## Facts

- A minority shareholder of Alabama Dry Dock & Shipbuilding Co., Inc. filed a derivative equity action on the corporation’s behalf.
- The complaint alleged the board adopted resolutions authorizing corporate payments to the widows of the corporation’s deceased president and deceased comptroller.
- The payments were alleged to be unauthorized gifts of corporate property made without consideration and without any contractual or legal obligation owed to the widows.
- As to the president, the complaint alleged all compensation due for services had already been paid in full to him or to his estate, and the corporation was not indebted to his widow.
- The shareholder demanded that directors and shareholders take steps to recover amounts paid and stop further payments; they refused.
- The complaint did not allege directors acted for personal gain or with intentional wrongdoing.
- Defendants (directors, the corporation, and the widows) filed demurrers challenging the complaint’s legal sufficiency; the trial court overruled the demurrers, and defendants appealed.

## Issues

1. Whether a minority shareholder may maintain a derivative action challenging board-authorized payments alleged to be gratuitous transfers of corporate assets to third parties to whom the corporation owed no obligation.
2. Whether the complaint sufficiently satisfied derivative-suit prerequisites under the then-applicable Alabama statute, including demand on corporate decisionmakers and refusal to act.
3. Whether alleged director good faith and lack of personal benefit bar judicial review at the pleading stage when the challenged act is an alleged unauthorized gift of corporate funds.

## Decision

- The Supreme Court of Alabama affirmed the interlocutory decree overruling the demurrers.
- The court held the complaint stated a sufficient derivative cause of action to proceed, assuming the pleaded facts as true.
- The court held allegations of demand on directors and shareholders and their refusal were sufficient under the pre-amendment version of the governing statute.
- The court did not adjudicate the ultimate legality of the payments; it only determined the complaint was legally sufficient.

## Legal Principles

- Directors generally lack authority to dispose of corporate assets as gratuitous transfers to non-obligated third parties; such alleged transfers may be challenged as a misapplication of corporate funds.
- The absence of alleged self-dealing, personal benefit, or intentional wrongdoing does not necessarily defeat a claim where the challenged act is an alleged unauthorized gift of corporate property.
- A minority shareholder may proceed derivatively when the shareholder pleads demand on those controlling corporate action (directors and, as applicable, shareholders) and refusal or failure to seek recovery for the corporation.
- On demurrer, well-pleaded factual allegations are taken as true for purposes of testing legal sufficiency.

## Conclusion

The court allowed a minority shareholder’s derivative suit to go forward where the complaint alleged directors authorized non-contractual, no-consideration payments of corporate funds to officers’ widows and corporate decisionmakers refused to pursue recovery, notwithstanding allegations that directors acted without personal profit or intentional misconduct.


Adams v. Smith, 153 So. 2d 221 (Ala. 1963)