A Blog of the Global Justice Movement

Wednesday, February 8, 2012

Raw Judicial Power XVIII: Dodge v. Ford Motor Company

As we saw in the previous posting in this series, prior to the entry of Theodore Roosevelt into the 1912 presidential campaign on the Progressive ticket, the outlook was extraordinarily grim for the United States. The choice was between William Howard Taft, who had caved in to the reactionary Old Guard Republicans, and Woodrow Wilson, who, in defiance of the populist leanings of the Democratic Party, supported laissez-faire capitalism.

This put the American voter between a rock and a hard place as far as choice was concerned. Elect Taft and get more ineffectual progressive rhetoric as the Old Guard dismantled Roosevelt's reforms while they purged the G.O.P. of progressive elements, or elect Wilson and keep things as they were, with a stalemate between a reactionary president and a populist Congress.

By forcing both the Democrat and Republican presidential candidates to adopt a more progressive stance, Roosevelt made the election a genuine contest between Wilson and himself, instead of a landslide for Wilson. Taft was, to all intents and purposes, unelectable no matter what happened. He had lost the confidence of the progressive Republicans by caving in to the Old Guard, and all the Democrats and independents, and had never had the confidence of the populists and socialists in the first place.

Roosevelt thereby managed to turn the tide for a short time, but progressivism as a movement depended too much on him personally at that point; it had not been institutionalized, that is, become truly a part of the system. Had Taft not previously caved, or had Roosevelt been elected in 1912, the reforms could have taken root and grown, restoring the American system, but they did not, and the brief chance that reform had under the Democrats came to nothing in the end.

Still, the Democrats kept their biggest promises and instituted the Federal Reserve and the income tax. These institutions, however, necessary as they were and remain, were not integrated into a holistic approach. They were tacked on, so to speak, to a system that still embodied several flaws, notably lack of democratic access to the means of acquiring and possessing capital to replace the Homestead Act.

This became evident when, for the sake of political expedience, both the income tax and the Federal Reserve were misused to finance the entry of the United States into World War I. Rather than raise the necessary funds by the politically unpopular move of raising taxes — although taxes were raised; just not enough to defray the full cost of the war — the money creation powers of the Federal Reserve were used to monetize government deficits by purchasing the securities floated in the Second Liberty Loan and Victory Loan issues.

Bad as the misuse of these institutions was and remains, however, they can be corrected by relatively simple changes in government policy. This was not the case with the institution of private property, especially after the distortions that resulted from the decision in the Slaughterhouse Cases became embedded in constitutional law. Nowhere was the change more evident than in the decision of the Michigan Supreme Court in Dodge v. Ford Motor Company (204 Mich. 459, 170 N.W. 668. (Mich. 1919)).

As a result of the "slavery of past savings" assumption that forces an economy into capitalism, socialism, or the Servile State, the new definitions of private property that resulted from the Slaughterhouse Cases had the world economy in their grip. The Great War had accelerated the process of proletariatization and the economic disenfranchisement of small owners. The next step was to start undermining or eliminating the rights of minority owners, leaving only the richest and thus most powerful in total control. In Dodge v. Ford Motor Company the abolition of private property for the majority of the population even in a capitalist society was recognized as a legal principle.

The story is rather ugly. In the first quarter of the 20th century, Henry Ford decided to finance a plant expansion using accumulated cash instead of selling new equity or borrowing the money. The Dodge brothers, minority owners, protested. They wanted the dividends to which they were entitled under the traditional rights of private property. Ford refused to pay dividends, and the Dodge brothers sued.

In Dodge, among other issues, the court ignored the traditional definition of private property, embodied in all codes of law, as the right to control what is owned. (Louis O. Kelso, "Karl Marx: the Almost Capitalist," American Bar Association Journal, March 1957.) The court, in effect, redefined the traditional right to receive the "fruits of ownership" (i.e., income from what is owned — dividends) for minority shareholders as limited to the power to sell their shares if they were not happy with the dividend policy of the majority owner(s).

The court ruled, in effect, that minority shareholders are able to enjoy their full "fruits of ownership," including the right to receive any and all income generated by what is owned, only if the majority owner so agrees. That is, the majority owner(s) alone, through control of the Board of Directors, have the right to set dividend policy for a company, and do not need the consent of a minority owner or owners to withhold that which belongs by natural right to the minority owner(s).

Ford built his case on the "business judgment rule." That is, if the individual elected by the shareholders (who happened to be Ford, as he retained the majority block of shares) decided it was in the best interests of the company — and therefore the shareholders — to stop or reduce payment of dividends, the minority shareholders had no recourse other than to retain their shares and take whatever the majority owner(s) chose to dish out. The alternative was to exercise their "take-it-or-leave-it" right to sell their shares and wash their hands of the whole business — in other words, to exercise their property rights solely to become non-owners.

