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fact that some of the money paid to stockholders as dividends was borrowed for that purpose did not show that the dividends paid were not paid out of the earnings or surplus.

This procedure of investing net earnings in corporate enterprises, and subsequently borrowing money represented by such earnings to pay dividends, obviously may have certain advantages, as the keeping of the funds of the company actively at work, and is not apparently an inherently dangerous policy to be condemned by the courts.78

But the view has been taken that a court of equity will not compel direc

78 See Excelsior Water & Min. Co. v. Pierce (1891) 90 Cal. 131, 27 Pac. 44; State v. Baltimore & O. R. Co. (Md.) and other cases cited, supra.

79 Hunter V. Roberts, T. & Co. (1890) 83 Mich. 63, 47 N. W. 131. See note 111 infra.

And, in Stevens v. United States Steel Corp. (1905) 68 N. J. Eq. 373, 59 Atl. 905, the court observed that it knew of no rule of equity which required directors to sell property at a loss, or to borrow money, in order to pay dividends, because an appraisement of the corporate assets exhibited a surplus of what bookkeepers might call profits.

In Murray v. Beattie Mfg. Co. (1912) 79 N. J. Eq. 604, 82 Atl. 1038, it was said that stockholders can only obtain the aid of a court to compel the distribution to them of profits which exist in the form of cash, or which can be readily converted into cash, and which the corporation does not reasonably require for the continuation of the business.

80 See Sexton v. C. L. Percival Co. (1920) 189 Iowa, 586, 177 N. W. 83, in note 390, infra.

81 Lee v. Neuchatel Asphalte Co. (1889) L. R. 41 Ch. Div. (Eng.) 1. It was held in this instance that a limited company formed to acquire and work a mine or quarry, which was of a wasting nature, might pay dividends from profits without setting aside money to meet the depreciation in the value of its wasting property, and that in so doing nothing in the Companies Act was violated. It was said that, if a company is formed to acquire and work a property of a wasting nature, as a mine, quarry, or

tors of a corporation, acting in good faith, to borrow money for the purpose of paying dividends, against their judgment and wishes.79

The presumption is that a stock dividend was from earnings, and not from capital, even though at the time the corporation was in such a financial condition that it could not have paid a dividend of like amount in cash without borrowing money.8 80

V. Wasting-assets corporations. The so-called wasting-assets doctrine seems to have originated in an English case of comparatively recent date.81 According to this doctrine a

a patent, the capital expended in acquiring the property may be regarded as sunk or gone, and if the company retains sufficient assets to pay its debts, there is nothing in the act to prevent any excess of money obtained by working the property, over the cost of working it, from being divided among the shareholders; that there is no obligation imposed by law or statute to create a reserve fund out of revenue to recoup the wasting nature of capital; and that, subject to any provision to the contrary contained in the articles of the company, the disposition of the revenue is entirely in its hands and under its control. And in reply to the contention that a company is not at liberty to pay a dividend unless it can show that it has available property which at the time of declaring the dividend is equivalent to its nominal or share capital, it was said (opinion of Lopes, L. J.): "In my opinion such a contention is untenable. Where nominal or share capital is diminished in value, not by means of any improper dealing with it by the company, but by reason of causes over which the company has no control, or by reason of its inherent nature, that diminution need not, in my opinion, be made good out of revenue. In such a case a dividend may be paid out of current annual profits, out of profits arising from the excess of ordinary receipts over expenses properly chargeable to the revenue account, provided there is nothing in the articles of association prohibiting such an application, and provided it is done honestly. It appears to me that, if a contrary view were adopted, it might be success

so-called wasting-assets corporation, such as one engaged in mining, whose capital is necessarily exhausted in the carrying on of its operations, may rightfully declare and pay dividends out of net income, without making up for the loss of its capital which is thus being constantly diminished. It has already been shown 82 that a distinction is made in England between fixed and floating capital, the courts holding that fixed capital, i. e., property or funds invested or held for the purpose of making gains or profits, as distinguished from circulating capital, which is expended for this purpose, may be lost, and yet dividends may be declared out of the excess or earnings over expenditures, without replacement of such capital. The wasting-assets doctrine appears to be but one application of this rule, and the leading case in England 83 involving the doctrine has been relied on as authority in other decisions in that counfully contended that where, owing to extraneous circumstances, the capital is increased in value, that increase might be dealt with as revenue or profits, and go to increase the dividend. This is contrary to all practice, and I think contrary to principle. The capital and the revenue accounts appear to me to be distinct and separate accounts, and, for the purpose of determining profits, accretions to and diminutions of the capital are to be disregarded." But this view as to accretions to capital seems not to be the general rule, according to the weight of authority. See III. e, supra.

