CARY, William L. Corporations – Cases and Materials. Mineola, The Foundation Press, Inc.

,
1969, Fourth Edition – Unabridged, p. 1580-1588.
(Reprodução exclusivamente para fins didáticos)

DODGE v. FORD MOTOR CO. [ABRIDGED]

Supreme Court of Michigan, 1919.
204 Mich. 459, 170 NW 6688, 3 A.L.R. 4131

The Ford Motor Company was incorporated in 1903 under the laws of Michigan with authorized
capital stock of $150,000 of which $100,000 was then issued, $49,000 for cash, $40,000 for patents
and $11,000 for other property. In 1908, the authorized and issued capital was increased to
$2,000,000 by the declaration of a stock dividend out of accumulated profits. Thereafter its
directors regularly declared cash dividends at the rate of 60 per cent per year on the increased
capital of $2,000,000, and between December, 1911, and October, 1915, also declared additional
special cash dividends from time to time amounting in all to $41,000,000. Thereafter no special
dividends were declared except one of $2,000,000 declared on November 8, 1916, before the
answers in the present case were filed, and Henry Ford, who controlled the board of directors, had
stated that no more special dividends would be declared at present and that the greater portion of
the profits should be put back into the business in order to expand it, thereby increasing
employment and selling a larger number of cars at a lower price per car. The surplus of the
corporation at July 31, 1916, was $112,000,000 and it had cash and municipal bonds amounting to
nearly $54,000,000. On November 2, 1.916, the directors voted to expend $11,325,000 to erect
blast furnaces and other plant in which to manufacture iron and other products for use in the
manufacture of cars, and also $5,150,000 out of a program calling for $9,895,000 for a substantial
duplication of existing plant. Thereupon, two minority stockholders, owning one tenth of the
company's stock, brought suit to compel the declaration of an additional dividend of not less than
75 per cent of the accumulated cash surplus. The court ordered the declaration of a dividend of
$19,275,385.96. Defendants appealed.

OSTRANDER, J. . . . When plaintiffs made their complaint and demand for further dividends the
Ford Motor Company had concluded its most prosperous year of business. The demand for its cars
at the price of the preceding year continued. It could make and could market in the year beginning
August 1, 1916, more than 500,000 cars. Sales of parts and repairs would necessarily increase. The
cost of materials was likely to advance, and perhaps the price of labor, but it reasonably might have
expected a profit for the year of upwards of $60,000,000.

In justification, the defendants have offered testimony tending to prove, and which does prove, the
following facts. It had been the policy of the corporation for a considerable time to annually reduce
the selling price of cars, while keeping up, or improving, their quality. As early as in June, 1915, a
general plan for the expansion of the productive capacity of the concern by a practical duplication
of its plant had been talked over by the executive officers and directors and agreed upon, not all of
the details having been settled and no formal action of directors having been taken. The erection of
a smelter was considered, and engineering and other data in connection therewith secured.

The plan, as affecting the profits of the business for the year beginning August 1, 1916, and
thereafter, calls for a reduction in the selling price of the cars.. . . . .In short, the plan does not call
for and is not intended to produce immediately a more profitable business but a less profitable one;
not only less profitable than formerly but less profitable than it is admitted it might be made. The
apparent immediate effect will be to diminish the value of shares and the returns to shareholders.

1
Statement of facts substituted: portions of opinion omitted.

1
It is the contention of plaintiffs that the apparent effect of the plan is intended . . . to continue the
corporation henceforth as a semi - eleemosynary institution and not as a business institution. In
support of this contention they point to the attitude and to the expressions of Mr. Henry Ford.

"My ambition," said Mr. Ford, "is to employ still more men to spread the benefits of this
industrial system to the greatest possible number, to help them build up their lives and
their homes. To do this we are putting the greatest share of our profits back in the
business."
"With regard to dividends, the company paid sixty per cent on its capitalization of two
million dollars, or $1,200,000, leaving $58,000,000 to reinvest for the growth of the
company. This is Mr. Ford's policy at present, and it is understood that the other
stockholders cheerfully accede to this plan."

He had made up his mind in the summer of 1916 that no dividends other than the regular dividends
should be paid, "for the present."

.....

The record, and especially the testimony of Mr. Ford, "convinces that he has to some extent the
attitude towards shareholders of one who has dispensed and distributed to them large gains and that
they should be content to take what he chooses to give. His testimony creates the impression, also,
that he thinks the Ford Motor Company has made too much money, has had too large profits, and
that although large profits might be still earned, a sharing of them with the public, by reducing the
price of the output of the company, ought to be undertaken. We have no doubt that certain
sentiments, philanthropic and altruistic, creditable to Mr. Ford, had large influence in determining
the policy to be pursued by the Ford Motor Company - the policy which has been herein referred
to.

