Dodge v. Ford Motor Co.
204 Mich. 459, 170 N.W. 668 (1919)
- Ford, as the CEO and majority shareholder of his company, announced a plan to end paying out special dividends to shareholders, and instead take the profits and reinvest them in order to employ more workers and build more factories. That would allow him to employ more people and cut the costs of his cars to make them affordable to more people.
- Ford said, “My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business.”
- Minority shareholders, including Dodge, sued to stop Ford’s plans.
- Dodge argued that the purpose of the company was to maximize shareholder profits, not to help the community by making affordable cars, or employ more workers.
- The Trial Court found for Dodge and ordered Ford to give out a big dividend to shareholders. Ford appealed.
- The Michigan Supreme Court affirmed.
- The Michigan Supreme Court found that a corporation is organized primarily for the profit of the stockholders, as opposed to the community or its employees.
- The Court found that the corporations’ directors have some discretion to chart the course of the business (under the business judgment rule), but that discretion does not extend to the reduction of profits or the non-distribution of profits among stockholders in order to benefit the public.
- Basically, a corporation is a business, not a charity. It is the primary duty of the management to maximize shareholder wealth.
- That doesn’t mean it is the sole duty of the directors to maximize profits. The Court noted that “an incidental humanitarian expenditure for the benefit of the employees” would be permissible.
- Btw, Ford wasn’t as altruistic as one might think. Turns out, Ford knew that Dodge was using the dividend money to build a rival car company, and he was probably trying to bankrupt any potential competition.
Note, however, that as a general rule, corporations are rarely forced to payout dividends.