In Lambert v. Neuchatel Asphalte Co. (1882) 51 L. J. Ch. N. S. (Eng.) 882, where a company was operating under a concession granted for a limited time, for which it had paid a large sum, and a holder of common stock sought to prevent declaration of a dividend on the preferred stock without first providing a sinking fund to replace the capital lost or expended in the purchase of the "wasting" property of the company, the court denied the relief sought on the ground that the matter was controlled by the articles of the company, one of the provisions of which was that, in case of any dispute as to the amount of the net profits, the decision of the

try where the question was merely one of exhaustion of fixed capital. The decisions in England have failed to fix the boundaries of the wasting-assets doctrine in that country, or of the broader doctrine, of which this appears to be a part, that capital assets which are impaired or lost need not be replaced in order to justify the payment of dividends out of the revenue account; but that there are limits to the doctrine has been suggested, the court intimating in a subsequent case that it would not be right for a corporation to purchase the last two or three years of a valuable patent and distribute the whole of the receipts in respect thereof as profits, without replacing the capital expended in the purchase.84

There seem to be few cases in this country on the wasting-assets doctrine, though there are holdings or intimations that it may be applicable here.85 However, the doctrine that dividends

company in general meeting should be final.

As to right of lessor to distribute rental instalments, where the lease is about to expire and the property has become depreciated or worthless, see Lawrence v. West Somerset Mineral R. Co. [1918] 2 Ch. (Eng.) 250, in note 21, supra, and note 352, infra. 82 See II. b, supra. 83 Lee V. Neuchatel Asphalte Co. (1889) L. R. 41 Ch. Div. 1. See note 27, supra.

84 In Bond V. Barrow Hæmatite Steel Co. [1902] 1 Ch. (Eng.) 353, where the court declined to force the corporation to pay dividends on its preferred stock, it appeared that the company, whose business was in part mining, had lost a large amount in certain matters, and that it had undergone a further loss by way of depreciation of assets, and that it had in its profit and loss account assets about equivalent to those losses. The court considered that the subject was not one of general rules, but that each case must be decided on its own facts, and made the observations above indicated.

85 In the reported case (FEDERAL MIN. & SMELTING Co. v. WITTENBERG, ante, 1) the court, while doubtful whether the wasting-assets doctrine (permitting the declaration of divi

may properly be declared in the case of wasting-assets corporations, where mines, oil wells, quarries, etc., are bedends by companies engaged in the exploitation of such assets as mines, oil wells, etc., without regard to impairment of capital caused by depletion) was a part of the common law of that state, held that in any event, as the statutes of the state regulating the declaration of dividends and forbidding the making of dividends except from surplus or net profits made no exception in favor of wasting-assets corporations, the court should not usurp the functions of the legislature by reading into the statute an exception that was not expressed, and was clearly at variance with the language used. It was held accordingly, that a mining corporation could not, over the protest of minority stockholders, pay dividends on the common stock when there is an outstanding issue of preferred stock, the capital of the company is greatly depleted and its net assets less than its paid-in, or invested capital.

