The Ford Squeeze-Out

Abstract

In 1916, Henry Ford announced his intent to indefinitely suspend distribution of nearly all company profits to the shareholders (including himself), as well as continue cutting prices and expanding production on his wildly popular automobile. He claimed that his primary goals were to build ever-cheaper cars and employ more people, with profits being incidental to his plans.

This announcement touched off a battle between Ford, the company's controlling shareholder, and the minority shareholders, who would soon see their returns severely curtailed. While much of the press (whom Ford cultivated) saw this as a fight by greedy capitalists versus an untraditional, socially-minded industrialist, Ford's real motivation very likely included a desire to stifle the growth of his most threatening competitor—fellow shareholders John and Horace Dodge—who were using Ford dividends to build an effective, rival car company.

This battle progressed via the Michigan courts, where the state Supreme Court, in 1919, famously affirmed the business judgment rule and the principle of shareholder primacy. This was a mixed decision for Ford, and it enhanced his determination to shed his minority shareholders.

Ford resigned from the company bearing his name and threatened to build a competing firm. The move depressed the value of Ford Motor Co. shares and provided Ford the economic leverage to negotiate the purchase of all outstanding shares at an implied valuation of $255 million. While this represented an unprecedented return on capital for the investors, it was arguably well below the true value of company at the time. The scrap among wealthy businessmen quickly subsided in the public consciousness, but the implications for corporate governance were significant and enduring.

Keywords: Corporate governance, scandal, squeeze-out, corporate social responsibility

JEL Classification: D64, G32, G34, K22, L21, L62, M14, N82