Dodge v. Ford Motor Company

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Dodge v. Ford Motor Company
COLLECTIE TROPENMUSEUM Automobiel op een rubberonderneming op Oost-Sumatra. TMnr 60005349.jpg
Keywords
Stakeholders, shareholders, directors' duties

Dodge v. Ford Motor Company, 170 NW 668 (Mich 1919)[1] is a case in which the Michigan Supreme Court held that Henry Ford owed a duty to the shareholders 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.

More recent cases such as AP Smith Manufacturing Co v. Barlow[2] or Shlensky v. Wrigley[3] suggest that the approach in Dodge no longer represents the law in most states, including Delaware, which regards the balancing of stakeholder interests as within a director's business judgment. Dodge has not been expressly overruled, but ceased to represent the law in most states.[4]

Facts[edit]

By 1916, the Ford Motor Company 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 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:

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 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 for the charitable ends that he had declared.

Judgment[edit]

The Michigan Supreme Court held that Henry Ford could not lower consumer prices and raise employee salaries. In its opinion, 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 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.

Significance[edit]

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.[5] 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, the general view is that this interpretation has not represented the law in most states for some time.

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:

See also[edit]

Notes[edit]

  1. ^ Dodge v. Ford Motor Company, 170 N.W. 668 (Mich. 1919).
  2. ^ 39 ALR 2d 1179 (1953)
  3. ^ 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
  4. ^ For instance, Dodge was distinguished in its application to the mutual insurance industry. See Churella v. Pioneer State Mut. Ins. Co., 258 Mich.App. 260 (2003).
  5. ^ Hodak, Marc (Fall 2007). "The Ford Squeeze-Out". New York University. SSRN 1011924. 
  6. ^ Stout, Lynn A. (2007-09-18). "Why We Should Stop Teaching Dodge v. Ford". Law-Econ Research Paper No. 07-11. UCLA School of Law. SSRN 1013744. 
  7. ^ Henderson, M. Todd (December 2007). "Everything Old is New Again: Lessons from Dodge v. Ford Motor Company". Olin Working Paper No. 373. University of Chicago Law School. SSRN 1070284. 
  8. ^ Macey, Jonathan R. (2008-01-01). "A Close Read of an Excellent Commentary on Dodge v. Ford". Virginia Law & Business Review. 

References[edit]

  • Stout, Lynn A. (2007-09-18). "Why We Should Stop Teaching Dodge v. Ford". Law-Econ Research Paper No. 07-11. UCLA School of Law. SSRN 1013744.