However, after the above decision was rendered by the supreme court of New Jersey, the legislature of that state amended the statutory provisions involved so that a wasting-assets corporation might ignore the item of depletion in calculating net profits for dividend purposes, and declare a dividend on the common stock, so long as the capital was not diminished below the amount of the preferred stock. And it was conceded in subsequent proceedings in the above case, reported in (1927) Del. Ch. 138 Atl. 352, that the dividend rule defined by the statute as amended should govern. The court accordingly denied the injunction sought by the preferred stockholders against the declaration of a dividend on the common stock, holding that the evidence showed an excess of net assets above the amount of the preferred stock more than the amount of the proposed dividend. And it was held, also, that an injunction should not be granted to restrain the carrying out of a policy declared by the directors, to be effective until further action, to the effect that approximately one half of the current net profits of the company, beginning with the succeeding year, remaining after all charges except depletion, and after

coming exhausted by the working of them, without setting aside funds for the purchase of other mines, etc., has payment of current and unpaid dividends on the preferred stock, should be paid out as dividends on the common stock, as it did not appear that the policy would result in the depletion of assets below the amount of the preferred stock, and, in case it did, a remedy would at any time be available.

It has been held in California that a mining or similar corporation organized for utilizing and wasting property-that is, property which can be used only by consuming it is not deemed to have divided its capital merely because it distributes the net proceeds of its mining operations, although the necessary result is that so much has been subtracted from the substance of the estate; that such a corporation may distribute its net earnings, although the value of the mine is thereby diminished; and that the above is true notwithstanding a general statute provides that directors of corporations must not make dividends except from the surplus profits, nor divide, withdraw or pay to stockholders any part of the capital stock, such inhibition not extending to the net proceeds of mining operations, although it would forbid the sale of a mine and distribution of the proceeds. Excelsior Water & Min. Co. v. Pierce (1891) 90 Cal. 131, 27 Pac. 44. The court said that, if a mine belonging to a mining corporation, when it commences operations, is free from debt and provided with all the necessary openings and appliances for its convenient working, the problem of ascertaining the amount of its surplus profits from time to time would be very simple, and would consist in merely deducting the gross outlay from the gross receipts, the balance, less a reasonable reserve to meet contingencies, being the legitimate subject of a dividend. It will be observed that this decision seems to conflict with the holding in the reported case (FEDERAL MIN. & SMELTING Co. v. WITTENBERG, ante, 1), as to the effect of the statute.

As to the liability of directors in the Pierce Case (Cal.), see also note 218, infra.

See also, citing the case of Lee v. Neuchatel Asphalte Co. (1889) L. R.

been held inapplicable to a case in which oil has been severed from the ground and placed in tanks before the formation of the company, and has thus become a part of the capital of the company, in which event a dividend of the proceeds of the oil constitutes an illegal distribution of capital.86 And it cannot be said that the operating plant of a mine has little or no value, for the purpose of determining whether there is a profit out of which dividends may rightfully be declared, simply because it is used as a factor in the development and working. of a wasting property; the value of such property must be left to the honest judgment of the board of directors, and a mere mistake of judgment, if honestly arrived at, must stand as the final act of the directorate.87

It has been held that a coal-mining company may accumulate a sinking fund by retaining annually from the proceeds of its sales such a sum as will eventually, on the depletion of its mine, equal the amount of the par value of its stock, and that stockholders have no right to complain against the adoption of such a policy, instead 41 Ch. Div. (Eng.) 1, supra, People ex rel. United Verde Copper Co. v. Roberts (1898) 156 N. Y. 585, 51 N. E. 293, where it was held that surplus earnings of a mining company were not taxable as "capital," as the company was not required to set money aside from its earnings to make up for the depletion of ore.

86 Van Vleet v. Evangeline Oil Co. (1911) 129 La. 406, 56 So. 343.

87 Hyams v. Old Dominion Copper Min. & Smelting Co. (1913) 82 N. J. Eq. 507, 89 Atl. 37, affirmed on opinion of lower court in (1914) - N. J. Eq. 91 Atl. 1069, rehearing denied in (1914) 83 N. J. Eq. 705, 92 Atl. 588.

88 Ford v. Locust Mountain Coal & I. Co. (1868) 25 Phila. Leg. Int. (Pa.) 268.

89 Ibid.

90 McKean v. Philadelphia Contributionship (1897) 6 Pa. Dist. R. 40, affirmed on opinion of lower court in (1897) 181 Pa. 361, 37 Atl. 528. See this case in note 7, supra.

