Tuesday, November 15, 2011

Dodge v. Ford Motor Co. case brief

Dodge v. Ford Motor Co.
204 Mich. 459, 170 N.W. 668 (1919)

-Ford, as the CEO and majority shareholder of his company, announced a plan to end paying out special dividends to shareholders, and would instead take the profits and reinvest them in order to employ more workers and build more factories.
-This would allow Ford to employ more people as well as cut the costs of his cars, making them affordable to more people.
-Ford said: "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."
-Minority shareholders, including Dodge, sued to stop Ford's plans.
-Dodge argued that the purpose of the company was to maximize shareholder profits, not to help the community by making affordable cars, or employ more workers.

-The Trial Court found for Dodge and ordered Ford to give out a big dividend to the shareholders. Ford appealed.
-The Michigan Supreme Court affirmed.

-Can a corporation partake in charity instead of giving a dividend?

-No, a corporation is organized first for profit (of stockholders) and not for charity.

-A corporation is organized primarily for the profit of the stockholders, as opposed to the community or its employees.
-The corporations' directors have some discretion to chart the course of the business (under the business judgment rule).  However, that discretion does not extend to the reduction of profits or the non-distribution of profits among stockholders in order to benefit the public.

-A corporation is a business, not a charity.
-The primary duty of the management to maximize shareholder wealth.
-That doesn't mean it is the sole duty of the directors to maximize profits. The Court noted that "an incidental humanitarian expenditure for the benefit of the employees" is permissible.

-Ford knew Dodge was using the dividend money to build a rival car company, and it is argued that he was probably trying to bankrupt any potential competition.

Course: Corporations.
Topics: Charity, Dividends, Duties to society.

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