Dodge V. Ford Stands for the Legal Principle That

This case is often cited as support for the idea that corporate law requires boards of directors to maximize shareholder wealth. One view, however, is that this interpretation has not represented law in most states for some time. The directors of the defendant company decided to exercise their discretion and withhold a portion of the corporation`s capital gains for reinvestment, thereby denying certain expected dividend payments to the plaintiffs. The plaintiffs argued that the reason the defendant company withheld dividends, in part to reinvest in the company and reduce the final cost of purchasing a car, was semi-humanitarian and was not approved by the company`s charter. The trial court ruled that the defendant company was entitled to reinvest the excess capital gains at its own discretion and did not order any further dividend distributions. The Court of Appeal set aside that decision. Aside from academic agreements about the subject matter of a company or the case itself, Dodge v. Ford resonates at a time when companies are treated as benevolent for simple actions like a one-time premium simply because they are about to make a stroke of luck from a random tax break. (AT&T made a $13 billion profit last year; its announcement this week that 200,000 employees will receive a $1,000 bonus due to the tax bill, costing the company $200 million is a relatively small and virtually irrelevant drop in the ocean.) As a direct result of this decision, Henry Ford threatened to create a competing manufacturer in order to force his opponents to sell their shares to him. Subsequently, the money the Dodge brothers received from the case was used to expand the Dodge Brothers Company. In the 1950s and 1960s, states rejected Dodge several times, including in cases such as AP Smith Manufacturing Co v. Barlow[2] or Shlensky v. Wrigley.

[3] The general legal situation today is that the commercial judgment that directors can exercise is broad. Management decisions are not challenged if a rational connection to the profit of the enterprise as a whole can be indicated. While Ford may have believed that such a strategy could benefit the company in the long run, he told fellow shareholders that the value of this strategy to them was not a major consideration in his plans. Minority shareholders have rejected this strategy, demanding that Ford stop lowering its prices when they can barely fulfill car orders and continue to pay special dividends on excess capital instead of its planned investments in the plant. Two brothers, John Francis Dodge and Horace Elgin Dodge, owned 10% of the company and were among the largest shareholders alongside Ford. Ford`s view isn`t upsetting: most ceOs today will likely say that as part of their profit-maximizing strategy, they`ll try to make sure employees are happy. But unlike the announcement of a $1,000 bonus — a drop in the ocean for most companies today and a PR stunt at best — Ford explicitly argued that the company should reinvest profits in the company through wage increases. In particular, obiter dicta argued in the statement drafted by Russell C. Ostrander that profits should be the primary concern of corporate directors for shareholders.

Because this company was for profit in business, Ford could not make it a charity. This has been compared to the looting of the company`s assets. The court therefore upheld the trial court`s order requiring directors to pay an additional dividend of $19.3 million. While others agreed that the case did not fabricate the idea of maximizing shareholder wealth, she noted that it was an accurate statement of the law because “officers and directors have a duty to manage the corporation for the purpose of maximizing profits for the benefit of shareholders,” is a standard rule of law. and why “Dodge v. Ford is a rule that is almost never enforced by the courts” is not that it is bad jurisprudence, but because the rule of commercial judgment means: A commercial company is organized and sued primarily for the benefit of shareholders. To that end, the powers of the directors shall be exercised. The discretion of directors is exercised in the choice of means to achieve this objective and does not extend to a modification of the object itself, the reduction of profits or the non-distribution of profits among shareholders in order to use them for other purposes. [1] See Stephen M.

Bainbridge, Making Sense of the Business Roundtable`s Reversal on Corporate Purpose, 46 J. Corp. L. 285, 292 (2021) (“Dodge was a logical extension of the legal trends of the time and was almost immediately accepted by judges and academics as the correct statement of corporate purpose law.”) Dodge is often misinterpreted or misunderstood because it establishes a legal rule to maximize shareholder wealth. It was and is not the law. Maximizing shareholder wealth is a standard of conduct for officers and directors, not a statutory mandate. The business valuation rule [which was also confirmed in this decision] protects many decisions that deviate from this standard. This is a dodge read. However, if that`s all it`s all about, it`s not that interesting.

It`s a story that has been repeated a few times over the years as we look back at the impact of the Ford Motor Company, which was sitting on a $60 million surplus in the mid-1910s, thanks in large part to the success of the Model T. The automaker`s highly controversial and Nazi-friendly president, Henry Ford, had a new idea of what he wanted to do with this additional crash: limit dividend payments to shareholders and build more affordable cars and pay higher wages. This decision provoked the anger of some minority investors, John and Horace Dodge.