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Dodge vs Ford Motor Case Study

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Dodge v. Ford Motor Co. 170 N.W. 668 (Mich. 1919)
In 1916, brothers John and Horace Dodge owned 10 percent of the common shares of the Ford Motor Company. Henry Ford owned
58 percent of the outstanding common shares and controlled the corporation and its board of directors.
Starting in 1911, the corporation paid a regular annual dividend of $1.2 million, which was 60 percent of
its capital stock of $2 million but only about 1 percent of its total equity of $114 million. In addition, from
1911 to 1915, the corporation paid special dividends totaling $41 million.
The policy of the corporation was to reduce the selling price of its cars each year. In June 1915, the board and officers agreed to
increase production by constructing new plants for $10 million, acquiring land for $3 million, and
erecting an $11 million smelter. To finance the planned expansion, the board decided not to reduce the
selling price of cars beginning in August 1915 and to accumulate a large surplus.
A year later, the board reduced the selling price of cars by $80 per car. The corporation was able to produce 600,000 cars annually,
all of which, and more, could have been sold for $440 instead of the new $360 price, a forgone revenue
of $48 million. At the same time, the corporation announced a new dividend policy of paying no special
dividend. Instead, it would reinvest all earnings except the regular dividend of $1.2 million.
Henry Ford announced his justification for the new dividend policy in a press release: “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.” The corporation had a $112 million surplus, expected profits of $60 million, total
liabilities of $18 million, $52.5 million in cash on hand, and municipal bonds worth $1.3 million.
The Dodge brothers sued the corporation and the directors to force them to declare a special dividend. The trial court ordered the
board to declare a dividend of $19.3 million. Ford Motor Company appealed.
Ostrander, Chief Justice
It is a well-recognized principle of law that the directors of a corporation, and they alone, have the power to declare a
dividend of the earnings of the corporation, and to determine its amount. Courts will not interfere in the
management of the directors unless it is clearly made to appear that they are guilty of fraud or
misappropriation of the corporate funds, or they refuse to declare a dividend when the corporation has a
surplus of net profits which it can, without detriment to the business, divide among its stockholders, and
when a refusal to do so would amount to such an abuse of discretion as would constitute a fraud, or breach of
that good faith that they are bound to exercise towards the shareholders.
The testimony of Mr. Ford convinces this court that he has to some extent the attitude towards shareholders of one who
has dispensed and distributed to them large gains and that they should be content to take what he chooses to
give. His testimony creates the impression that he thinks the Ford Motor Company has made too much
money, has had too large profits, and that, although large profits might be still earned, a sharing of them with
the public, by reducing the price of the output of the company, ought to be undertaken. We have no doubt
that certain sentiments, philanthropic and altruistic, creditable to Mr. Ford, had large influence in
determining the policy to be pursued by the Ford Motor Company.
There should be no confusion of the duties that Mr. Ford conceives that he and the shareholders owe to the general public
and the duties that in law he and his co-directors owe to protesting, minority shareholders. A business
corporation is organized and carried on primarily for the profit of the shareholders. The powers of the
directors are to be employed for that end.
We are not, however, persuaded that we should interfere with the proposed expansion of the Ford Motor Company. In
view of the fact that the selling price of products may be increased at any time, the ultimate results of the
larger business cannot be certainly estimated. The judges are not business experts. It is recognized that plans
must often be made for a long future, for expected competition, for a continuing as well as an immediately
profitable venture. We are not satisfied that the alleged motives of the directors, in so far as they are reflected
in the conduct of the business, menace the interests of shareholders.
Assuming the general plan and policy of expansion were for the best ultimate interest of the company and therefore of its
shareholders, what does it amount to in justification of a refusal to declare and pay a special dividend? The
Ford Motor Company was able to estimate with nicety its income and profit. It could sell more cars than it
could make. The profit upon each car depended upon the selling price. That being fixed, the yearly income
and profit was determinable, and, within slight variations, was certain.
There was appropriated for the smelter $11 million. Assuming that the plans required an expenditure sooner or later of
$10 million for duplication of the plant, and for land $3 million, the total is $24 million. The company was a
cash business. If the total cost of proposed expenditures had been withdrawn in cash from the cash surplus
on hand August 1, 1916, there would have remained $30 million.
