As I work away at my new book The Profit Motive: Defending Shareholder Wealth Maximization, I've been researching the foundational American corporate law decision: Dodge v. Ford Motor Co., 170 N.W. 668(Mich. 1919).
As informed readers will know, Dodge held that:
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.
I'm specifically working on the chapter defending Dodge from the attacks that have been widely aimed at it by progressive corporate law scholars, one of which is a question posed by the late Lynn Stout: "Why rely on a case that is nearly one hundred years old if there is more modern authority available?” Her argument actually conflates two distinct claims. One is that there is modern authority that contradicts Dodge. As we shall see, however, modern authority supports Dodge. The other component claim is that old cases have minimal precedential weight." Lynn A. Stout, Why We Should Stop Teaching Dodge v. Ford, 3 Va. L. & Bus. Rev. 163, 166 (2008).
In researching the former component of Stout's argument, I ran across the following claim by Ewan McGaughey of King’s College, London and The London School of Economics and Political Science:
... the claim that “shareholder primacy” is the “traditional paradigm” is absurd. The single case reference is predictably Dodge v. Ford Motor Co., 204 Mich. 459 (1919) which does not represent the law in the vast majority of states, including Michigan. See Lynn A. Stout, Why We Should Stop Teaching Dodge v. Ford (UCLA, Law-Econ Research Paper No. 07-11, 2007).
Ewan McGaughey, The Codetermination Bargains: The History of German Corporate and Labor Law, 23 Colum. J. Eur. L. 135, 176 n.71 (2016).
I took note of that claim because, as long time readers will recall, McGaughey was the fellow who subjected me to the Reductio ad Hitlerum a few years back.
I am unable to find any specific reference in the SSRN version of Lynn's article to Dodge's status as a matter of Michigan law. More generally, her discussion of the case law is more nuanced than McGaughey suggests. She thinks almost all of the cases on point are dicta and that the one non-dicta decision, Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., is "a dead letter." So I think Lynn's article provides very weak support for McGaughey's description of the law, at best.
Turning to the actual law, a 1935 Michigan Supreme Court decision cited Dodge with approval. Wagner Electric Corp. v. Hydraulic Brake Co., 257 N.W. 884, 887 (Mich. 1934). So did a 2006 Michigan Court of Appeals decision. Wojcik v. McNish, 2006 WL 2061499, at *5 (Mich. App. July 25, 2006). Most recently, a 2020 Michigan federal court decision concluded that it was still “well established under Michigan law that the primary purpose of a business corporation is to benefit and profit the stockholders.” Smith v. Smith, 2020 WL 2308683, at *8 (E.D. Mich. May 8, 2020) (emphasis supplied), citing Dodge for that proposition.
In addition, a 2003 Michigan appellate court decision, Churella v. Pioneer State Mut. Ins. Co., 671 N.W.2d 125 (Mich. App. 2003), explained that Michigan law draws an important distinction between business corporations and mutual insurance companies. While “the purpose of a business corporation is to provide profit to its shareholders . . . this is not the purpose of a mutual insurance company. The purpose of a mutual insurance company is to provide affordable insurance coverage to its members.” Id. at 132. The court specifically cited Dodge for its statement of the purpose of a business corporation. Id.
To repeat: Dodge is a “well established" proposition of Michigan law.
As for whether Dodge is good law in other states, while you wait to read my book (in about a year), I refer you to the relevant portion of my article Making Sense of the Business Roundtable's Reversal on Corporate Purpose, 46 J. Corp. L. 285, 289ff (2021).
