Gay v. Gay's Super Mkts., Inc.

Supreme Judicial Court of Maine · 1975 · Corporations

343 A.2d 577 (Me. 1975)

Updated August 22, 2026

CorporationsDividendsClosely held corporationsJudicial review of board discretionboard discretionbad faithabuse of discretionminority shareholder

Facts

Gay's Super Markets, Inc. was a closely held Maine corporation in which Hannaford Bros. Co. owned 51% of the common stock and plaintiff Lawrence E. Gay and his brother Carroll V. Gay owned the rest equally. Lawrence, a minority shareholder and former store manager, claimed that after his discharge the board's decision in January 1972 not to declare a dividend was an illegal tactic designed to force him out of the business. The directors testified that no dividend was declared because the corporation needed funds for expansion in Machias and Calais, anticipated competitive pressures, and expected start-up losses from a new store. The corporate minutes reflected discussion of anticipated financial needs and expansion before the unanimous vote not to declare a dividend.

Issue

May a court compel a corporation's board of directors to declare a dividend when a minority shareholder alleges the board withheld dividends in bad faith to pressure him, despite the board's stated business reasons for retaining earnings? More specifically, did the plaintiff prove that the directors' no-dividend decision was motivated by bad faith or abuse of discretion rather than legitimate corporate financial needs?

Rule

Under Maine law, declaration of dividends is committed to the discretion of the board of directors. A court of equity may compel a dividend only in a clear case where the plaintiff shows that the refusal to declare a dividend amounted to fraud, bad faith, breach of fiduciary duty, or abuse of discretion; if plausible business reasons support the board's decision and are credible, courts will not interfere with internal corporate management.

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North Harbor Foods, Inc., a closely held corporation based in Portland, Maine, has had profitable operations for three years and holds $900,000 in cash. Its board declines to declare a dividend after approving a warehouse expansion in Bangor and reserving funds for expected start-up losses at a new location in Augusta. A minority shareholder, Elena Cruz, sues to compel a dividend, arguing that the company obviously has enough money to pay one.

How should a court most likely rule?

Explanation. Dividend declarations are committed to the board's discretion. A court may compel a dividend only in a clear case of fraud, bad faith, breach of fiduciary duty, or abuse of discretion. The mere existence of earnings or cash surplus does not create a shareholder right to a dividend, and credible evidence of expansion and expected start-up losses is a plausible business reason for retaining earnings.