91 Where a public service corporation has performed all its duties, and.

of paying out the surplus as dividends,88 but that it cannot establish a trust for this purpose.89

VI. Discretion of directors or corporation as to declaring or paying dividends, or as to time, place, and manner of payment; circumstances warranting or not warranting interfer

ence.

Every business or trading corporation has the right to declare and pay dividends to its stockholders.90 This is true, of course, even as to public service corporations.91 Assuming that the net earnings of a corporation are such that the board of directors, or other governing body of the corporation may properly declare and pay dividends on the common stock, they have a discretion in this regard (in the absence of special contract or statute), either to declare dividends or to apply the earnings to some other legitimate corporate purpose, with which the courts will not interfere, unless a clear case is made out of fraud, oppression, or such arbitrary or unreasonable conduct on their part as amounts to breach of trust.92

One practical application of the rule by its fortunate situation, good management, or any lawful conduct, has a surplus of earnings remaining, it has the right to distribute this surplus among its stockholders in dividends; the public has no share in the net profits available for dividends; and, upon the question whether there shall be an issue of additional stock to meet liabilities incurred by the company in increasing the efficiency or value of the plant, the amount of undivided profits on hand at the time the liabilities were incurred or the benefit made, which thereafter, and before the application for approval of such issue by the public service commission has been lawfully distributed as dividends, is immaterial. Fall River Gas Works Co. v. Gas & E. L. Comrs. (1913) 214 Mass. 529, 102 N. E. 475.

92 (The cases cited are generally those involving dividends on common stock, although in several instances where preferred stock was involved the conclusion seems a fortiori to support the rule stated.)

United States.-New York, L. E. &

arises in the case of disputes between a life tenant and a remainderman of

W. R. Co. v. Nickals (1886) 119 U. S. 296, 30 L. ed. 363, 7 Sup. Ct. Rep. 209; Gibbons v. Mahon (1890) 136 U. S. 549, 34 L. ed. 525, 10 Sup. Ct. Rep. 1057; Continental Ins. Co. v. United States (1922) 259 U. S. 156, 66 L. ed. 871, 42 Sup. Ct. Rep. 540; Storrow v. Texas Consol. Compress & Mfg. Asso. (1898) 31 C. C. A. 139, 59 U. S. App. 120, 87 Fed. 612, writ of certiorari denied in (1899) 174 U. S. 800, 43 L. ed. 1187, 19 Sup. Ct. Rep. 887; Schell v. Alston Mfg. Co. (1906; C. C.) 149 Fed. 439; Bernier v. Griscom-Spencer Co. (1908; C. C.) 161 Fed. 438; Wilson v. American Ice Co. (1913; D. C.) 206 Fed. 736; Union P. R. Co. v. Frank (1915) 141 C. C. A. 510, 226 Fed. 906; Staats v. Biograph Co. (1916) L.R.A.1917B, 728, 149 C. C. A. 506, 236 Fed. 454; Southern P. Co. v. Lowe (1917; D. C.) 238 Fed. 847, reversed on other grounds in (1918) 247 U. S. 330, 62 L. ed. 1142, 38 Sup. Ct. Rep. 540; Re Brantman (1917) 156 C. C. A. 529, 244 Fed. 101; Mitchell v. Des Moines & Ft. D. R. Co. (1920; C. C. A. 2d) 270 Fed. 465; Thatcher v. Chicago R. Co. (1924; D. C.) 297 Fed. 466 (affirmed in (1925; C. C. A. 7th) 4 F. (2d) 63, which has writ of certiorari denied in (1925) 268 U. S. 689, 69 L. ed. 1158, 45 Sup. Ct. Rep. 509; Wabash R. Co. v. American Refrigerator Transit Co. (1925; C. C. A. 8th) 7 F. (2d) 335 (writ of certiorari denied in (1926) 270 U. S. 643, 70 L. ed. 776, 46 Sup. Ct. Rep. 208); Collins v. Portland Electric Power Co. (1925; D. C.) 7 F. (2d) 221, affirmed in (1926; C. C. A. 9th) 48 A.L.R. 73, 12 F. (2d) 671; Brown V. Wisconsin Syndicate (1927; C. C. A. 8th) 19 F. (2d) 198.

