Brief Fact Summary. Plaintiff shareholders, Dodge et al., brought an action against Defendant corporation, Ford Motor Company, to force Defendant to pay a more substantial dividend, and to change questionable business decisions by Defendant.
Synopsis of Rule of Law. The purpose of a corporation is to make a profit for the shareholders, but a court will not interfere with decisions that come under the business judgment of directors.
Courts of equity will not interfere in the management of the directors unless it is clearly made to appear that they are guilty of fraud or misappropriation of the corporate funds, or refuse to declare a dividend when the corporation has a surplus of net profits which it can, without detriment to its business, divide among its stockholders, and when a refusal to do so would amount to such an abuse of discretion as would constitute a fraud, or breach of that good faith which they are bound to exercise towards the stockholders.View Full Point of Law
Issue. The issue is whether Plaintiff shareholders can force Defendant to increase the cost of the product and limit the money invested into expansion in order to pay out a larger dividend.
Held. Plaintiffs are entitled to a more equitable-sized dividend, but the court will not interfere with Defendant’s business judgments regarding the price set on the manufactured products or the decision to expand the business. The purpose of the corporation is to make money for the shareholders, and Defendant is arbitrarily withholding money that could go to the shareholders. Notably, Ford did not deny himself a large salary for his position with the company in order to achieve his ambitions. However, the court will not question whether the company is better off with a higher price per vehicle, or if the expansion is wise, because those decisions are covered under the business judgment rule.
Discussion. The lead plaintiffs, the Dodge brothers, had a motive outside of their position as minority shareholders. Their own business competed with Defendant, and larger dividends would have helped finance their business while draining resources from Defendant. There could then be an argument that Ford’s decision was in the best interests of Defendant corporation.