It is said by his counsel that –

"Although a manufacturing corporation cannot engage in humanitarian works as its principal

business, the fact that it is organized for profit does not prevent the existence of implied
powers to carry on with humanitarian motives such charitable works as are incidental to the
main business of the corporation."

.....

In discussing this proposition, counsel have referred to decisions [citations omitted]. These cases,
after all, like all others in which the subject is treated, turn finally upon the point, the question,
whether it appears that the directors were not acting for the, best interests of the corporation. . .
There should be no confusion (of which there is evidence) of the duties which Mr. Ford conceives
that he and the stockholders owe to the general public and the duties which in law he and his
codirectors owe to protesting, minority stockholders. A business corporation is organized and
carried on primarily for the profit of the stockholders. The powers of the directors are to be
employed for that end. The discretion of directors is to be exercised in the choice of means to attain
that end and does not extend to a change in the end itself, to the reduction of profits or to the
nondistribution of profits among stockholders in order to devote them to other purposes.

. . . As we have pointed out, and the proposition does not require argument to sustain it, it is not
within the lawful powers of a board of directors to shape and conduct the affairs of a corporation
for the merely incidental benefit of shareholders and for the primary purpose of benefiting others,

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and no one will contend that if the avowed purpose of the defendant directors was to sacrifice the
interests of shareholders it would not be the duty of the courts to interfere.

We are not, however, persuaded that we should interfere with the proposed expansion of the
business of the Ford Motor Company. In view of the fact that the selling price of products may be
increased at any time, the ultimate results of the larger business cannot be certainly estimated. The
judges are not business experts. . . We are not satisfied that the alleged motives of the directors, in
so far as they are reflected in the conduct of the business, menace the interests of shareholders. It is
enough to say, perhaps, that the court of equity is at all times open to complaining shareholders
having a just grievance.
....
. . . The large sum appropriated for the smelter plant was payable over a considerable period of
time. So that, without going further, it would appear that, accepting and approving the plan of the
directors, it was their duty to distribute on or near the first of August, 1916, a very large sum of
money to stockholders.

.. . . . It is obvious that an annual dividend of sixty per cent upon $2,000,000 or $1,200,000, is the
equivalent of a very small dividend upon $100,000,000, or more.

The decree of the court below fixing and determining the specific amount to be distributed to
stockholders is affirmed.2 . .

STEERE, FELLOWS, BROOKE, and STONE, JJ., concurred with OSTRANDER, J.

[Concurring opinion of MOORE, J., omitted.]

______________________

NOTE ON COMPELLING DECLARATION OF DIVIDENDS3.

(Obs.: Na reprodução desta “Note” de Cary, foram omitidas as notas de rodapé).

In Conviser v. Simpson, 122 F.Supp, 205 (D.Md.1954), plaintiff, a shareholder in Tri-Continental

Corporation, an investment company, brought an action to require that Tri-Continental abandon its
policy of retaining realized capital gains, and to compel the distribution of dividends equal to them.
The result of such a decree would be to relieve the company of an obligation to pay $1,874,000 as
income taxes on its 1953 realized grains. Under [now] I.R.C. subchapter M, § 851, a special relief
provision afforded by the Internal Revenue Code, such capital gains, if distributed, are freed of
corporate tax and taxed as such in the hands of the individual shareholder distributees.] Plaintiff
also sought to hold the director's liable for income taxes paid for prior years because of its retention
of capital gains then realized.

Plaintiff demonstrated that Tri-Continental was the only investment company of its kind which had
not made a practice of distributing capital gains, and argued further that the tax loss was reflected in
a detriment to the common stock, by the discount at which it was selling and that the policy has
resulted (1) in undue benefits to other classes of security holders, (2) in double taxation to the
individual stockholder, and (3) in further loss to common stockholders through inability to take
2
The Fords later bought all, minority shares. See Re Couzens, supra; Ford Motor Co. v. United States, 9 F. Supp.
590, 81 Ct.Cls.. 30 (1935), and 47 F. Supp. 259, 97 Ct.Cls. 370 (1942).
3
For recent cases (limited in number) see 1 Hornstein, op. cit. § 477 (1968 Supp); See also Doherty v. Mutual
Warehouse Co., 225 F. 2d 489 (5 th Cir. 1958)

3
advantage of lower tax rates afforded to individuals on capital gains. Finally it was claimed the
company's policy was not needed for the protection of its senior securities or warrants, or to refund
its preferred.

