## Facts

- Minority shareholders of a closely held family corporation sued the corporation and its controlling directors seeking an order compelling “fair and adequate” common-stock dividends.
- The corporation had common stock, Class A stock (with priority over common for dividends), and preferred stock (including preferred issued by a wholly owned subsidiary).
- From 1931 to 1945, the corporation paid no dividends on common stock, while paying preferred dividends regularly and Class A dividends intermittently.
- After the suit began, the corporation declared a common-stock dividend of $31,532 in 1945, roughly 45% of the prior year’s earnings.
- Later in 1945, the corporation and its subsidiary retired outstanding preferred stock for $165,000 (about equal to 1944 net earnings); all shareholders benefited proportionately and relative ownership positions were unchanged.
- Plaintiffs alleged a majority “freeze-out” plan to pressure minority shareholders to sell at an unfair price by withholding dividends, while majority directors extracted value through compensation, bonuses, and loans.
- Evidence showed substantial compensation and loans to certain defendants, but much of it predated the dividend dispute; an alleged “freeze-out” statement by one director was denied and uncorroborated.
- The trial court directed a verdict for defendants and dismissed the complaint.

## Issues

1. Whether the directors’ refusal to declare common-stock dividends, despite an assertedly adequate surplus, was in bad faith such that a court could compel dividends.
2. What evidentiary showing is required to overcome deference to directors’ discretion on dividend policy in a closely held corporation.

## Decision

- The court entered judgment for defendants and dismissed the action.
- The court held plaintiffs failed to prove the dividend policy was adopted in bad faith or for directors’ personal interests rather than corporate welfare.
- The court declined to order the declaration of additional common-stock dividends.

## Legal Principles

- Dividend declarations are generally within directors’ discretion; courts intervene only on a clear showing of bad faith or abuse.
- Even where surplus exists, directors may not withhold dividends in bad faith; bad faith is shown when decisions are dictated by personal interests rather than the corporation’s welfare.
- Allegations of shareholder hostility or disputed “freeze-out” statements, without corroboration and supporting financial proof, do not justify judicial compulsion of dividends.
- Corporate uses of earnings that benefit shareholders proportionately (including retirement of preferred stock) may support a finding that directors acted for corporate purposes rather than oppression.

## Conclusion

The court refused to compel dividends because the minority shareholders did not establish that the board’s conservative dividend policy was driven by personal advantage or oppressive intent rather than legitimate corporate needs, and the evidence—including a substantial common dividend and proportionate benefits from preferred-stock retirement—did not rebut business-judgment deference.


Gottfried v. Gottfried, 73 N.Y.S.2d 692 (N.Y. Sup. Ct. 1947)