Zidell v. Zidell, Inc.
277 Or. 413, 560 p.2d 1086 (1977)
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Rule of Law:
A court will not interfere with a corporate board's decision regarding dividend payments unless the minority shareholder challenging the decision proves that the directors acted in bad faith, fraudulently, or abused their discretion, rather than for a legitimate business purpose.
Facts:
- Arnold Zidell and his brother Emery Zidell were the principal shareholders in four closely-held family corporations.
- For years, all shareholders, including Arnold, agreed to a policy of retaining all corporate earnings for business needs rather than distributing them as dividends, as the shareholders were all employed by the company and received salaries.
- Another partner sold his shares to Emery's son, Jay Zidell, which gave Emery and Jay a majority controlling interest in the corporations.
- Growing animosity between the brothers culminated in Arnold demanding a significant salary increase; when it was refused, he voluntarily resigned from his employment in May 1973.
- After resigning and no longer receiving a salary, Arnold demanded the corporations pay reasonable dividends.
- The boards of directors subsequently declared dividends, but Arnold considered them unreasonably small, especially as salaries and bonuses for the remaining family members on the payroll were increased.
Procedural Posture:
- Arnold Zidell, a minority shareholder, filed four lawsuits in the circuit court (trial court) against four related corporations and their directors.
- The lawsuits sought to compel the directors to declare larger dividends, alleging their refusal to do so was 'arbitrarily, unreasonably and in bad faith'.
- The trial court found in favor of Zidell and ordered each of the defendant corporations to declare additional dividends.
- The defendant corporations and their directors appealed the trial court's decision to the Supreme Court of Oregon.
- The plaintiff, Arnold Zidell, filed a cross-appeal, arguing the dividends ordered by the trial court should have been even larger.
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Issue:
Does a board of directors' conservative dividend policy constitute a breach of its fiduciary duty to a minority shareholder when the board presents credible business reasons for retaining earnings, despite evidence of hostility between the shareholders?
Opinions:
Majority - Howell, J.
No. The directors' decision not to declare larger dividends does not breach their fiduciary duty because it was based on legitimate business purposes. Under the business judgment rule, the burden of proof is on the plaintiff shareholder to demonstrate that the directors' dividend policy was motivated by bad faith, fraud, or an abuse of discretion, rather than by the corporate welfare. Here, the directors provided credible business reasons for their conservative dividend policy, including the need for future plant improvements, large inventory purchases, dock renovations, and maintaining a strong financial position to secure bank loans. While factors like intense hostility and the exclusion of the minority from employment are relevant to an inquiry of bad faith, they are not determinative if they are not the motivating causes of the directors' policy. Arnold Zidell failed to carry his burden of proving that the defendants' legitimate business reasons were merely a pretext for a bad-faith effort to 'squeeze' him out of the company.
Analysis:
This case strongly affirms the business judgment rule's application to dividend policies in closely-held corporations. It establishes a high bar for minority shareholders seeking to compel dividends, requiring them to prove that the directors' primary motivation is bad faith, not merely that the policy has a harsh effect on the minority. By deferring to the directors' articulated business justifications despite clear evidence of internal hostility, the court signals that it will not act as a 'general manager' or referee internal corporate disputes. This decision solidifies the principle that as long as plausible business reasons exist and can be credibly articulated, directors have wide discretion over the retention of corporate earnings.
