Shareholders in a corporation expect to receive a dividend — or share of the company’s profits — but sometimes these dividends can diminish or disappear if employees who are shareholders (whether they be directors, officers, or other staff) receive overly large compensation packages.
Disputes can also arise among employee shareholders over why one person receives more or receives the same while doing less. A typical shareholder compensation dispute might arise when the owners — who are also shareholders — are believed to be taking away shareholder proceeds through generous compensation packages, including salary, bonuses, and other perks.
What can the other shareholders do if they feel their dividends are being hurt (or even eliminated) by the actions of a few in controlling positions? What if they are employee shareholders and feel they’re being unjustly compensated?
If you’re in or around Birmingham, or anywhere in the state of Alabama or the Florida Panhandle, contact Clark Law Firm PC. Attorney John W. Clark IV is an experienced shareholder dispute and business litigation attorney who will listen to your story, assess the situation, and present you with your best options going forward.
In examples in which the owners take what is perceived to be an excessive share of company profits for themselves, the other shareholders can press the subject at shareholder meetings, by bringing attention to the matter to the board of directors, or ultimately by filing a derivative shareholder lawsuit. Hopefully, a resolution can be achieved internally through negotiation or through mediation and arbitration offered by third parties.
When those at the top are viewed as eating up too large a share of company profits, the goal is to determine what reasonable compensation should be. Toward this end, there are two recognized methods of valuing a compensation package.
One method is called the independent investor test. This analysis was used by a U.S. Tax Court case involving the two owners of a concrete contracting firm who received $7.3 million in compensation. The court ruled that the shareholders still received a “reasonable” return on their investment, so the salaries were deemed to be justified.
Another form of analysis hinges on comparable salaries. Public and private data comparing salaries for similar individuals in similar industries and similar geographic locations is an often-used method to determine a fair compensation package. Needless to say, either of these analyses needs to be done by outside analysts due to the emotions and sensitivities of those close to the situation.
Employees who are also shareholders can become disgruntled when one or more of their fellow shareholder-employees receives more or receives the same and does less. Internal employee disputes over compensation can also arise when family members are paid more, given higher titles and offices, and are perceived not to be carrying their weight in relation to non-family employees.
Disputes of this nature should not reach the level of a derivative shareholder lawsuit and should be handled internally - though that is not always possible. Again, the reliance on an outside negotiator, mediator, or arbitrator may be the best route to resolution before the feud trickles down to non-employee shareholders, who may question the ability of those in charge to manage operations.
As much as possible, disputes over compensation should be handled internally. Depending on the size and nature of the corporation, internal resolution may be more or less viable. It is always advisable to engage experienced legal counsel, who can help negotiate or act as a mediator or arbitrator.
In the end, if all measures by shareholders — starting with informing the directors and officers of the situation — lead to an impasse, then a derivative shareholder lawsuit might be the only remaining option. Alabama courts, however, are reluctant to interfere with internal corporate matters as long as the directors and officers act in “the best interest” of the corporation.
This attitude reflects Alabama’s business-judgment rule, which states that “the best interest” of the corporation is upheld if decisions are made on a “reasonable basis” and in “good faith.” This would include the award of compensation to officers and directors.
The Alabama Supreme Court ruled in Smith v. Dunlap: “In evaluating compensation under the business judgment rule, our inquiry is whether the compensation is so excessive that it bears no reasonable relation to the value of services rendered.”
In disputes over compensation, matters can spiral out of control — especially in a smaller, more closely held corporation. Even in a larger corporation, resentment can breed. If your company is mired in issues of compensation, you need to seek legal counsel to help resolve the situation.
If you’re in Alabama or the Florida Panhandle, reach out to Clark Law Firm PC. Attorney John W. Clark IV is committed to resolving disputes as smoothly and peacefully as possible. Let him work with all of you to achieve the best available resolution. If matters get worse, John is also an experienced dispute business litigation attorney. Reach out today for reliable legal guidance!