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shares of stock, since the rights of these parties may depend upon the dis

v. Putnam (Trefry v. Putnam) (1917)
227 Mass. 522, L.R.A.1917F, 806, 116
N. E. 904; Boston Safe Deposit & T.
Co. v. Commissioner of Corp. & Taxn.
(1928) Mass., 159 N. E. 536.

Michigan. Hunter v. Roberts, T. &
Co. (1890) 83 Mich. 63, 47 N. W. 131;
Dodge v. Ford Motor Co. (1919) 204
Mich. 459, 3 A.L.R. 413, 170 N. W.
668 (recognizing rule).

Missouri. Hayes v. St. Louis Union
Trust Co (1927)
-, 298 S. W. 91; Slayden v. Seip Coal
Co. (1887) 25 Mo. App. 439.

New Jersey.-Park v. Grant Loco-
motive Works (1885) 40 N. J. Eq.
114, 3 Atl. 162, affirmed, without opin-
ion, in (1888) 45 N. J. Eq. 244, 19
Atl. 621; Laurel Springs Land Co. v.
Fougeray (1893) 50 N. J. Eq. 756, 26
Atl. 886 (recognizing rule); Trimble
v. American Sugar Ref. Co. (1901) 61
N. J. Eq. 340, 48 Atl. 912; Lillard v.
Oil, Paint & Drug Co. (1903) 70 N.
J. Eq. 197, 56 Atl. 254, 58 Atl. 188;
Stevens v. United States Steel Corp.
(1905) 68 N. J. Eq. 373, 59 Atl. 905;
Raynolds v. Diamond Mills Paper Co.
(1905) 69 N. J. Eq. 299, 60 Atl. 941;
Murray v. Beattie Mfg. Co. (1912)
79 N. J. Eq. 604, 82 Atl. 1038; Blanch-
ard v. Prudential Ins. Co. (1912) 80
N. J. Eq. 209, 83 Atl. 220; Tooker v.
National Sugar Ref. Co. (1912) 80 N.
J. Eq. 305, 84 Atl. 10 (recognizing
rule); Hyams v. Old Dominion Cop-
per Min. & Smelting Co. (1913) 82 N.
J. Eq. 507, 89 Atl. 37, affirmed on opin-
ion of lower court in (1914)
Eq., 91 Atl. 1069, rehearing denied
N. J.
in (1914) 83 N. J. Eq. 705, 92 Atl.
588; Blancard V. Blancard & Co.
(1924) 96 N. J. Eq. 264, 125 Atl. 337;
Day v. United States Cast Iron Pipe
& Foundry Co. (1924) 96 N. J. Eq.
736, 126 Atl. 302. See also Jackson
v. Newark Plankroad Co. (1865) 31
N. J. L. 277 (recognizing rule).

New York.-Ely v. Sprague (1840) Clarke, Ch. 351; Barry v. Merchants' Exch. Co. (1844) 1 Sandf. Ch. 280; Scott v. Eagle F. Ins. Co. (1838) 7 Paige, 198; Boardman v. Lake Shore & M. S. R. Co. (1881) 84 N. Y. 157; Williams v. Western U. Teleg. Co. (1883) 93 N. Y. 162; Beveridge v. New York Elev. R. Co. (1889) 112 N. Y. 1, 2 L.R.A. 648, 19 N. E. 489; Burden v. Burden (1899) 159 N. Y. 287, 54 N. E. 17; Greeff v. Equitable Life Assur. Soc. (1899) 160 N. Y. 19, 46 L.R.A. 288, 73 Am. St. Rep. 659, 54

