197 Dodge v. Ford Motor Co.
204 Mich. 459, 170 N.W. 668 (1919)
J. Ostrander
FACTS
1. In 1916, Ford has expected a profit for the year of
upward of $60M. On that same year, it announced a
new dividend policy of paying no special dividends.
Instead, it would reinvest all earnings except the
regular dividend of $1.2M.
2. It has been the policy of the corporation to annually
reduce the selling price of cars, while keeping up, or
improving their quality. The goal of Ford was to
expand its production capacity, to employ more and
double the salary of employees and to cut the price of
cars.
3. Henry Ford admitted that the price negatively
impacted short-term profits, but he defends his
decision based on his ambition to spread the benefits
of industrialized society with as many people as
possible.
4. He also contends that he has out substantial
dividends ensuring that they have made a
considerable profit and should be content to take what
he chooses to give.
5. Dodge brothers (minority shareholders) who owned
their own motor company, brought an action against
Ford Motor Company to compel the declaration of
dividends and to stop the building of Fords proposed
smelting plant.
a. They argued that the purpose of the
company was to maximize shareholder
profits, not to help the community by making
affordable cars or employ more workers.
ISSUE
Whether plaintiffs can force defendant to increase the cost of
the product and limit the money invested into expansion of the
business in order to pay out a larger dividend.
HELD
Court held that they are entitled to a more equitable-sized
dividend, but the Court will not interfere with the companys
business judgment regarding the price set on the products or
the decision to expand the business.
The Court found that a corporation is organized primarily
for the profit of the stockholders. The powers of the directors
are to be employed for that end. The discretion is to be
exercised in the choice of mean to attain that end and does not
extend to a change in the end itself, to the reduction of profits
or to the non-distribution of profits among stockholders in order
to devote them to other purposes.
Basically, a corporation is a business and not a charity. It
is the primary duty of the management to maximize
shareholder wealth. But that doesnt mean it is the sole duty of
directors to maximize profits. The Court noted that an
incidental humanitarian expenditure for the benefit of the
employees would be permissible.
As to the proposed expansion, Court is not persuaded that
it should interfere. Judges are not business experts. It is
recognized that plans must often be made for a long future for
expected competition, for a continuing as well as an
immediately profitable venture. The experience of the Ford
Motor Company is evidence of capable management of its
affairs.
Court affirmed the lower courts decision that the company
declare a dividend and reversed the lower courts
injunction that halted company expansion.