The directors of Ford Motor Company say, and it is true, that a considerable cash balance must be at all times carried by
such a concern. But there was a large daily, weekly, monthly receipt of cash. The output was practically
continuous and was continuously, and within a few days, turned into cash. Moreover, the contemplated
expenditures were not to be immediately made. The large sum appropriated for the smelter plant was payable
over a considerable period of time. So that, without going further, it would appear that, accepting and
approving the plan of the directors, it was their duty to distribute on and near the 1st of August 1916, a very
large sum of money to stockholders.
Judgment for the Dodge brothers affirmed.
[Note: Dodge v. Ford may be the most famous lawsuit in the history of American corporate law.
Academics, judges, and legal and business practitioners have used it—and misused it—for
many purposes, likely because it touches on so many fundamental aspects of corporate law.
The case also has a fascinating backstory that will be appreciated by anyone interested in law,
business, or entrepreneurship. See M. Todd Henderson, Everything Old Is New Again:
Lessons from Dodge v. Ford Motor Company, University of Chicago Law & Economics, Olin
Working Paper (2007).]
Zapata Corp. v. Maldonado 430 A.2d 779 (Del. 1981)
Zapata Corporation had a share option plan that permitted its executives to purchase Zapata shares at a below-market price. Most
of the directors participated in the share option plan. In 1974, the directors voted to advance the share
option exercise date in order to reduce the federal income tax liability of the executives who exercised
the share options, including the directors. An additional effect, however, was to increase the
corporation’s federal tax liability.
William Maldonado, a Zapata shareholder, believed that the board action was a breach of a fiduciary duty and that it harmed the
corporation. In 1975, he instituted a derivative suit in a Delaware court on behalf of Zapata against all
of the directors. He did not make a demand on the directors to sue themselves, alleging that this would
be futile because they were all defendants.
The derivative suit was still pending in 1979, when four of the defendants were no longer directors. The remaining directors then
appointed two new outside directors to the board and created an Independent Investigation Committee
consisting solely of the two new directors. The board authorized the committee to make a final and
binding decision regarding whether the derivative suit should be brought on behalf of the corporation.
Following a three-month investigation, the committee concluded that Maldonado’s derivative suit
should be dismissed as against Zapata’s best interests.
Zapata asked the Delaware court to dismiss the derivative suit. The court refused, holding that Maldonado possessed an individual
right to maintain the derivative action and that the business judgment rule did not apply. Zapata
appealed to the Supreme Court of Delaware.
Quillen, Justice
We find that the trial court’s determination that a shareholder, once demand is made and refused, possesses an
independent, individual right to continue a derivative suit for breaches of fiduciary duty over objection by
the corporation, as an absolute rule, is erroneous.
Derivative suits enforce corporate rights, and any recovery obtained goes to the corporation. We see no inherent reason
why a derivative suit should automatically place in the hands of the litigating shareholder sole control of the
corporate right throughout the litigation. Such an inflexible rule would recognize the interest of one person
or group to the exclusion of all others within the corporate entity.
When, if at all, should an authorized board committee be permitted to cause litigation, properly initiated by a derivative
stockholder in his own right, to be dismissed? The problem is relatively simple. If, on the one hand,
corporations can consistently wrest bona fide derivative actions away from well-meaning derivative
plaintiffs through the use of the committee mechanism, the derivative suit will lose much, if not all, of its
effectiveness as an intracorporate means of policing boards of directors. If, on the other hand, corporations
are unable to rid themselves of meritless or harmful litigation and strike suits, the derivative action, created
to benefit the corporation, will produce the opposite, unintended result. It thus appears desirable to us to
find a balancing point where bona fide shareholder power to bring corporate causes of action cannot be
unfairly trampled on by the board of directors, but the corporation can rid itself of detrimental litigation.
