Vanderbilt Law Review


F. Hodge O'Neal

First Page



This article considers the legal issues raised when a corporate pension system is attacked by minority stockholders. These issues perhaps best can be delineated by focusing attention on a representative fact-situation.

The board of directors of a corporation formulate a pension plan for corporate officers and employees. Retirement benefits under the plan are to be based on employees' "past service" (i.e., service rendered the company prior to the effective date of the plan) as well as on their "future service" (i.e., service rendered after the plan is in operation). The plan includes provisions for funding the pensions with either a trust company or an insurance company. Perhaps a number of the officer-beneficiaries of the plan are on the board of directors or are" principal stockholders. The plan is submitted to the stockholders and it is approved by a majority vote. Stockholders who oppose the plan go to court to enjoin the corporation and its officers from putting it into operation. The legality of the pension system may be challenged on one or more of the following grounds: (1) a corporation does not have authority to establish a pension system; the payment of pensions is ultra vires because pensions constitute gifts of corporate assets; (2) the granting of pensions based on-past service is especially objectionable since past service benefits are nothing more than additional compensation for "past performances"; (3) the particular pension system adopted is unsound and will result in a waste or "spoliation" of corporate assets; (4) a disproportionate share of expenditures under the pension system is to be used to purchase benefits for corporate directors or executives; (5) interested directors or officers breached fiduciary duties to the corporation to obtain the adoption of the project; (6) the plan was not acted on by the proper corporate representatives; (7) fatal defects or omissions invalidated the acts purporting to adopt the plan.