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plaintiffinjunctionappealcorporationappellantappellee
plaintiffinjunctionwillcorporationobjectionappellant

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Murphy v. Washington American League Base Ball Club, Inc., 324 F.2d 394, 116 U.S.App.D.C. 362

Facts

The plaintiff-appellant, H. Gabriel Murphy, owns over 40% of the stock of the Washington American League Base Ball Club, Inc. After the corporation moved its baseball team and headquarters from Washington to Minnesota, the board voted substantial salary increases for its members and other employees. Murphy discovered these increases months later and filed suit, challenging the increases and alleging exclusion from the board, low dividends, and improper expense allowances.

The plaintiff-appellant, H. Gabriel Murphy, owns or controls over 40% Of the stock of the Washington American League Base Ball Club, Inc., a District of Columbia corporation. In late 1960 and early 1961, over appellant's objection, the corporation moved its base ball team and its headquarters from Washington to Minnesota.

Issue

Whether the salary increases voted by the board of directors, which included members who were also majority stockholders, were void due to self-dealing.

Appellant's main contention is that since the board voted salary increases to most of its members, the rule against self-dealing vitiates the board's action as a matter of law.

Rule

In a closely-held corporation, self-dealing on salary questions may be inevitable and does not render the board's action void; whether the action is voidable depends on the circumstances, including the reasonableness of the action.

In a closely-held corporation, where the directors are officers and majority stockholders, self-dealing on salary questions may be inevitable as a practical matter, and does not render the board's action void.

Analysis

The court found that the District Court was justified in denying the preliminary injunction against the salary increases. The evidence suggested that the corporation's move to Minnesota was profitable and allowed for salaries more in line with industry standards. Additionally, there was no indication that Murphy would suffer irreparable harm from the salary payments, and he was attempting to revert salaries to levels from two years prior rather than maintain the status quo.

We think the District Court was amply justified in denying the preliminary injunction against payment of the salary increases. The materials before it could reasonably be regarded as showing that when the corporation's operations were centered in Washington it had insufficient profits to pay adequate salaries; that the move to Minnesota was a profitable one; and that salaries more in line with what other baseball companies were paying became possible for the first time as a consequence of the move.

Conclusion

The Court of Appeals affirmed the District Court's order, concluding that the judge did not abuse his discretion in denying the preliminary injunction.

For these reasons, the order of the District Court will be affirmed, without prejudice to further proceedings authorized by law and not inconsistent with this opinion.

Who won?

The appellee corporation prevailed because the court found that the salary increases were not void due to self-dealing and that the board's actions were reasonable under the circumstances.

The court held that action of directors of a closely held corporation where the directors were officers and majority stockholders in voting salary increases for certain officers and employees was not void on theory of self-dealing.

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