Why I Still Teach Dodge v. Ford Motor Co.

Because it's good law and sound policy

I suspect most readers will be familiar with Dodge v. Ford Motor Co.,¹ possibly the most important corporate law case the Michigan Supreme Court ever decided (no offence to Michiganders in my audience; if you’re only going to have one, this is a pretty good one to have).

I taught Dodge in Business Associations this week, which got me thinking about my intervention a few years ago in the longstanding debate over this controversial decision. Hence, this post.

For the benefit of those who have not encountered the case, let me start with a quick review. The Dodge brothers held a 10 percent interest in the Ford Motor Co.; Henry Ford held 58 percent. The company had been highly successful and had made it a policy to issue huge special dividends. Henry Ford announced that he would stop issuing the special dividends and would instead pump the money into a new facility, which became the giant Ford River Rouge plant.

The Dodge brothers sued (a) to require FMC to reinstate the special dividends, and (b) to enjoin the construction of the River Rouge plant.²

The court held that FMC had to reinstate the special dividends but could continue with its construction plans.

As to the former, the court held that Ford’s board had abused its discretion by cancelling the dividends. It observed that courts generally leave dividends to the discretion of the directors, but not if a refusal to pay constitutes an arbitrary refusal to do what the circumstances required to be done. Here Henry Ford ran the company as an eleemosynary institution.

Then came the key passage that has rankled corporate social responsibility folks for decades:

A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself, to the reduction of profits or to the nondistribution of profits among stockholders in order to devote them to other purposes.

Some years ago, the late Lynn Stout wrote an article entitled Why We Should Stop Teaching Dodge v. Ford,³ whose title neatly captured her thesis.

I was unpersuaded and kept teaching Dodge. Eventually I undertook to explain why as part of a larger project on corporate social responsibility and the ESG movement (I’ll talk about that project in my next post). The result was my article, Why We Should Keep Teaching Dodge v. Ford Motor Co.⁴

Obviously, that article came to mind this week as I taught Dodge, which suggested it would be worthwhile to remind people why Dodge is both good law and good policy. Herein, however, I focus mainly on the former. The latter will come next time.