotments of stock. In years when company net profits exceeded $8,222,245, the treasurer was to distribute among the president and five vice presidents of the company 10 percent of the excess such that the president received 2½ percent and each vice president received 1½ percent. As the company grew more successful, the amount each officer received ballooned. In 1931, Mr. Richard Rogers, who had owned 600 assorted shares of stock in the company since 1916, demanded that the ATC sue the officers to account for whatever portion of the payments the courts found illegal since 1921. The company refused.
Rogers brought a suit against Hill, the president of the company and vice presidents Neiley and Riggio as well as the ATC in the Supreme court of New York. The suit was removed to the federal district court for the Southern District of New York. The plaintiff also filed suit in district court against another vice president, Taylor, and the ATC. The two cases were consolidated
Plaintiff made a motion for pleadings on the judgment that defendants Hill, Neiley, and Riggio be required to account for amounts so paid them and that further payments be enjoined; and that in alternative that such payments be restrained pendente lite. The court, without decision on any other question, granted a temporary injunction.
Defendants appealed, and the Circuit Court of Appeals reversed the interlocutory order and directed that a mandate issue to the District court in accordance with this decree. The District court vacated the temporary injunction and dismissed the bills of complaint. Plaintiff appealed and the Circuit Court of Appeals affirmed, citing its opinion on the former appeal. The plaintiff appealed.
Issue: Are large executive compensation payments justifiable by the approval of the majority of the shareholders?
Decision: No. The rule prescribed by a by-law cannot, against the protest of a shareholder, be used to justify payments of sums as salaries so large as in substance and effect to amount to spoliation or waste of corporate property.
The Supreme Court reversed the decree of the Circuit Court of appeals, vacated the District Court decree dismissing the bill of complaints on the merits, remanding the case to the District Court with instructions the reinstate the injunction pendente lite and for further proceedings in conformity with the Supreme Court opinion.
Reason: The plaintiff claimed that even if the by-law was valid when it was adopted, the payments fixed by it were no longer equitable or fair and asked the court to restore to the company the payments made to the (individual) defendants under the by-law. The court must determine whether the District Court may revise the payments.
The shareholders presumably acted in good faith and according to good judgment when they adopted the by-law. The small sizes of the percentages of payments were not unreasonable in and of themselves, considering they depended on business gains. Thus, the payments were ostensibly reasonable when the by-law was made. However, enormous increases in payments warrant investigation.
The size of executive compensation payments in themselves does not prove fraud itself, but the size of payments warrants an investigation in equity in the interest of the company. Although the actions of the stockholders hold much weight and the many stockholders had supported the by-law out of respect for continuity, the majority of stockholders have no power to give away corporate property against the protest of the minority.
“The facts alleged by the plaintiff are sufficient as to require that the District Court, upon the consideration of all the relevant facts brought forward by the parties, determine whether and to what extent payments to the individual defendants under the by-laws constitute misuse and waste of the money of the corporation.”