Sagalyn v. Meekins, Packard & Wheat, Inc.

Supreme Judicial Court of Massachusetts · 1935 · Corporations

290 Mass. 434 (1935)

Updated August 22, 2026

Corporationsdirectorsfiduciary dutyself-dealingexecutive compensationreasonable salaryfair value of servicesgood faith

Facts

The corporation operated a large department store, and after an executive officer died, the directors increased the annual salaries of Charles H. Tenney, Wheat, and Charles M. Tenney by $5,000 each. Those three were directors present at the meeting, each abstained on his own increase, but no increase could have passed without the vote of at least one of the other interested officers; the master found each increased salary exceeded the fair value of the officer’s services. Later, when preferred stockholders were likely to gain voting power because dividends would not be paid, the Tenneys and Wheat arranged a voting trust of preferred stock to preserve their management, and the corporation paid the expenses of setting it up without express vote. The corporation was not a party to the trust, and the directors honestly believed continued management by them was beneficial to the corporation.

Issue

Whether directors who, in a setting of reciprocal self-interest, participate in salary increases for themselves may retain compensation above the fair value of their services merely because they acted honestly and in good faith. Whether corporate funds may be used to pay the expenses of creating a voting trust designed to preserve control in certain managers when the corporation is not a party to the trust.

Rule

Directors act in a fiduciary capacity and must exercise their authority in the utmost good faith; while they are not personally liable for mere errors of judgment made in good faith, where personal advantage is involved, especially in fixing salaries to be received by directors, equity may inquire into the transaction. In such circumstances, honesty of purpose alone is not decisive, fraud is not essential to a breach of fiduciary duty, and directors who obtain salary above the fair value of their services through a self-interested arrangement must refund the excess. Corporate funds cannot be used for setting up a voting trust of stockholders when the corporation is not a party and the expenditure is not a corporate purpose; such payment is ultra vires and must be returned.

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Redwood Outfitters, Inc., a retailer in Portland, Oregon, has a seven-member board. At a June meeting, three director-officers each abstain on his own proposed raise, but each raise passes only because at least one of the other two interested directors votes in favor; a later fact finder determines each new salary materially exceeded the fair value of that officer's services, though all directors honestly believed the raises were deserved.

In a shareholder derivative suit seeking repayment of the excess compensation, what is the strongest argument for the corporation?

Explanation. When directors participate in a setting where personal advantage is involved in fixing salaries to be received by directors, equity may inquire into the transaction. Under the majority opinion, good faith and absence of conscious fraud do not bar recovery if self-interested directors obtain compensation exceeding the fair value of their services. The key is that this is not treated as a mere business misjudgment, but as a fiduciary breach for personal profit requiring refund of the excess.