Dodge v. Ford Motor Company
204 Mich. 459 (1919)
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Rule of Law:
A business corporation is organized and carried on primarily for the profit of its stockholders. The powers of directors are to be employed for that end, and their discretion does not extend to changing this fundamental purpose, such as by reducing profits or refusing to distribute them to shareholders in order to devote the funds to humanitarian or other altruistic purposes.
Facts:
- John F. Dodge and Horace E. Dodge were minority shareholders in the Ford Motor Company, while Henry Ford was the president and majority shareholder.
- The Ford Motor Company was exceptionally profitable, accumulating a surplus of nearly $112 million and holding cash and bonds worth almost $54 million by the end of its 1916 fiscal year.
- For several years prior, the company had regularly paid substantial special dividends in addition to its regular dividends.
- In 1916, Henry Ford, as the dominant director, announced that the company would discontinue paying special dividends.
- Ford stated his intention was to reinvest the profits into a significant expansion of the company's production facilities, including the construction of a large smelting plant.
- He also planned to dramatically lower the price of Ford cars, with the stated ambition to "employ still more men, to spread the benefits of this industrial system to the greatest possible number" rather than to maximize returns for shareholders.
- The Dodge brothers protested this policy, arguing that the primary duty of the corporation was to generate profit for its shareholders and demanded the distribution of a special dividend.
- Ford's plan would consciously reduce the company's profitability from what it otherwise could have been, prioritizing public and employee benefit over shareholder returns.
Procedural Posture:
- John F. Dodge and Horace E. Dodge (plaintiffs) filed a lawsuit against the Ford Motor Company and its directors in a Michigan trial court.
- The plaintiffs sought a court order compelling the company to declare a special dividend of at least 75% of its cash surplus and to enjoin the company's planned expansion at its River Rouge plant.
- The trial court found in favor of the plaintiffs, ordering the Ford Motor Company to pay a dividend of over $19 million and granting an injunction to halt the proposed smelter construction.
- The Ford Motor Company and its directors (defendants) appealed the trial court's judgment to the Supreme Court of Michigan.
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Issue:
Does a board of directors' refusal to declare a special dividend from a massive corporate surplus, based on a stated intention to benefit the public through lower prices and business expansion rather than to maximize shareholder profits, constitute a breach of their legal duty to the shareholders?
Opinions:
Majority - Ostrander, J.
Yes. A board's refusal to declare a special dividend based on a desire to benefit the public over the shareholders is a breach of duty. While directors have broad discretion in managing a corporation under the business judgment rule, this discretion applies to the means of achieving the corporation's primary purpose, which is to generate profit for its shareholders. The board's power does not extend to changing that end itself or to transforming the business into a 'semi-eleemosynary institution.' Henry Ford's testimony made clear that his motive for withholding dividends was to pursue philanthropic goals at the expense of shareholder interests, which constitutes an abuse of discretion. Therefore, while the court would not interfere with the business decision to expand the plant, it would compel the distribution of a portion of the vast surplus that was being improperly withheld from the shareholders.
Concurring - Moore, J.
Yes. While agreeing with the majority's ultimate conclusion to compel the dividend payment, this opinion reaches it on simpler grounds. The sheer size of the accumulated surplus is, by itself, sufficient evidence that the directors' refusal to distribute a portion of it to stockholders was an arbitrary act. This arbitrary refusal justifies judicial intervention without a full analysis of the directors' motives. I agree with the majority's holding on the capitalization and smelting plant issues.
Analysis:
This case is a foundational decision in American corporate law, establishing the doctrine of shareholder primacy. It sets a limit on the business judgment rule, clarifying that directors' discretion is aimed at achieving shareholder profit, not at fundamentally altering the corporation's purpose to pursue social or humanitarian goals. While later developments in corporate law, such as the rise of stakeholder theory and benefit corporations, have challenged a strict interpretation of this rule, Dodge v. Ford remains the classic authority for the principle that a for-profit corporation's primary legal obligation is to its shareholders. The decision continues to frame the ongoing debate about corporate social responsibility and the role of corporations in society.
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