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Although courts are hesitant to inquire into the reasonableness of executive compensation when it is fixed by a disinterested board, the standard for fixing executive compensation is obviously more strict when it is fixed by the recipient himself. And where the recipient's vote as a director is necessary to the fixing of the amount of his compensation, then the burden of showing the reasonableness of such compensation clearly falls upon its recipient. That is so because of the fiduciary position which directors hold towards their corporation and its stockholders.
Eleanor M. Wilderman, the plaintiff in this action, sues in her own right and in her capacity as a stockholder with an interest in one-half of the issued and outstanding stock of the defendant Marble Craft Company, Inc. She primarily seeks a ruling to the effect that the defendant Joseph M. Wilderman (the president of the corporate defendant and her former husband) for the fiscal years ending March 31, from 1971 through 1973, caused excessive and unauthorized payments to be made to himself out of earnings of the corporate defendant and that such payments, made in the form of unearned and unauthorized salary and bonuses, must accordingly be returned to the treasury of Marble Craft Company.
Did the president discharge his burden to show the reasonableness of the amounts he had drawn for all the years in question?
The court held that the stockholder/board member's letter concerning the president/board member's compensation served to revoke board authorization for the continuing payment to him of compensation on the basis previously recognized. The president did not discharge his burden to show the reasonableness of the amounts he had drawn for all of the years in question. The court concluded from a consideration of the facts and circumstances surrounding the president's services to the corporation that compensation in excess of the compensation suggested by the financial analyst who testified at trial would be reasonable but that such compensation should be within the limits considered appropriate by the Internal Revenue Service. The president's counterclaims, which had to do with the division of former marital property, would either be dismissed or transferred to a court of appropriate jurisdiction as provided for under the provisions of Del. Code Ann. tit. 10, § 1901.