Bayer v. Beran
49 N.Y.S.2d 2 (N.Y.Sup.Ct. 1944)
- A corporation called Celanese spent $100k a year to advertise on a classical music radio show.
- Turns out that one of the singers on the radio show was a woman named Tennyson, who coincidentally happened to be married to Celanese’s director, a guy named Dreyfus!
- Bayer, a stockholder, sued Dreyfus because he felt that the expenses were inappropriate and that hurt the company, and therefore the value of his stock.
- That’s known as a derivative stockholder’s suit.
- The Trial Court found for Dreyfus.
- The Trial Court found that Directors (such as Dreyfus) were not ‘trustees’, and so were not strictly accountable for business decisions, but they did have some level of accountability.
- The Court invoked the business judgment rule.
- Basically, the business judgment rule says that questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to decision of directors, and the exercise of their decision may not be questioned although the results show that what directors did was unwise or inexpedient.
- The Court agreed that it was not really a wise decision for Dreyfus to be wasting money supporting his wife’s career. However, as long as there is no “negligence, waste or improvidence,” the courts should not second guess the director’s decisions.
- Basically, as long as the expense isn’t reckless or unconscionable, it isn’t a breach of fiduciary duty.
- In this case, the advertising served a legitimate and useful corporate purpose and the company received the full benefits of the advertising.
- It wasn’t like they were paying a premium to advertise on the show, they were paying the going rate.
- Under modern corporate law, the duties of corporate officers have been split into a duty to care and a duty of loyalty.
- In this case, Dreyfus was probably not guilty of violating the duty to care, but his conflict of interest might be considered a violation of his duty of loyalty.