Rogers v. Hill

Background

A longtime shareholder of a New Jersey tobacco corporation sued to force the company’s president and vice-presidents to account for large payments made under a stockholders’ by-law adopted in 1912. The by-law paid percentages of profits (2% to the president, 1% to each vice-president) when net profits exceeded a set threshold. The shareholder alleged the by-law was invalid or, in any event, that recent payments were unreasonably large and should be recovered; he sought an injunction and an accounting.

Reasoning

The Court addressed whether stockholders could adopt the by-law and whether courts may examine large payments made under it. The Court held stockholders retained power to adopt the by-law despite any delegation to directors, and the by-law’s definition of “profits” included the payments at issue. But because payments rose enormously with increased profits, the Court concluded equity courts may investigate whether the payments amount to waste or misuse of corporate assets. The Court also found the appeals court’s earlier mandate did not require dismissal and therefore reversed the appeals court and vacated the district court’s dismissal.

Real world impact

The case is sent back to the trial court with instructions to reinstate the temporary injunction and to allow further proceedings so a judge can determine whether the by-law payments were improper and should be returned to the company. The decision leaves open full judicial review of the fairness of the specific payments and does not finally resolve the merits.

Dissents or concurrances

The Court noted a prior dissent (Judge Swan) which said a bonus unrelated to actual services is effectively a gift and majority stockholders cannot give away corporate property over a protesting minority. This view helped frame the inquiry into possible waste.