Alabama. Smith v. Prattville Mfg. Co. (1857) 29 Ala. 503; Wolfe v. Underwood (1892) 96 Ala. 329, 11 So. 344; Mobile Towing & Wrecking Co. v. Hartwell (1922) 208 Ala. 420, 95 So. 191; Holcomb v. Forsyth (1927) 216 Ala. 486, 113 So. 516. California. Excelsior Water & Min. Co. v. Pierce (1891) 90 Cal. 131, 27 Pac. 44; Zellerbach v. Allenberg (1893) 99 Cal. 57, 33 Pac. 786; Mulcahy v. Hibernia Sav. & L. Soc. (1904) 144 Cal. 219, 77 Pac. 910.

Colorado. Rollins v. Denver Club (1908) 43 Colo. 345, 18 L.R.A. (N.S.) 733, 96 Pac. 188.

Connecticut.-Pratt v. Pratt, R. & Co. (1866) 33 Conn. 446; Fuller v.

Metropolitan L. Ins. Co. (1898) 70 Conn. 647, 41 Atl. 4.

Delaware.-Bryan v. Aiken (1912) 10 Del. Ch. 1, 82 Atl. 817 (reversed on another ground in (1913) 10 Del. Ch. 446, 45 L.R.A. (N.S.) 477, 86 Atl. 674).

District of Columbia.-Gibbons v. Mahon (1885) 4 Mackey, 130, 54 Am. Rep. 262 (affirmed in (1890) 136 U. S. 549, 34 L. ed. 525, 10 Sup. Ct. Rep. 1057).

Hawaii. Carter v. Crehore (1900) 12 Haw. 309.

V.

Illinois. Cratty v. Peoria Law Library Asso. (1906) 219 Ill. 516, 76 N. E. 707; Robertson v. H. E. Bucklen & Co. (1903) 107 Ill. App. 369; Gehrt v. Collins Plow Co. (1910) 156 Ill. App. 98; Channon H. Channon Co. (1920) 218 Ill. App. 397 (recognizing rule). See also Waterman v. Alden (1891) 42 Ill. App. 294, reversed on other grounds in (1893) 144 Ill. 90, 32 N. E. 972, and Alsop v. De Koven (1903) 107 Ill. App. 190, affirmed in (1903) 205 Ill. 309, 63 L.R.A. 587, 68 N. E. 930.

Iowa.-Lauman

V. Foster (1912) 157 Iowa, 275, 50 L.R.A. (N.S.) 531, 135 N. W. 14; Sexton v. C. L. Percivak Co. (1920) 189 Iowa, 586, 177 N. W. 83.

Kentucky.-Taylor v. Com. (1903) 119 Ky. 731, 75 S. W. 244; Guthrie v. Akers (1914) 157 Ky. 649, 163 S. W. 1117; Smith v. Southern Foundry Co. (1915) 166 Ky. 208, 179 S. W. 205; Bickel v. Henry Bickel Co. (1919) 184 Ky. 582, 212 S. W. 602. Louisiana.

-

· State v. Bank of Louisiana (1834) 6 La. 745; Marks v. American Brewing Co. (1910) 126 La. 666, 52 So. 983.

Maine.-Belfast & M. L. R. Co. v. Belfast (1885) 77 Me. 445, 1 Atl. 362; Spear v. Rockland-Rockport Lime Co. (1915) 118 Me. 285, 6 A.L.R. 793, 93 Atl. 754.

Maryland.-State v. Baltimore & O. R. Co. (1848) 6 Gill, 363 (express charter provision). Massachusetts.

Minot v. Paine (1868) 99 Mass. 101, 96 Am. Dec. 705; D'Ooge v. Leeds (1900) 176 Mass. 558, 57 N. E. 1025; Fernald v. Frank Ridlon Co. (1923) 246 Mass. 64, 140 N. E. 421; Thomas v. Laconia Car Co. (1925) 251 Mass. 529, 146 N. E. 775. See also Field v. Lamson & G. Mfg. Co. (1894) 162 Mass. 388, 27 L.R.A.136, 38 N. E. 1126; Tax Comr.

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