We are not satisfied that acceptance of the business judgment rationale at this stage of derivative litigation is a proper
balancing point. We must be mindful that directors are passing judgment on fellow directors in the same
corporation and fellow directors, in this instance, who designated them to serve both as directors and
committee members. The question naturally arises whether a “there but for the grace of God go I” empathy
might not play a role. And the further question arises whether inquiry as to independence, good faith and
reasonable investigation is sufficient safeguard against abuse, perhaps subconscious abuse.
We thus steer a middle course between those cases that yield to the independent business judgment of a board committee
and this case as determined below, which would yield to unbridled shareholder control.
We recognize that the final substantive judgment whether a particular lawsuit should be maintained requires a balance of
many factors—ethical, commercial, promotional, public relations, employee relations, fiscal, as well as legal.
We recognize the danger of judicial overreaching but the alternatives seem to us to be outweighed by the
fresh view of a judicial outsider.
After an objective and thorough investigation of a derivative suit, an independent committee may cause its corporation to
file a motion to dismiss the derivative suit. The Court should apply a two-step test to the motion. First, the
Court should inquire into the independence and good faith of the committee and the bases supporting its
conclusions. The corporation should have the burden of proving independence, good faith, and reasonable
investigation, rather than presuming independence, good faith, and reasonableness. If the Court determines
either that the committee is not independent or has not shown reasonable bases for its conclusions, or if the
Court is not satisfied for other reasons relating to the process, including but not limited to the good faith of
the committee, the Court shall deny the corporation’s motion to dismiss the derivative suit.
The second step provides the essential key in striking the balance between legitimate corporate claims as expressed in a
derivative stockholder suit and a corporation’s best interests as expressed by an independent investigating
committee. The Court should determine, applying its own independent business judgment, whether the
motion should be granted. The second step is intended to thwart instances where corporate actions meet the
criteria of step one, but the result does not appear to satisfy its spirit, or where corporate actions would
simply prematurely terminate a stockholder grievance deserving of further consideration in the
corporation’s interest. The Court of course must carefully consider and weigh how compelling the corporate
interest in dismissal is when faced with a non-frivolous lawsuit. The Court should, when appropriate, give
special consideration to matters of law and public policy in addition to the corporation’s best interests.
The second step shares some of the same spirit and philosophy of the statement of the trial court: “Under our system of
law, courts and not litigants should decide the merits of litigation.”
Judgment reversed in favor of Zapata. Case remanded to the trial court.
How to Write a “Brief”
Use the following “IRAC” (Issue Rule Application Conclusion) format:
Issue: What question must be answered in order to reach a conclusion in the case? The Issue
must be expressed in the form of a legal question which, when answered, gives the result in the
case. Make it specific (e.g. “Has there been a false imprisonment if the plaintiff was asleep at
the time of ‘confinement’?”) rather than general (e.g. Did the defendant owe a duty of care to the
plaintiff when the plaintiff was trespassing on the defendant’s property?). Some cases present
more than one issue; if there is more than one issue, it is OK to write more than one, but be
sure to list the principal one and focus on that.
Rule: The Rule is the law that applies to the principal issue. It should be stated as a general
principal, (e.g. A duty of care is owed whenever the defendant should anticipate that her
conduct could create a risk of harm to the plaintiff.) not a conclusion to the case being briefed,
(e.g. “The plaintiff was negligent.”). Typically, the Rule can be expressed in one or two
Application: The Application is a discussion of how the Rule applies to the facts of the case.
Essentially, the Application section is a description of the relevant facts, the parties’ arguments
and positions in the case, and the court’s thought process by which it answered the Issue and
established the Rule. While the Issue and Rule are normally only one or two sentences each,
the Application section of a brief should be two to four paragraphs long. It should be a written
debate, not simply a statement of the Conclusion. Whenever possible, present both sides of any
issue. Do not begin with your Conclusion. The Application section shows how you can track the
court’s reasoning on paper and is the most difficult skill you will learn. It is also permissible to
put the relevant facts of the case in a separate section of the Brief.
Conclusion: What was the result of the case? Did the appellate or supreme court affirm,
reverse or reverse and remand the lower court’s decision?
The case gives you a background of the facts along with the judge’s reasoning and
conclusion. When you brief cases, you are summarizing the judge’s opinion. Briefs should not
have to exceed more than two pages in length.

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