Dodge v. Ford Motor Co., 204 Mich 459; 170 NW 668 (1919),[1] is a case in which the Michigan Supreme Court held that Henry Ford had to operate the Ford Motor Company in the interests of its shareholders, rather than in a manner for the benefit of his employees or customers. It is often taught as affirming the principle of "shareholder primacy" in corporate America, although that teaching has received some criticism.[2][3] At the same time, the case affirmed the business judgment rule, leaving Ford an extremely wide latitude about how to run the company.[citation needed]
The general legal position today (except in Delaware, the jurisdiction where over half of all U.S. public companies are domiciled and where shareholder primacy is still upheld[4][5]) is that the business judgment that directors may exercise is expansive.[citation needed] Management decisions will not be challenged where one can point to any rational link to benefiting the corporation as a whole.
By 1916, the Ford Motor Company had accumulated a surplus of $60 million. The price of the Model T, Ford's mainstay product, had been successively cut over the years while the wages 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 increase production, and the number of people employed at his plants, while continuing to cut the costs and prices of his cars. 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 main 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 dividends 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 in the direction that he had declared.
Judgment
Notably, obiter dicta (a non-binding remark) in the opinion written by Russell C. Ostrander argued that the profits to the stockholders should be the primary concern for the company directors. Because this company was in business for profit, Ford could not turn it into a charity. This was compared to a spoliation of the company's assets. The court therefore upheld the order of the trial court requiring that directors declare an extra dividend of $19.3 million. It said the following:
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 a direct result of this decision, Henry Ford threatened 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.
Ford was also motivated by a desire 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.[6] 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 complete control as he wished.
This case is frequently cited as support for the idea that corporate law requires boards of directors to maximize shareholder wealth. However, one view is that this interpretation has not represented the law in most states for some time:
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 rule [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.
However, others, while agreeing that the case did not invent the idea of shareholder wealth maximization, found that it was an accurate statement of the law, in that "corporate officers and directors have a duty to manage the corporation for the purpose of maximizing profits for the benefit of shareholders" is a default legal rule, and that the reason that "Dodge v. Ford is a rule that is hardly ever enforced by courts" is not that it represents bad case law, but because the business judgement rule means:
The rule of wealth maximization for shareholders is virtually impossible to enforce as a practical matter. The rule is aspirational, except in odd cases. As long as corporate directors and CEOs claim to be maximizing profits for shareholders, they will be taken at their word, because it is impossible to refute these corporate officials' self-serving assertions about their motives.
A dividend is a distribution of profits by a corporation to its shareholders, after which the stock exchange decreases the price of the stock by the dividend to remove volatility. The market has no control over the stock price on open on the ex-dividend date, though more often than not it may open higher. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business. The current year profit as well as the retained earnings of previous years are available for distribution; a corporation is usually prohibited from paying a dividend out of its capital. Distribution to shareholders may be in cash or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or by share repurchase. In some cases, the distribution may be of assets.
The retained earnings of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point in time, such as at the end of the reporting period. At the end of that period, the net income at that point is transferred from the Profit and Loss Account to the retained earnings account. If the balance of the retained earnings account is negative it may be called accumulated losses, retained losses, accumulated deficit, or similar terminology.
Corporate law is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refers to the legal practice of law relating to corporations, or to the theory of corporations. Corporate law often describes the law relating to matters which derive directly from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.
The business judgment rule is a case-law-derived doctrine in corporations law that courts defer to the business judgment of corporate executives. It is rooted in the principle that 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 fides regard for the interests of the corporation whose affairs the stockholders have committed to their charge." The rule exists in some form in most common law countries, including the United States, Canada, England and Wales, and Australia.
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An agency cost is an economic concept that refers to the costs associated with the relationship between a "principal", and an "agent". The agent is given powers to make decisions on behalf of the principal. However, the two parties may have different incentives and the agent generally has more information. The principal cannot directly ensure that its agent is always acting in its best interests. This potential divergence in interests is what gives rise to agency costs.
