III. Dodge v. Ford: Inverting an Antiquated Analysis for Use in More Modern Applications
While the evolution of the business judgment rule and its modern application to corporate dividend policy by the courts would, in theory, be sufficient to sustain the presumption of correctness by Apple, Inc.’s directors under current jurisprudence, it is important to note that the seminal case on corporate dividend policy, Dodge v. Ford Motor Co., yielded an opposite result on similar (albeit somewhat less transparent) facts. In Dodge, the plaintiffs sought to compel payment of a previously-existing special dividend by Ford Motor Company from the approximately $52 million in surplus capital being held by the company under Henry Ford and his fellow directors. As later revealed off the record, Ford’s true reason for withholding the special dividend was to prevent the further capitalization two minority shareholders (Horace and John Dodge, “the Dodge Brothers”) in their ongoing efforts to create a competing automotive company (“Dodge Brothers Company”). Note that Ford’s fears about the Dodge brothers threat was an extremely plausible one; In 1916, the same year that the original case (from which this appeal stems) was filed, William Durant (and his partner Louis Chevrolet) leveraged profits from Durant’s ownership of General Motors stock to gain a controlling interest in the General Motors company. Durant subsequently became the President of GM by the end of that same year by utilizing the same methods employed by the Dodge brothers in this case. Despite these now-known facts (which are remarkably similar to the Apple, Inc./CIC facts from our foregoing hypothetical) Ford chose to officially posit a completely different rationale for withholding the special dividend.
According to Henry Ford, the board withheld the dividend so that the company would be able “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.” Despite this apparently benevolent intent, the court rejected Ford’s business decision by saying the company must be operated “primarily for the benefit of the stockholders” and that directors must exercise their authority solely to that end. Thus, the court decided that the board could not reduce shareholder profits “in order to devote them to other purposes.” It would seem, therefore, that Ford may have had a greater chance of successfully defending this suit if he had stated his true intentions for withholding the dividend; which was to protect and, ultimately, enhance wealth for a majority of the shareholders (by not supporting the interests of a competing corporation through the payment of the dividend).