Gottfried v. Gottfried

Brief Fact Summary. This action was brought by minority stockholders of Gottfried Baking Corporation, (Plaintiffs), against Gottfried Baking Corp., its directors, and Hanscom Baking Corp., a wholly owned subsidiary, (Defendants), to compel the Board of Directors of that corporation to declare dividends on its common stock.

Synopsis of Rule of Law. If an adequate corporate surplus is available for the purpose of paying dividends, directors may not withhold the declaration of dividends in bad faith. The test of bad faith is to determine whether the policy of the directors is dictated by their personal interests rather than the corporate welfare.

Facts. Gottfried Baking Corporation, (Gottfried), is a closely held family corporation. Most of its stockholders are children of the founder of the business and their spouses. Until 1945 no dividends were paid on the common stock although dividends had been regularly paid upon the preferred stock, and intermittently upon the “A” stock. In 1945, dividends were paid on the common stock presumably stimulated by the commencement of this suit. Hostility has existed for a long time between the Plaintiffs and Defendants in this case. Plaintiffs contend that the Board of Directors are motivated by a desire to coerce Plaintiffs to sell their stock to the majority interests at a grossly inadequate price and have circumvented the need for dividends insofar as they are concerned by excessive salaries, bonuses and corporate loans to themselves.

Issue. Whether Defendants withheld the declaration of dividends in bad faith.

Held. No. It may not be said that the directorate policy regarding common stock dividends at the time the suit was brought was unduly conservative and inspired by bad faith.

Discussion. It is true that there is animosity between the majority and minority shareholders of Gottfried. It is also true that several defendants have received substantial sums in compensation. Substantial loans have also been made to several of the defendants. However, these were incurred in large part prior to the controversy surrounding dividends. The evidence with respect to the financial condition of the corporation and its business requirements does not sustain Plaintiff’s claims. Evidence shows that expenditures included the retirement of the then outstanding preferred stocks in the sum $165,000, in which Plaintiffs benefited proportionately. Further, despite the motivation, dividends were paid in 1945 on common stock.