## Facts

- A shareholder of Celanese Corporation of America brought a derivative action against directors and officers challenging two board-approved decisions.
- Celanese manufactured a synthetic fiber and faced competitive and regulatory pressure after being required to label its product as “rayon,” prompting management to seek stronger brand differentiation.
- Historically, Celanese’s annual advertising spending was about $683,000.
- The board approved a radio advertising campaign costing about $1 million per year, featuring a high-quality music program.
- A principal singer on the program was a professional soprano who was also the corporation president’s wife.
- Before approving the campaign, the company conducted internal advertising studies, retained a radio consultant, and engaged a prominent advertising agency.
- The advertising-related contracts were cancellable at short intervals, limiting the corporation’s long-term financial commitment.
- After the campaign had run for approximately a year or more, the board renewed it.
- The board also renewed an employment agreement for the president’s brother, a co-inventor of technology important to the business, paying substantial compensation despite his reduced day-to-day operational role.
- The employment arrangement functioned in part to prevent him from working for competitors.

## Issues

1. Whether directors breached the duty of loyalty or committed corporate waste by approving and renewing a costly advertising campaign in which the president’s wife performed.
2. Whether directors breached fiduciary duties or committed waste by renewing an employment agreement for the president’s brother despite limited active services.
3. What level of judicial scrutiny applies when board action involves potential director self-interest, and what showing is required to set aside the transaction.

## Decision

- The court dismissed the derivative complaint and entered judgment for the directors and officers.
- The radio advertising program was upheld as a proper corporate expenditure serving legitimate business objectives, not a diversion of funds for personal benefit.
- The employment agreement renewal was upheld as a valid corporate decision that protected corporate interests and did not constitute waste.
- The court applied stricter scrutiny due to the appearance of conflicts but found no showing of “negligence, waste or improvidence.”

## Legal Principles

- Courts generally defer to board decisions on management policy and corporate expenditures when made in honest pursuit of corporate interests, even if outcomes later appear unwise.
- When directors have a personal interest or conflicting relationship connected to a transaction, ordinary business-judgment deference is reduced and the court will scrutinize the decision more closely.
- A conflicted transaction may be sustained if it serves a legitimate corporate purpose and the corporation does not pay an exorbitant or unconscionable price.
- Corporate waste requires more than a large or debatable expenditure; it requires a showing of recklessness or extreme disproportionality such that the transaction cannot be justified as a reasonable corporate act.
- Evidence of investigation, use of outside advisors, and contractual protections limiting exposure supports a finding of good-faith decision-making and counters claims of waste.

## Conclusion

The court held that potential conflicts arising from familial relationships justified closer review but did not establish liability where the board demonstrated a rational business basis for the advertising and employment decisions and the plaintiff failed to prove waste or disloyal diversion of corporate assets.


Bayer v. Beran, 49 N.Y.S.2d 2 (Sup. Ct. N.Y. Cnty. 1944)