Chicago Business Litigation Lawyer Blog
Yes, taking excessive compensation can indeed violate a managing member or majority shareholder’s fiduciary duties. Case law supports this assertion. In Fleming v. Louvers International, Inc., the court found that a majority shareholder violated his fiduciary duties by taking excessive compensation, depriving a minority shareholder of his rightful distributions. This conduct was seen as a breach of both his common-law fiduciary duty and his duty under section 12.56(a)(3) of the Act, and also constituted constructive fraud.
The case of Kovac v. Barron highlighted the defendant shareholder who had the corporations pay him and his wife millions in excessive compensation, which was then concealed by disguising the payments as “contract labor” on the corporations’ tax returns.
Similarly, in Halperin v. Halperin, it was held that the payment of excessive compensation and the concealment of the amount of compensation received by the officers were breaches of fiduciary duty. Concealing compensation amounts from shareholders could still constitute a breach of fiduciary duty, even if the compensation was not found to be excessive.
However, it’s important to note that courts usually do not intervene unless the compensation is so unreasonable as to constitute ‘waste’ or ‘spoliation’. In Jaffe Commercial Finance Co. v. Harris, the court held that the evidence failed to establish that the salaries received by the Harris brothers were beyond the range of reason, and thus, they did not breach their fiduciary relationship.
The case of Feldheim v. Sims further supports the notion that a majority shareholder, or a group of shareholders who combine to form a majority, has a fiduciary duty to the corporation and to its minority shareholders, particularly if the majority shareholder dominates the board of directors and controls the corporation. If a shareholder plaintiff can prove that the majority shareholder has used his control over the corporation’s board of directors to engage in self-dealing, this could be judged as a breach of fiduciary duty.
Therefore, whether compensation is excessive and violates fiduciary duties is ultimately a determination that depends on the specific facts and circumstances.
Lubin Austermuehle is the right choice for those needing robust legal representation in breach of fiduciary duty or shareholder or LLC member oppression litigation. Their commitment to their clients and proven track record make them a reliable and effective option in the legal landscape of Chicago and the Chicago area. Contact us for a free consultation online or at 630-333-0333.