88 N.Y.2d 189
SYNOPSIS: Plaintiff shareholder sought review of an order of the Appellate Division of the Supreme Court in the Second Judicial Department (New York), which affirmed the trial court's grant of motions by defendants, a company and its board of directors, to dismiss the amended complaint. The shareholder had commenced the shareholder derivative action alleging that the board wasted corporate assets without first demanding that the board initiate a lawsuit.
-Plaintiff challenged Defendants’ decision to increase three of the outside director’s compensation to $55,000 plus 100 shares of IBM stock.
-The increase was above the rate of the cost of living, and the company under Defendants has been struggling.
-Therefore, Plaintiff asserted that the compensation was excessive.
-Defendants argued that only three directors were affected by the compensation increase, and therefore a majority of the Board had no interest – and therefore demand was not excused. -Defendants also argued that Plaintiff only asserted conclusory statements and did not assert with particularity any facts to establish that the compensation was excessive.
(A shareholder alleged that the board wasted corporate assets and that the directors engaged in self-dealing by awarding excessive compensation to company executives and outside directors during a period of declining profitability.)
The court found that because only three directors were alleged to have received the benefit of the compensation scheme, a majority of the board was not "interested" in it.
-The allegations that the board used faulty accounting procedures to calculate executive compensation levels were "conclusory allegations of wrongdoing" insufficient to excuse demand.
-The court did find that a director who voted for a raise in directors' compensation was always "interested" because that person received a personal financial benefit from it.
-Consequently, a demand was excused as to the allegations that the compensation set for outside directors was excessive.
-The court held, however, that the allegations that the compensation bore no relationship to duties performed or to the cost of living were insufficient as a matter of law because they lacked factually-based allegations of wrongdoing or waste which could, if true, sustain a verdict for the shareholder.
OUTCOME: The court affirmed the order of the court below dismissing the shareholder's complaint for failure to state a cause of action, with costs.
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