On October 4, 2022, Justice Cohen of the New York County Commercial Division issued a decision in Pinto v. Schinitsky, 2022 NY Slip Op. 33360(U), holding that directors who set their own compensation must show that the compensation is fair to the corporation, explaining:
[I]t is well-settled that the amount of compensation to be paid corporate officers is properly a matter for the business judgment of the board of directors. Their judgment in this respect is final and subject to interference by the court only ‘in cases of clear abuse bad faith or fraud for the benefit of the corporation.
However, directors who approve their own compensation bear the burden of proving that the transaction was fair to the corporation. Like any other interested transaction, directoral self-compensation decisions lie outside the business judgment rule’s presumptive protection, so that, where properly challenged, the receipt of self-determined benefits is subject to an affirmative showing that the compensation arrangements are fair to the corporation.
While it is true that where there is merely a difference of opinion between a stockholder and directors as to the value of an employee’s services, a corporate officer will not be held personally liable for compensation received, this case does not
(Internal quotations and citations omitted).
involve merely a difference of opinion. Here, Plaintiff and Defendant are the only shareholders of Racher, and Defendant’s compensation is considerably higher than Plaintiffs. While the circumstances may support that the difference in salary is appropriate, Plaintiff denies that he ever approved Defendant’s increase in salary. As Defendant fails to submit any proof that Plaintiff did, in fact, approve Defendant’s increase in salary, it is Defendant’s burden to prove that the compensation arrangement is fair to the corporation. Defendant’s argument incorrectly assumes that if Plaintiff has no witnesses to establish that Defendant’s compensation was unreasonable, Plaintiffs claim of excessive compensation is precluded.