In the context of a Motion to Dismiss, the Chancery Court in
Horbal v. Three Rivers Holdings, Inc., download file, addressed claims that Horbal was forced out of his management position by co-investors and that the co-investors abused their positions by siphoning off millions of dollars in the form of disguised salaries, bonuses and corporate perquisites. The plaintiffs considered these perks to be constructive or “de facto dividends” which shareholders have a right to share in equally. Chancellor Chandler noted that no Delaware court has ever recast executive compensation as a constructive dividend, however, the court noted that the facts in this case are similar to those of Wilderman v. Wilderman, 315 A.2d 610, 612 (Del. Ch. 1974). Although the court in Wilderman required the return of excess compensation taken by one 50% shareholder to the corporation, it did not order that it be distributed as a dividend, because the decision to grant a dividend is a matter for the board of directors in their discretion absent an allegation of fraud. A similar holding based on similar facts was found in Keenan v. Eshleman, 2 A.2d 904 (Del. 1938).
Here the court determined that, in essence, the plaintiffs should be making a classic allegation of self-dealing or waste, but the plaintiffs failed to make the necessary allegations for breach of the duty of loyalty, and the court gave them leave to amend for that purpose. The court also addressed a Section 220 claim which is part of the lawsuit and ordered that an accounting be provided to show exactly how much money had been paid to the defendants in any form.