Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668 (Mich. 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
The Michigan Supreme Court held that Henry Ford could not lower consumer prices and raise employee salaries.
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 non-distribution 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. 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 of 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 or accumulated deficit, or similar terminology.
In a corporation, a stakeholder is a member of "groups without whose support the organization would cease to exist", as defined in the first usage of the word in a 1963 internal memorandum at the Stanford Research Institute. The theory was later developed and championed by R. Edward Freeman in the 1980s. Since then it has gained wide acceptance in business practice and in theorizing relating to strategic management, corporate governance, business purpose and corporate social responsibility (CSR). The definition of corporate responsibilities through a classification of stakeholders to consider has been criticized as creating a false dichotomy between the "shareholder model" and the "stakeholder model", or a false analogy of the obligations towards shareholders and other interested parties.
Eisner v. Macomber, 252 U.S. 189 (1920), was a tax case before the United States Supreme Court that is notable for the following holdings:
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 fide 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.
Shareholder value is a business term, sometimes phrased as shareholder value maximization. It became prominent during the 1980s and 1990s along with the management principle value-based management or "managing for value".
Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may "pierce" or "lift" the corporate veil.
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.
The Delaware Supreme Court is the sole appellate court in the United States state of Delaware. Because Delaware is a popular haven for corporations, the Court has developed a worldwide reputation as a respected source of corporate law decisions, particularly in the area of mergers and acquisitions.
The duty of loyalty is often called the cardinal principal of fiduciary relationships, but is particularly strict in the law of trusts. In that context, the term refers to a trustee's duty to administer the trust solely in the interest of the beneficiaries, and following the terms of the trust. It generally prohibits a trustee from engaging in transactions that might involve self-dealing or even an appearance of conflict of interest. Furthermore, it requires a fiduciary to deal with transparency regarding material facts known to them in interactions with beneficiaries.
The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal vehicle to organise and run business. Tracing their modern history to the late Industrial Revolution, public companies now employ more people and generate more of wealth in the United Kingdom economy than any other form of organisation. The United Kingdom was the first country to draft modern corporation statutes, where through a simple registration procedure any investors could incorporate, limit liability to their commercial creditors in the event of business insolvency, and where management was delegated to a centralised board of directors. An influential model within Europe, the Commonwealth and as an international standard setter, UK law has always given people broad freedom to design the internal company rules, so long as the mandatory minimum rights of investors under its legislation are complied with.
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.
The domestic international sales corporation is a concept unique to tax law in the United States. In 1971, the U.S. Congress voted to use U.S. tax law to subsidize exports of U.S.-made goods. The initial mechanism was through a Domestic International Sales Corporation (DISC), an entity with no substance which received tax benefits. Today, shareholders of a DISC continue to receive reduced income tax rates on qualifying income from exports of U.S.-made goods.
A celebrity board director is an officer with significant influence in the company's governance decision-making process and who possesses one or more celebrity traits including credibility, goodwill, rights, image, influence, liability, and standard of value. A director's leadership and decision-making affects the governance and wealth maximization of shareholders’ wealth.
Shareholder primacy is a theory in corporate governance holding that shareholder interests should be assigned first priority relative to all other corporate 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 the corporation", 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. Their activities may or may not differ much from traditional corporations. 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 discretion of the board to determine how to balance the interests of stakeholders. 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, 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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