The "business judgment rule" is a concept in U.S. corporate case law in which "directors of a corporation . . . are clothed with [the] presumption, which the law accords to them, of being [motivated] in their conduct by a bona fide regard for the interests of the corporation whose affairs the stockholders have committed to their charge." (Gimbel v. Signal Cos., 316 A. 2d 599, 608 (Del. Ch. 1974).) In order for someone to bring suit for violating the rule, the one suing must prove that there was a conflict of interest, i.e., "the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty — good faith, loyalty, or due care." (Cede & Co. v. Technicolor, Inc., 634 A. 2d 345, 361 (Del. 1993).)

If it cannot be shown that the Board of Directors had a self-interested motive in reaching its decision, the individual or group alleging a breach of fiduciary duty "is not entitled to any remedy unless the transaction constitutes waste . . . [that is,] the exchange was so one-sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration." (In re The Walt Disney Co. Derivative Litigation, 906 A. 2d 27 (Del. June 8, 2006).)

The suit that the Dodge brothers brought against Henry Ford was one of the earliest cases in which this rule was invoked. In a line of reasoning that appeared to advance the claim that minority owners are not owners in the same sense or manner as majority owners, the Michigan Supreme Court ruled that, "courts of equity 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 refuse to declare a dividend when the corporation has a surplus of net profits which it can, without detriment to its 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 which they are bound to exercise towards the stockholders." (Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668 (1919).) This is simply using a rule of law — the business judgment rule — to ride roughshod over the natural right to be an owner, whether one is a minority, small, or majority owner.

It might thus be argued at some time in the future, when the rights of private property have been restored, that by deciding to deprive minority owners — shareholders — of their traditional rights of property in furtherance of what might be interpreted as vindictive or malicious acts on the part of Henry Ford to deprive the Dodge brothers of their rights as shareholders, the court in Dodge v. Ford Motor Company might not have applied the business judgment rule properly in the case that seems to have been used most often to validate the concept.

What is also frequently ignored in analyses of the case is the fact that Ford had dismissed another right of private property, that of control. He had previously blocked every effort of the minority shareholders to have input into decisions and exercise some degree of control over the business, such as design improvements and marketing strategy. This was particularly egregious with respect to the Dodge brothers, who owned the next largest block of shares (10%) after Ford, and who were increasingly unhappy with Ford's dictatorial actions.

Consequently, prior to their lawsuit over Ford's restriction of dividend payments, the Dodge brothers began setting up their own automobile manufacturing company in secret, using their Ford dividends to finance the effort. Ford got wind of this and began withholding dividends. Ford was also suspected of wanting to reduce the price of Ford automobiles as a way of justifying the proposed reduction in dividend payouts and reducing the company value per share.

After the Michigan Supreme Court ruled in his favor, Ford threatened to set up another rival automobile manufacturing company, probably to be wholly owned by Ford personally. This was apparently as a way to compel the Dodge brothers to sell their shares back to the Ford Motor Company at the reduced value per share that Ford had manipulated. In this he was successful — and thereby undermined another right of private property, that of disposal, by taking away the Dodge brothers' free choice in the matter of whether or not to sell their shares.

Thus, consistent with the redefinition of private property that came out of the Slaughterhouse Cases, Henry Ford, one of the "high priests" of capitalism, did more than almost anyone else to wreck the institutions of private property, liberty, and free markets on which capitalism is ostensibly based.

#30#

4 comments:

shalomes2012 said...

The "business judgment rule" is a concept in U.S. corporate case law in which "directors of a corporation . . . are clothed with [the] presumption, which the law accords to them, of being [motivated] in their conduct by a bona fide regard for the interests of the corporation whose affairs the stockholders have committed to their charge."

This stated presumption,admiration and respect for those in the seat of significant economic power probably blinds the eyes of the judges and lawmakers who need to disregard one's social station in deciding whether they are due some advantage over the minority.

This was obvious in one conversation I had in discussing the lopsided economy, where the few own great holdings and most of the people own little; his comment, "You know, those one percent are quite a talented bunch". As if they deserve such prizes!

Michael D. Greaney said...

I, too, am humbled by their greatness. I wish I had as much ability to run my own life as they and the State have to run it for me — and so well!

shalomes2012 said...

I feel that we are idenifying a human weakness that needs to be exposed...a childish tendency for hero worship. The only hero to worship is the Divine Being. The rest of us need to wrestle with the best ideas upon which to build our homes and nation, not capitulate all reason and energy to some (insert name of current politician dizzy with accolades)mania

Michael D. Greaney said...

There are countless names for that weakness, and it would be an endless task to list them. It is, as you point out, essentially a surrender of our personal and individual responsibility to acquire and develop virtue to someone or something else. This is an abrogation of our individual duty to become more fully human, as well as our social duty to organize with others to correct flaws in the social order. "Let somebody else do it" is comforting and comfortable ... until we realize that what we've done by saying it is resign our membership in the human race. It's as deadly as someone who insists on doing everything for us ... thereby gaining absolute mastery over our lives.