Hunter v. Roberts, Throp & Co.
47 N.W. 131 · Michigan Supreme Court · 1890
Facts
The administratrix of a deceased stockholder sued Roberts, Throp & Co., a manufacturing corporation, to compel its directors to declare a dividend, alleging the existence of surplus profits. The corporation had not declared a dividend since 1881, and its directors, who were also major stockholders, testified that declaring a dividend would be detrimental to the company's business. The company's assets were largely tied up in long-term, low-value bills receivable, and it relied on borrowed money to operate.
Issue
Can a court compel corporate directors to declare a dividend when the directors, exercising their business judgment, believe such a dividend would seriously injure the corporation's business, despite the existence of a theoretical 'net profit' on paper?
Holding
The court affirmed the dismissal of the complaint, holding that it would not compel the directors to declare a dividend. The evidence supported the directors' judgment that a dividend would cause serious detriment to the company's operations and financial stability.
Rule
Courts will not interfere with the sound discretion of corporate directors in declaring dividends unless there is clear evidence of fraud, misappropriation, or an abuse of discretion amounting to fraud, and the corporation can safely make a dividend without detriment to its business. Directors are not obligated to borrow money to pay dividends.
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