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.