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Michael Cole Jensen was an American economist who worked in the field of financial economics. From 1967-1988, he was on the University of Rochester's faculty. Between 2000 and 2009 he worked for the Monitor Company Group, a strategy-consulting firm which became "Monitor Deloitte" in 2013. Until 2000, he held the position of Jesse Isidor Straus Professor of Business Administration at Harvard University.
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Smith v. Van Gorkom 488 A.2d 858 is a United States corporate law case of the Delaware Supreme Court, discussing a director's duty of care. It is often called the "Trans Union case". Van Gorkom is sometimes referred to as the most important case regarding business organizations because it shows a unique scenario when the board is found liable even after applying the business judgment rule. The decision "stripped corporate directors and officers of the protective cloak formerly provided by the business judgment rule, rendering them liable for the tort of gross negligence for the violation of their duties under the rule."
Share repurchase, also known as share buyback or stock buyback, is the reacquisition by a company of its own shares. It represents an alternate and more flexible way of returning money to shareholders. Repurchases allow stockholders to delay taxes which they would have been required to pay on dividends in the year the dividends are paid, to instead pay taxes on the capital gains they receive when they sell the stock, whose price is now proportionally higher because of the smaller number of shares outstanding.
Directors' duties are a series of statutory, common law and equitable obligations owed primarily by members of the board of directors to the corporation that employs them. It is a central part of corporate law and corporate governance. Directors' duties are analogous to duties owed by trustees to beneficiaries, and by agents to principals.
United States corporate law regulates the governance, finance and power of corporations in US law. Every state and territory has its own basic corporate code, while federal law creates minimum standards for trade in company shares and governance rights, found mostly in the Securities Act of 1933 and the Securities and Exchange Act of 1934, as amended by laws like the Sarbanes–Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act. The US Constitution was interpreted by the US Supreme Court to allow corporations to incorporate in the state of their choice, regardless of where their headquarters are. Over the 20th century, most major corporations incorporated under the Delaware General Corporation Law, which offered lower corporate taxes, fewer shareholder rights against directors, and developed a specialized court and legal profession. Nevada has attempted to do the same. Twenty-four states follow the Model Business Corporation Act, while New York and California are important due to their size.
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, was a landmark decision of the Delaware Supreme Court on hostile takeovers.
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Shareholder primacy is a theory in corporate governance holding that shareholder interests should be assigned first priority relative to all other stakeholders. A shareholder primacy approach often gives shareholders power to intercede directly and frequently in corporate decision-making, through such means as unilateral shareholder power to amend corporate charters, shareholder referendums on business decisions and regular corporate board election contests. The shareholder primacy norm was first used by courts to resolve disputes among majority and minority shareholders, and, over time, this use of the shareholder primacy norm evolved into the modern doctrine of minority shareholder oppression.
In business, and only in United States corporate law, a benefit corporation is a type of for-profit corporate entity whose goals include making a positive impact on society. Laws concerning conventional corporations typically do not define the "best interest of society", which has led some to believe that increasing shareholder value is the only overarching or compelling interest of a corporation. Benefit corporations explicitly specify that profit is not their only goal. An ordinary corporation may change to a benefit corporation merely by stating in its approved corporate bylaws that it is a benefit corporation.
Shlensky v Wrigley, 237 NE 2d 776 is a leading US corporate law case concerning the board's discretion to determine how to balance stakeholders' interests. The case embraces the application of the business judgment rule to directors' good-faith judgments about long-term shareholder value. Some believe it represents the shift in most states away from the idea that corporations should only pursue shareholder value, as seen in the older Michigan decision of Dodge v. Ford Motor Co..
Miles v Sydney Meat-Preserving Co Ltd was a 1912 decision of the High Court of Australia regarding directors' duties and shareholder primacy. Businessman William John Miles sued the company, of which he was a major shareholder, for its failure to pay out dividends. The court found by a 2–1 majority that there was no fiduciary duty of the board of directors to maximise shareholder value.
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