Dodge v. Ford Motor Company
Encyclopedia
Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668. (Mich.
1919), is a case in which the Michigan Supreme Court
held that Henry Ford
owed a duty to the shareholder
s of the Ford Motor Company
to operate his business to profit his shareholders, rather than the community as a whole or employees. It is often cited as embodying the principle of "shareholder value" in companies.
The case has not represented the present law in the United States generally, or Delaware in particular, for over thirty years.
It has not, however, been overruled.
had accumulated a capital surplus
of $60 million. The price of the Model T, Ford's mainstay product, had been successively cut over the years while the cost of the workers had dramatically, and quite publicly, increased. The company's president and majority stockholder, Henry Ford, sought to end special dividends for shareholders in favor of massive investments in new plants that would enable Ford to dramatically grow the output of production, and numbers of people employed at his plants, while continuing to cut the costs and prices of his car
s. In public defense of this strategy, Ford declared:
While Ford may have believed that such a strategy might be in the long-term benefit of the company, he told his fellow shareholders that the value of this strategy to them was not a primary consideration in his plans. The minority shareholders
objected to this strategy, demanding that Ford stop reducing his prices when they could barely fill orders for cars and to continue to pay out special dividend
s from the capital surplus in lieu of his proposed plant investments. Two brothers, John Francis Dodge
and Horace Elgin Dodge
, owned 10% of the company, among the largest shareholders next to Ford.
The Court was called upon to decide whether the minority shareholders could prevent Ford from operating the company for the charitable ends that he had declared.
Because this company was in business for profit, Ford could not turn it into a charity. This was compared to a spoilation of the company's assets. The court therefore upheld the order of the trial court requiring that directors declare an extra dividend of $39 million.
The contested actions of Henry Ford that led to this decision can also be viewed as a conscious attempt to squeeze out his minority shareholders, especially the Dodge brothers, whom he suspected (correctly) of using their Ford dividends to build a rival car company. By cutting off their dividends, Ford hoped to starve the Dodges of capital to fuel their growth. In that context, the Dodge decision is viewed as a mixed result for both sides of the dispute. Ford was denied the ability to arbitrarily undermine the profitability of the firm, and thereby eliminate future dividends. Under the upheld business judgment rule, however, Ford was given considerable leeway via control of his board about what investments he could make. That left him with considerable influence over dividends, but not as complete control as he wished.
As a result of this decision, Ford ended up resorting to threatening to set up a competing manufacturer as a way to finally compel his adversaries to sell back their shares to him.
Subsequently, the money that the Dodge brothers received from the case would be used to expand the Dodge Brothers Company
.
Michigan Supreme Court
The Michigan Supreme Court is the highest court in the U.S. state of Michigan. It is known as Michigan's "court of last resort" and consists of seven justices who are elected to eight-year terms. Candidates are nominated by political parties and are elected on a nonpartisan ballot...
1919), is a case in which the Michigan Supreme Court
Michigan Supreme Court
The Michigan Supreme Court is the highest court in the U.S. state of Michigan. It is known as Michigan's "court of last resort" and consists of seven justices who are elected to eight-year terms. Candidates are nominated by political parties and are elected on a nonpartisan ballot...
held that Henry Ford
Henry Ford
Henry Ford was an American industrialist, the founder of the Ford Motor Company, and sponsor of the development of the assembly line technique of mass production. His introduction of the Model T automobile revolutionized transportation and American industry...
owed a duty to the shareholder
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
s of the Ford Motor Company
Ford Motor Company
Ford Motor Company is an American multinational automaker based in Dearborn, Michigan, a suburb of Detroit. The automaker was founded by Henry Ford and incorporated on June 16, 1903. In addition to the Ford and Lincoln brands, Ford also owns a small stake in Mazda in Japan and Aston Martin in the UK...
to operate his business to profit his shareholders, rather than the community as a whole or employees. It is often cited as embodying the principle of "shareholder value" in companies.
The case has not represented the present law in the United States generally, or Delaware in particular, for over thirty years.
It has not, however, been overruled.
