Corporations – Shareholders – Use of Corporate Funds for Proxy Contest Expenses

Following a proxy contest in which the insurgent faction of stockholders was successful, the new board of directors paid out $28,000 to members of the old board to cover expenses incurred by them, and also used $127,000 to reimburse the prevailing group. The latter expenditure was approved by a sixteen-to-one majority vote of the stockholders. Plaintiff brought a derivative action seeking restoration of both amounts. The trial court dismissed the complaint, and the appellate division affirmed this judgment. On appeal to the New York Court of Appeals, held, affirmed, three judges dissenting. Corporate directors may make reasonable expenditures in connection with proxy contests which involve issues of policy, and stockholders may reimburse successful contestants for similar expenses. Each allegedly improper expenditure must be challenged specifically. Rosenfeld v. Fairchild Engine and Airplane Corp., (N.Y. 1955) 128 N.E. (2d) 291.