## Facts

- Minority shareholders of American Tobacco Company brought a derivative action challenging incentive bonuses paid to senior officers under a shareholder-approved 1912 by-law.
- The by-law awarded the president and vice-presidents annual bonuses tied to profits, in addition to fixed salaries.
- The company was large and profitable; 1939 sales were about $262,416,000.
- From 1929–1939, covered officers received about $3,784,999.69 in salaries and $11,672,920.27 in bonuses; the president received over $1,000,000 annually in 1930 and 1931 and averaged roughly $400,000 per year over the period.
- Plaintiffs claimed the bonuses had no reasonable relation to services rendered and therefore constituted waste and, to the extent excessive, an ultra vires “gift” of corporate assets.
- Plaintiffs also attacked the continuing legitimacy of the bonus regime by alleging that a substantial attorney’s fee approved in prior related litigation improperly tainted the earlier compromise that reduced, but did not remove, bonuses.
- At trial, plaintiffs relied primarily on compensation and sales figures and offered no expert testimony, comparative data, or other affirmative proof that the amounts were grossly disproportionate or the product of bad faith.

## Issues

1. Whether shareholder-approved incentive bonuses may constitute corporate waste or an unlawful gift where the payments allegedly bear no relation to the value of services rendered.
2. What level of proof a minority shareholder must produce to justify judicial interference with director- and shareholder-approved executive compensation.
3. Whether prior litigation and a court-approved attorney’s fee required reopening or disregarding the earlier compromise affecting the bonus plan.

## Decision

- The trial court entered judgment for the directors and refused to order restitution or curtail the bonuses.
- The court accepted that majority shareholders cannot give away corporate property over minority objection if purported compensation is unrelated to the value of services and is therefore a gift in part.
- The court held plaintiffs did not meet their burden to prove the bonuses were wasteful or functioned as gifts, because they offered no evidentiary standard by which to measure reasonable compensation.
- The court declined to treat the prior attorney’s fee as corruption warranting reopening the earlier compromise.
- The Appellate Division affirmed without opinion.

## Legal Principles

- Executive compensation may be attacked as corporate waste or as an ultra vires transfer if it bears no reasonable relation to the value of services rendered and is, in substance, a gift in part.
- Shareholder approval and long-standing acquiescence weigh against judicial intervention, though they do not immunize truly wasteful payments.
- The plaintiff in a derivative waste challenge bears the burden of producing affirmative proof (not merely large numbers) that compensation is unrelated to services or resulted from bad faith, fraud, or comparable misconduct.
- Courts will not set or reduce executive pay on an ad hoc basis without a reliable evidentiary benchmark for reasonableness.

## Conclusion

The courts upheld American Tobacco’s shareholder-approved incentive compensation plan because the minority shareholders failed to prove that the large bonus payments were unrelated to services rendered or otherwise amounted to corporate waste; absent an evidentiary basis for measuring excess, judicial revision of compensation was denied.


Heller v. Boylan, 29 N.Y.S.2d 653 (Sup. Ct. N.Y. Cnty. 1941), aff'd, 263 A.D. 852 (1st Dep't 1942)