170 N.W. 668
The Ford Motor Company was organized under Michigan statutes with an authorized capital stock of $2,000,000.1 By July 1916 the company had capital invested in property and accounts receivable of $78,278,418.65 and, after subtracting liabilities other than capital stock, more than $60,000,000.2 It also held nearly $54,000,000 in cash or cash equivalents.3 Its total assets exceeded $132,000,000 and its surplus approached $112,000,000.4
In June 1915 the executive officers and directors discussed and agreed upon a general plan to duplicate the existing plant and erect a smelter on the River Rouge.5 The plan called for maintaining the current selling price through the 1915-1916 model year, accumulating surplus to fund the expansion, and then reducing the price of each car by $80 beginning August 1, 1916, while aiming for eventual annual production of 1,000,000 vehicles.6 Henry Ford, who controlled the company, stated that his ambition was to employ still more men and to put the greatest share of profits back into the business rather than distribute them.7
After declaring only the regular dividend in October 1915, the company entered the 1916-1917 model year with the capacity to produce and sell more than 500,000 cars at the prior price. It reasonably might have expected a profit for the year of upwards of $60,000,000.8 Instead it appropriated $11,825,000 for the smelter.9 The plans required an expenditure sooner or later of $9,895,000 for duplication of the plant and for land and other expenditures $3,000,000.10 Minority shareholders demanded a further special dividend.11
The minority shareholders filed suit in Michigan circuit court seeking to enjoin the expansion and to compel distribution of profits.12 Three judges heard the application for a temporary restraining order.13 The case then proceeded to a hearing on the merits before the trial judge, who entered a decree that was appealed to the Michigan Supreme Court.14
Whether Michigan statutes that fix a maximum limit on authorized capital stock also limit the total capital assets a corporation may lawfully employ in its business?15
The Michigan statute limits only the amount of capital stock that may initially be aggregated and embarked in business under the law.16 It does not restrict the capital assets that may later be employed.17 Undistributed profits belong to the corporation and may lawfully be used as capital so long as the initial organization complies with the statutory maximum for capital stock.18
No. The Michigan statute's language addresses organization and fixes a maximum of $50,000,000 for capital stock in the first instance. Historical amendments confirm no continuing policy to cap assets.19 The Ford Motor Company was organized with the permitted $2,000,000 capital stock yet accumulated assets exceeding $132,000,000 and cash or equivalents nearing $54,000,000 by July 1916 through retained profits, an accumulation the statute permits without violation.20
Michigan statutes limiting authorized capital stock do not restrict the total capital assets a corporation may employ.21
Whether the proposed construction and operation of a smelter to produce iron castings for automobile parts falls within the corporate powers of the Ford Motor Company?22
A manufacturing corporation organized to produce motors and automobiles possesses the power to manufacture all components of its product.23 This includes making castings from iron ore rather than purchasing pig iron.24 The activity must serve the company's own manufacturing needs and must not extend to unrelated commercial ventures.25
Yes. Because the Ford Motor Company is organized to manufacture motors, automobiles, and parts, producing iron castings from ore for its own vehicles eliminates an intermediate step already within its manufacturing authority.26 The company may not smelt ore for sale to others, but the proposed River Rouge smelter is limited to internal use for the 800,000 cars annually contemplated.27 This places the project squarely inside corporate powers.28
The proposed smelter falls within the corporate powers of the Ford Motor Company.29
Whether the directors of the Ford Motor Company acted arbitrarily or abused their discretion by declining to declare a special dividend after the 1916 fiscal year and instead committing profits to plant expansion and price reduction?30
Directors possess discretion to declare dividends and to invest profits in business expansion.31 Courts will intervene when the refusal to distribute constitutes an arbitrary action or abuse of discretion.32 This is particularly true where the corporation possesses a large surplus of net profits that can be distributed without detriment to the business.33 The refusal must amount to a breach of the good faith owed to shareholders.34
Yes. After the 1916 fiscal year the company held assets over $132,000,000, a surplus approaching $112,000,000, and nearly $54,000,000 in cash while expecting profits exceeding $60,000,000; it had declared only the regular dividend and planned expenditures of roughly $24,220,000 for expansion and a smelter. These facts establish that the directors could have distributed a substantial special dividend without harming operations, rendering their refusal arbitrary rather than a legitimate exercise of discretion.35
The directors acted arbitrarily by declining to declare a special dividend after the 1916 fiscal year.36
Related opinions on this issue
Joined by Bird, C. J., And Kuhn, J.
Justice Moore concurred in the majority's conclusion regarding capitalization limits and the smelting enterprise.37 He also agreed that the large surplus demonstrated an arbitrary refusal to distribute funds that should have gone to stockholders as dividends.38 Moore therefore joined the result ordering distribution.39
However, he did not agree with all aspects of the majority's discussion of dividend policy.40 Despite this divergence on the broader analysis, Moore reached the same bottom line on the need for distribution to the stockholders.41