Hunter v. Roberts, Throp & Co.

Michigan Supreme Court · Corporations

CorporationsDividendsDirectors' discretionEquitycorporate dividendsboard discretionequity interventionnet profits

Facts

Roberts, Throp & Co. was a Michigan manufacturing corporation with $250,000 authorized capital but only $80,000 issued and paid in. After a 1881 change in stock ownership, the corporation's available assets were divided out, leaving it without available capital and forcing it to operate through borrowing and long-term credit sales. Although its books showed yearly increases in assets over liabilities and accumulated earnings, those assets consisted largely of long-term notes and accounts worth substantially less than face value and needed to finance ongoing operations. The complainant, as administratrix of a stockholder owning $6,000 in stock, sought to compel a dividend, including a requested 100 percent dividend, despite the directors' unanimous testimony that any dividend would seriously injure or ruin the business.

Issue

May a court of equity compel a corporation's directors to declare and pay a dividend when the corporation has apparent net profits on its books, but payment would deprive the company of necessary working capital and seriously injure its business?

Rule

Directors alone ordinarily have the power to declare dividends and determine their amount. A court of equity will not interfere unless it clearly appears that the directors are guilty of fraud or misappropriation of corporate funds, or refuse to declare a dividend when the corporation has a surplus of net profits that can be divided among stockholders without detriment to the business, such that the refusal amounts to an abuse of discretion constituting fraud or a breach of good faith.

🔒

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lakeview Harvest Equipment, a manufacturing corporation in Toledo, has shown accounting profits for four consecutive years. Most of its assets consist of customer notes payable over three years, and the board unanimously concludes that using those receivables to fund a dividend would leave the company unable to buy materials for the next production cycle.

A minority shareholder files suit in equity to compel a dividend. How should the court rule?

Explanation. The majority rule is that directors ordinarily decide whether to declare dividends. Equity intervenes only when there is fraud, misappropriation, or a refusal to distribute surplus net profits that can be paid without detriment to the business. Here, although the books show profits, the funds are bound up in long-term receivables needed to operate the business, so a court should not substitute its judgment for the board's.