## Facts

- A public corporation faced a contested solicitation of proxies for the election of directors between an incumbent (“old”) board and an insurgent (“new”) slate.
- A stockholder owning 25 shares brought a derivative action seeking return of $261,522 from the corporate treasury used to pay proxy-contest expenses for both factions.
- While still in office, the old board spent about $106,000 of corporate funds in connection with soliciting proxies to defend its position.
- After winning the election, the new board paid about $28,000 to compensate the former directors for additional expenses the new board deemed fair and reasonable.
- The new board also reimbursed members of the prevailing group about $127,000; that reimbursement was approved by stockholders by a 16-to-1 vote.
- The lower courts found the contest involved an understandable dispute over corporate policy (including a controversial employment/pension arrangement), not merely a struggle to perpetuate management’s control.
- The plaintiff did not allege fraud and did not seriously contest that the amounts were reasonable, arguing instead that corporate funds could not lawfully be used for these purposes.

## Issues

1. Whether directors may use corporate funds to pay reasonable proxy-solicitation expenses in a bona fide contest over corporate policy, rather than a fight for personal control.
2. Whether a corporation may reimburse expenses of both the unsuccessful incumbents and the successful insurgents when the expenditures are in good faith and reasonable.
3. What legal effect stockholder ratification has on reimbursing the prevailing insurgent group’s proxy-contest expenses.

## Decision

- The New York Court of Appeals affirmed dismissal of the derivative complaint.
- The court accepted the supported findings that the proxy contest centered on corporate policy and that the challenged expenditures were reasonable.
- The court held that reasonable proxy-solicitation expenses may be charged to the corporation when incurred in good faith in a bona fide policy contest.
- The court upheld reimbursement to the successful insurgent group, emphasizing that the stockholders expressly ratified that payment by an overwhelming vote.

## Legal Principles

- Corporate funds may be used for reasonable expenses of soliciting proxies when the solicitation is undertaken in good faith to present and defend corporate policy choices for stockholder decision.
- A key distinction is between (a) policy-based contests, where informing stockholders may justify corporate payment, and (b) contests primarily for personal power or office entrenchment, where such spending is improper.
- Courts may uphold reimbursements to both incumbents and insurgents if the expenses are reasonable and connected to a bona fide policy dispute; reimbursement to insurgents is strongly supported when ratified by informed stockholders.
- Absent proof of fraud, waste, bad faith, or unreasonableness, a derivative plaintiff cannot recover merely by asserting that proxy-contest spending is categorically unlawful.

## Conclusion

The court sustained corporate payment and reimbursement of proxy-contest expenses because the contest was found to concern substantive corporate policy and the amounts were reasonable and incurred in good faith, with the insurgents’ reimbursement additionally validated by decisive stockholder ratification.


Rosenfeld v. Fairchild Engine & Airplane Corp., 309 N.Y. 168 (N.Y. 1955)