The court (Coleman, J.) found that the corporation's policy did not represent an abuse of discretion,
and that the directors exercised their independent business judgment saying (p, 209):

"What, in the last analysis, are the plaintiffs really asking for? It seems to the Court that they are, in
effect, claiming that it is mandatory upon this corporation, by virtue of the provisions of the tax law
governing realized capital gains, to make the distribution here contended for. Plaintiffs do not
actually claim that. In fact, they must deny it, because the defendant company and its stockholders
are simply exercising an option which the law expressly gives them. Nevertheless, plaintiffs stress
the fact that other companies, similarly constituted, and working under the same law, do distribute
their realized capital gains. But the other companies with which Tri-Continental has been compared
do not have the same capital structure as respects senior securities. The position taken on behalf of
Tri-Continental is that good business judgment requires that its management should very carefully
protect its senior securities, namely, that it should have a sound refunding policy; that at the present
time, it has under consideration a plan, for refunding its preferred stock at, a lower dividend rate,
thus improving the position of the common stockholders; that the company's charter requires 200%
reserve against the preferred stock before dividends may be declared on the common stock, and that
this denotes the advisability of not disbursing realized capital gains, It is, contended that under the
company's present policy of not distributing capital gains, these gains work to the great advantage
of the common stockholders, by investments made for their benefit.. It is to be noted that while this
policy was announced as early as 1945, it received no complaint from any of the plaintiffs until
1953."

In Patton v. Nicholas, 154 Tex. 385, 279 S.W.2d 948 (1955), s. c., 302 S.W.2d 441.
(Tex.Civ.Ct.App.1957), suit was originally instituted as an action by plaintiffs as minority
stockholders for in accounting and liquidation of the defendant corporation, whose president,
defendant Patton, as majority stockholder was charged with mismanagement and maliciously
suppressing the payment of dividends. The District Court ordered liquidation of the corporation,
which judgment was affirmed by the Court of Civil Appeals. The Supreme Court granted a writ of
error and reversed the decree of liquidation of the corporation, and remanded the case to the
District Court for trial of the issues as to the proper amount of dividend to be declared and paid by
the corporation. The Supreme Court found that dividends had been maliciously suppressed by the
majority stockholder Patton and the corporation, but that liquidation for such reason was too harsh
a remedy; that, wisdom required "tailoring the remedy to fit the particular case", which the
Supreme Court found to be the remand of the case and the substitution of a new decree

"which will probably give adequate protection to the [plaintiffs] and at the same time afford both
parties a chance to normalize their relationships. The decree will include a mandatory injunction
requiring the corporation and . . . its dominant officer and stockholder to declare and pay at the
earliest practical date a reasonable dividend on the stock of the corporation. This means that the
amount of such dividend shall be substantial and shall take into consideration, as a strong factor in
favor of greater size or amount, the amount of accumulated surplus of the corporation, the fact that
[plaintiffs] have been wrongfully deprived of their dividends since the beginning [more than 10
years], the more or less, liquid or 'current asset' character of the large inventory of presumably
salable merchandise, as well as such other matters as have logical bearing. The [plaintiffs] are
further entitled to have the injunction provide for reasonable dividends to be thereafter declared
annually."

The decree further provided for the court

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"to retain continuing jurisdiction of the cause for a reasonable period, not to exceed five years . .
with the express provision that should the petitioner or the corporation . . . be adjudged to have
violated the injunction the court shall . . . forthwith appoint a receiver of the corporation, with
instructions to liquidate it …”.

Upon remand, the trial court ordered a dividend of $172,000 to be paid, and in the succeeding case
above-cited the Texas Court of Civil Appeals affirmed the judgment of the trial court.

In Hiscock v. Lacy, 9 Misc. 578, 30 N.Y.S. 860 (Supr.Ct.1894), directors in refusing to pay
dividends on shares of a national bank acted on orders from the president who had secretly obtained
voting control and then elected himself and his nominees as directors; hee wished to punish certain
minority

shareholders who had at an earlier time defeated his re-election as president; after his death, this
policy was continued by his nephew and executor; in part the purpose was to buy minority shares at
less than real worth. The court found that the two men had "acted without reasonable cause and in
bad faith for the purpose of punishing the minority interest and at the same time securing
advantages for themselves". pp. 591, 868-869.

