Zidell v. Zidell

Oregon Supreme Court · 1977 · Corporations

CorporationsDividendsClosely held corporationsMinority shareholdersFiduciary dutiesdividend declarationminority shareholderclosely held corporation

Facts

Arnold Zidell was a minority shareholder in four affiliated family corporations, while Emery Zidell and his son Jay controlled a majority interest after Jay purchased stock from another shareholder. Before Arnold resigned from employment in 1973, the corporations customarily retained earnings rather than paying dividends, and Arnold had agreed with that policy because the significant shareholders were active in the business and received salaries. After his resignation, Arnold demanded reasonable dividends, and the corporations declared dividends on 1973 earnings, which Arnold claimed were unreasonably small and part of an effort to deny him a fair share of profits while active shareholders received substantial salaries and bonuses. The directors, however, testified that they followed a conservative dividend policy because of anticipated capital improvements, possible plant relocation, inventory needs, dock renovation, the need to maintain short-term bank financing, and the unusual, possibly nonrecurring level of 1973 and 1974 earnings.

Issue

May a court compel closely held corporations to declare larger dividends merely because the corporations can afford them and the minority shareholder no longer receives salary, or must the shareholder prove that the directors' dividend decision was made in bad faith or for personal interests rather than legitimate corporate purposes? More specifically, did Arnold prove that the directors acted in bad faith in setting the 1973 and 1974 dividends?

Rule

Those who control corporate affairs owe minority shareholders fiduciary duties of good faith and fair dealing, but in matters of dividend policy that duty is discharged if the directors' decision is made in good faith and reflects legitimate business purposes rather than the private interests of those in control. Judicial intervention to compel dividends is proper only upon a showing of fraud, bad faith, breach of fiduciary duty, or abuse of discretion, and the burden of making that showing rests on the party seeking mandatory relief.

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

Lakeview Fabrication, Inc., a closely held corporation in Portland, has accumulated strong profits for two years. Mina Torres, a 22% shareholder who no longer works there, sues to compel a larger dividend after the board declares only a small one, even though the board testifies it is retaining cash for a warehouse retrofit, large raw-material purchases, and to preserve a line of short-term bank credit.

How should a court most likely rule?

Explanation. A court should not compel dividends merely because the corporation has sufficient earnings or because a minority shareholder is off payroll. The controlling rule is that judicial intervention is proper only upon a showing of bad faith, fraud, breach of fiduciary duty, or abuse of discretion, and the shareholder seeking mandatory relief bears that burden. Credible business reasons such as capital improvements, inventory needs, and preserving bank financing support nonintervention.