Facts
By 1916, the Ford Motor CompanyFord Motor Company
Ford Motor Company is an American multinational automaker based in Dearborn, Michigan, a suburb of Detroit. The automaker was founded by Henry Ford and incorporated on June 16, 1903. In addition to the Ford and Lincoln brands, Ford also owns a small stake in Mazda in Japan and Aston Martin in the UK...
had accumulated a capital surplus
Capital surplus
Capital surplus term that frequently appears as a balance sheet item as a component of shareholders' equity. Capital surplus is used to account for that a firm raises in excess of the par value of the shares ....
of $60 million. The price of the Model T, Ford's mainstay product, had been successively cut over the years while the cost of the workers had dramatically, and quite publicly, increased. The company's president and majority stockholder, Henry Ford, sought to end special dividends for shareholders in favor of massive investments in new plants that would enable Ford to dramatically grow the output of production, and numbers of people employed at his plants, while continuing to cut the costs and prices of his car
Čar
Čar is a village in the municipality of Bujanovac, Serbia. According to the 2002 census, the town has a population of 296 people.-References:...
s. In public defense of this strategy, Ford declared:
- "My ambition 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."
While Ford may have believed that such a strategy might be in the long-term benefit of the company, he told his fellow shareholders that the value of this strategy to them was not a primary consideration in his plans. The minority shareholders
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
objected to this strategy, demanding that Ford stop reducing his prices when they could barely fill orders for cars and to continue to pay out special dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s from the capital surplus in lieu of his proposed plant investments. Two brothers, John Francis Dodge
John Francis Dodge
John Francis Dodge was an American automobile manufacturing pioneer and co-founder of Dodge Brothers Company.-Biography:...
and Horace Elgin Dodge
Horace Elgin Dodge
Horace Elgin Dodge, Sr. was an American automobile manufacturing pioneer and co-founder of Dodge Brothers Company.-Early years and business:...
, owned 10% of the company, among the largest shareholders next to Ford.
The Court was called upon to decide whether the minority shareholders could prevent Ford from operating the company for the charitable ends that he had declared.
Judgment
The Court held that a business corporation is organized primarily for the profit of the stockholders, as opposed to the community or its employees. The discretion of the directors is to be exercised in the choice of means to attain that end, and does not extend to the reduction of profits or the nondistribution of profits among stockholders in order to benefit the public, making the profits of the stockholders incidental thereto.Because this company was in business for profit, Ford could not turn it into a charity. This was compared to a spoilation of the company's assets. The court therefore upheld the order of the trial court requiring that directors declare an extra dividend of $39 million.
Significance
This case is frequently cited as support for the idea that "corporate law requires boards of directors to maximize shareholder wealth." The following articles attempt to refute that interpretation."Among non-experts, conventional wisdom holds that corporate law requires boards of directors to maximize shareholder wealth. This common but mistaken belief is almost invariably supported by reference to the Michigan Supreme Court's 1919 opinion in Dodge v. Ford Motor Co."
"Dodge is often misread or mistaught as setting a legal rule of shareholder wealth maximization. This was not and is not the law. Shareholder wealth maximization is a standard of conduct for officers and directors, not a legal mandate. The business judgment ruleBusiness judgment ruleThe business judgment rule is a US case law-derived concept in corporations law whereby the "directors of a corporation . . . are clothed with [the] presumption, which the law accords to them, of being [motivated] in their conduct by a bona fide regard for the interests of the corporation whose...
[which was also upheld in this decision] protects many decisions that deviate from this standard. This is one reading of Dodge. If this is all the case is about, however, it isn’t that interesting."
The contested actions of Henry Ford that led to this decision can also be viewed as a conscious attempt to squeeze out his minority shareholders, especially the Dodge brothers, whom he suspected (correctly) of using their Ford dividends to build a rival car company. By cutting off their dividends, Ford hoped to starve the Dodges of capital to fuel their growth. In that context, the Dodge decision is viewed as a mixed result for both sides of the dispute. Ford was denied the ability to arbitrarily undermine the profitability of the firm, and thereby eliminate future dividends. Under the upheld business judgment rule, however, Ford was given considerable leeway via control of his board about what investments he could make. That left him with considerable influence over dividends, but not as complete control as he wished.
As a result of this decision, Ford ended up resorting to threatening to set up a competing manufacturer as a way to finally compel his adversaries to sell back their shares to him.
Subsequently, the money that the Dodge brothers received from the case would be used to expand the Dodge Brothers Company
Dodge
Dodge is a United States-based brand of automobiles, minivans, and sport utility vehicles, manufactured and marketed by Chrysler Group LLC in more than 60 different countries and territories worldwide....
.
See also
- Shlensky v. Wrigley, 237 N.E. 2d. 776 (Ill. App. 1968) a suit over the decision not to build baseball ground lights to allow games to be played at night-time.