See also Laurel Spring Land Co. v. Fougeray, 50 N.J.Eq. 756, 26 A 886 (C.E. & A. 1893);
Anderson v. Dyer & Bro., 94 Minn. 30, 101 N.W. 1061 (1904); In Re Brantman, 244 F. 101 (2d
Cir.1917); 2 Moskowitz v Bantrell, 41 Del.Ch. 177, 190 A.2d 749 (1963) (In the absence of fraud,
decision how much the income of a wasting asset corporation should be set aside for possible future
development rather than be declared as dividends is for the board, not the court.)

In a number of cases, the courts have given weight to charges that controlling directors have
withheld dividends to coerce minority or small shareholders to sell their holdings at low prices, but
where relief has been given there were usually other circumstances. Such a charge does not mean
the plaintiff will prevail.

Weight has also been given, especially in cases relating to closed or family corporations, to charges
that dividends have been withheld through divergence of earnings to high salaries and bonuses to
controlling directors as executives. See Executive Compensation-Closely-Held concerns, supra.

Under present conditions, the charge comes in that controlling directors withhold dividends to
avoid heavy personal income taxes. Most of the repetitive bases of attack are summed up in
Gottfried v. Gottfried, supra.

....

Upon remand, the trial court ordered a dividend of $1.72,000 to be paid, directors have long
continued a policy of unreasonable expansion, even though there is no fraud or bad faith or ulterior
purpose.

The cases in which courts have refused to require declaration of dividends or larger dividends
despite the existence of current earnings or a substantial surplus or both are numerous; plaintiffs
have won only a small minority of the cases. The labels are "business judgment"; "business
purpose"; "non-interference in internal affairs". The courts have accepted the general defense of
discretion, supplemented by one or more of a number of grounds put forward as reasons for not
paying dividends or larger dividends, such as the surplus was not liquid and to pay a substantial
dividend would require the corporation to borrow; the need to increase working capital and more

5
specifically inventories; to provide funds to finance sales of cars at a time when the banking
situation made it difficult or impossible to obtain bank credit; to purchase securities that could be
used as collateral for bank loans since it was difficult to obtain unsecured banking accommodations
for the class of business; to pay mortgage or other indebtedness and to repair and improve rented
real property; to provide for postwar replacements that had not been possible during the war; to
make a -necessary change in the method of production; to expand fixed assets and productive
capacity;'" to safeguard against current business and financial uncertainties.

For the defense, where closely held or family corporations are involved, weight has been given to
such facts as: over a period a fairly large proportion of total earnings has been distributed; plaintiff
made no complaint of the dividend policy while he was employed; the challenged policy is a
continuation of one to which plaintiff had in the past agreed as a director although he has changed
his mind.

None of the modern corporation statutes seem to have undertaken to require directors to declare all
or some particular proportion of earnings as dividends, or to deal with equitable control over the
discretion of directors as to declaration of dividends.

The old mandatory version of N.J. § 47, as copied from the act of 1896, was in force in a few
states, such as North Carolina. See Cannon v. Wiscassett Mills Co., 195 N.C. 119, 141 S.E. 344
(1928); Nebel v. Nebel, 241 N.C. 491, 85 S.E.2d 876 (1955). According to the comment in the
1955 Revision of the North Carolina Act, § 55-50 is an attempt to preserve some element of the
policy of the earlier statute "in view of the understandable objections of many stockholders against
seeing the corporation . . . year after year making money but paying no dividends." It provides
roughly that holders of one-fifth of the shares of any class may demand payment of dividends equal
to one-third of the net profits of the prior year (allocable to that class), but not more than half those
of the current year. A somewhat similar statute to compel dividends has been suggested in New
Jersey (Senate bill 273, 1955). See Note, Minority Shareholders' Power to Compel Declaration of
Dividends in Close Corporations - A New Approach, 10 Rutg. L.Rev. 723 (1956).
See generally Note, Minority Shareholder Suits to Compel Declaration of Dividends, 64 Harv. L.
Rev. 299 (1950); Note, Proposals to Help the Minority Stockholder Receive Fairer Dividend
Treatment From the Closely Held Corporation.; 56 N.W.L.Rev. 503 (1961); Scholder, Dividends
and the Minority Stockholder in a Closely Held Corporation, 14 N.Y.U. Intra.L.Rev. 140 (1959).

For cases of oppression giving rise to the alternative of dissolution, see Leibert v. Clapp, 13 N.Y.2d
313, 247 N.Y.S.Zd 102, 196 N.E.2d 540 (1963); compare with later Kruger v. Gerth, reproduced at
Chapter V, Section 6, supra.