Hamway and other minority shareholders brought an action against majority shareholders of Libbie Rehabilitation Center, Inc., including Frank Giannotti, CEO-director; Alex Grossman, president-director; Henry Miller, vice president–director; Ernest Dervishian, secretary and corporate attorney; and Lewis Cowardin, treasurer-director. The minority shareholders contended that the corporation paid excessive salaries to these director-officers and was wasting corporate assets. Prior to coming to Libbie, Giannotti had been a carpet and tile retailer, Grossman a pharmacist, Miller a real estate developer, Dervishian a lawyer, and Cowardin a jeweler. The evidence showed that the extent of their work for the corporation was very limited. For example, Cowardin, Libbie’s finance officer, who was paid $78,121, demonstrated no knowledge of the Medicare and Medicaid programs, the principal source of Libbie’s income. Although he claimed to have spent 20 to 25 hours a week on corporate duties, he reported on the tax return for his jewelry business that he spent 75 percent of his working time in that business. One expert witness of the plaintiff testified that the five men were performing the management functions of one individual. The director-officers contended that the business was making a profit and that all salaries were approved by a board of directors that had extensive business experience. Were the directors within their rights to elect themselves officers and set pay for themselves as they saw fit? Did they violate any legal or ethical duty to their shareholders?
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