Gottfried v. Gottfried

Brief Fact Summary. Minority stockholders (P) sought to compel the board of directors (D) to issue dividends on common stock, claiming that dividends had not been paid for other than on the corporation’s welfare and the stockholders.

Synopsis of Rule of Law. Directors cannot withhold the issuance of dividends in bad faith if there is an adequate surplus available.

Facts. Minority stockholders (P) sought to compel the board of directors (D) of a closely held family corporation to issue dividends on common stock, claiming that dividends had not been paid for other than on the corporation’s welfare and the stockholders. No dividends had been paid for on common stock for 14 years until the start of this action to compel payment in a fair and adequate amount. The minority stockholders (P) portray a bitter relationship with the majority controlling directors (D) to the point that the directors sought to coerce minority (D) into selling their stock at inadequate prices.

Issue. May directors withhold the issuance of dividends in bad faith if there is an adequate surplus available?

Held. (Corcoran, J.) No. Directors cannot withhold the issuance of dividends in bad faith if there is an adequate surplus available. The test of bad faith is to determine whether actions are dictated by personal interest or corporate welfare. Relevant facts indicating bad faith here include (1) hostility between the two factions; (2) exclusion of the minority from employment; (3) high compensation for officers in control; (4) The majority may be subject to high personal income taxes if substantial dividends were paid; (5) The majority held a desire to acquire the minority stock interests for cheap. In this case, it appears that the directors (D) held legitimate business reasons for not declaring dividends, and no bad faith was involved, so the complaint is dismissed and judgment for the defendants.

Discussion. Closely held corporations can easily be held at the mercy of dominant shareholders particularly if they wish to coerce the minority into selling their stocks at a loss. With or without bad faith, the impact of coercion is weightier in a closely held corporation. Frequently, a significant part of a stockholder’s assets are within the corporation. The parties moreover may make their livelihood based off of salaries from the corporation. The fact that a corporation is closely held will not cause greater scrutiny into the validity of the majority’s actions.