Global Journal of Management and Business Research, D: Accounting and Auditing, Volume 22 Issue 2

In summary, shareholders have negligible power to designate board membership. In addition threats deriving from the shareholder’s rights to vote and sue have negligible impact on limiting board discretion. Indeed, other constituents, such as labor, arguably have more influence over board discretion than do shareholders. Shareholders have no right to manage . k) Right to Income Do shareholders have a right to income of the corporation? Honoré (1961, 169) defines income as “…a surrogate of use, a benefit derived from forgoing personal use of a thing and allowing others to use it for reward.” In order for shareholders to have a right to income , others must have a corresponding duty to exclude themselves. But corporate law does not prohibit other corporate constituents (e.g., labor) from seeking to obtain this same income. Therefore, shareholders do not have an exclusive right to all income. This does not necessarily imply, however, that shareholders have no right to any income. In order for shareholders to have a right to any income , the board would need a duty to declare dividends. State statutes permit the board to declare dividends from corporate income, but there is no legal obligation. 32 The classic case law on this subject is Dodge v. Ford Motor Company (Mich. 1919) in which the Michigan Supreme Court ruled in favor of Dodge, ordering Ford to pay a special dividend of $19 million-- $1.9 million to Dodge and over $10 million to Ford. The specifics of this case were unique. First, Dodge owned a large (i.e., 10%) minority interest. Second, Dodge argued that, “…Ford was cutting off dividends to kill one competitor (the Dodges) and building a huge new factory to threaten the competitive position of them and others.” Third, Ford’s testimony professed a business strategy antithetical to capitalism. Therefore, strictly speaking, shareholders have no right to any corporate income. Still, for the sake of argument, shareholders could have the power to force the board to declare dividends and thus, in effect, they would have the right to at least some income. This issue is related to the right to manage , regarding whether shareholders have the power to limit board discretion. The difference is that the board decision under examination here is not one of general management, but is specific to declaring dividends. 33 32 If anything, state statutes place restrictions on the size of the dividend the board can declare. “No distribution may be made if, after giving it effect: (1) the corporation would not be able to pay its debts as they become due in the usual course of business...” (MBCA 2002 § 6.40(c)) 33 “Ford’s testimony was too much for the trial court to bear. After all, if a firm as large and important to the American economy were permitted to pursue an overtly socialist strategy, the political impact and the effect on other firms could be enormous. The geopolitical context of the trial made this point clear.” (Henderson 2007, 21) These special circumstances make the ruling difficult to generalize to other situations . 34 34 Some use this decision to argue that corporations have a legal obligation to maximize profit for shareholders. First, legal scholars disagree with this interpretation. For example, “Dodge is often misread or mist aught as setting a legal rule of shareholder wealth maximization. This was not and is not the law.” (Henderson 2007, 1) Second, case law related to takeovers suggests that corporations have no such obligation. For example, in Paramount Communications Inc. v. Time Inc . Delaware Supreme Court, 1990. 571 A.2d 1140: “[A] board of directors . . . is not under any per se duty to maximize shareholder value.” The precedent for Dodge v. Ford is expressed in Pyle v. Gallaher, 75 A. 373 (Del. 1908) has been that “[t]hat a shareholder in a corporation has no property interest in the profits of the business carried on by the corporation until a dividend has been declared out of such profits” is “substantially correct”, which the court applied in Dodge v. Ford follows: It is a well-recognized principle of law that the directors of a corporation, and they alone, have the power to declare a dividend of the earnings of the corporation, and to determine its amount. 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…so long as they do not abuse their discretionary powers, or violate the company’s charter, the courts cannot interfere. ( Dodge , 204 Mich. at 500.) This summary illustrates the obstacles shareholders face in bringing lawsuits against the large, diversified corporation for the board not paying dividends. As a result, to my knowledge, there has not been another successful shareholder lawsuit for dividends against a large corporation. Legal experts agree, the business judgment rule obliterates the power of shareholders to force boards to declare dividends. Professor M. Todd Henderson states that, “The decision to withhold dividends and invest in new businesses is, under current law, unassailable.” (Henderson 2007, 28) Professor Ken Greenwood states that, “…legal doctrine makes clear that shareholders have the same legal right to dividends as waiters have to tips: an expectation that is not enforceable in court…” (Greenwood 2006,108). Professor Lynn Stout explains that corporate profit can be used to, “…raise managers’ salaries, start an on-site childcare center, improve customer service, beef up retirees’ pensions, or make donations to charity.” (Stout 2002, 1194) The Effects of Entity Shielding on Claims to Assets: Implications for Financial Reporting 28 Global Journal of Management and Business Research Volume XXII Issue II Version I Year 2022 ( )D © 2022 Global Journals