N. E. 712; Lowry v. Farmers' Loan & T. Co. (1902) 172 N. Y. 137, 64 N. E. 796; Roberts v. Roberts-Wicks Co. (1906) 184 N. Y. 257, 3 L.R.A. (N.S.) 1034, 112 Am. St. Rep. 607, 77 N. E. 13, 6 Ann. Cas. 213 rule); Liebman v. Auto Strop Co. (recognizing (1926) 241 N. Y. 427, 150 N. E. 505, affirming (1925) 212 App. Div. 306, 208 N. Y. Supp. 589; Carpenter v. New York & N. H. R. Co. (1857) 5 Abb. Pr. 277; McNab v. McNab & H. Mfg. Co. (1891) 62 Hun, 18, 16 N. Y. Supp. 448, affirmed on opinion of lower court in (1892) 133 N. Y. 687, 31 N. E. 627; Marks v. Monroe County Permanent Sav. & L. Asso. (1889) 52 N. Y. S. R. 451, 22 N. Y. Supp. 589; Reynolds v. Bank of Mt. Vernon (1896) 6 App. Div. 62, 39 N. Y. Supp. 623, affirmed on opinion of lower court in (1899) 158 N. Y. 740, 53 N. E. 1131; Miller v. Crown Perfumery Co. (1908) 125 App. Div. 881, 110 N. Y. Supp. 806; Hastings v. International Paper Co. (1919) 187 App. Div. 404, 175 N. Y. Supp. 815; Nauss v. Nauss Bros. Co. (1921) 195 App. Div. 318, 187 N. Y. Supp. 158; Kranich v. Bach (1924) 209 App. Div. 52, 204 N. Y. Supp. 320. See also Dejonge v. Zentgraf (1918) 182 App. Div. 43, 169 N. Y. Supp. 377 (special contract held not to deprive directors of discretion.)

Ohio. De Lacroix v. L. Eid Concrete Steel Co. (1909) 8 Ohio N. P. N. S. 489, 19 Ohio Dec. 767, 54 Ohio L. J. 321; Mente v. Groff (1910) 10 Ohio N. P. N. S. 148; Miller v. Miller (1912) 34 Ohio C. C. 43, 15 Ohio C. C. N. S. 481, 58 Ohio L. J. 125; Smitt v. Aultman & T. Co. (1916) 25 Ohio C. C. N. S. 561, 38 Ohio C. C. 46. See also Arbuckle v. Woolson Spice Co. (1901) 21 Ohio C. C. 356, 11 Ohio C. D. 726.

Oregon.-Baillie v. Columbia Gold Min. Co. (1917) 86 Or. 1, 166 Pac. 965, 167 Pac. 1167.

Pennsylvania. McLean v. Pittsburgh Plate Glass Co. (1893) 159 Pa. 112, 28 Atl. 211; Allegheny v. Pittsburgh, A. & M. Pass. R. Co. (1897) 179 Pa. 414, 36 Atl. 161; Corgan v. George F. Lee Coal Co. (1907) 218 Pa. 386, 120 Am. St. Rep. 891, 67 Atl. 655, 11 Ann. Cas. 838; Goetz's Estate (1912) 236 Pa. 630, 85 Atl. 65; Ford v. Locust Mountain Coal & I. Co. (1868) 25 Phila. Leg. Int. 268; McKean v. Philadelphia Contribution

cretionary action of the directors in declaring or in failing to declare dividends.93

Minority stockholders when they acquire stock in a corporation are held to have done so knowing that directors have a discretion to declare dividends out of surplus or net profits, with which the courts will not interfere so long as they act in good faith, and are not in a position to question this right. And there is authority for ship (1897) 6 Pa. Dist. R. 40, affirmed in (1897) 181 Pa. 361, 37 Atl. 528.

Texas.-Bryan v. Sturgis Nat. Bank (1905) 40 Tex. Civ. App. 307, 90 S. W. 704; Southwestern Portland Cement Co. v.. Latta (1917) Tex. Civ. App. 193 S. W. 1115. Virginia. Gordon v. Richmond, F. & P. R. Co. (1884) 78 Va. 501; Kaufman v. Charlottesville Woolen Mills (1896) 93 Va. 673, 25 S. E. 1003.

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Browne v. Monmouthshire R. & Canal Co. (1851) 13 Beav. 32, 51 Eng. Reprint, 12; Stevens v. South Devon R. Co. (1851) 9 Hare, 313, 68 Eng. Reprint, 524; Gregory v. Patchett (1864) 33 Beav. 595, 55 Eng. Reprint, 499; Lee v. Neuchatel Asphalte Co. (1889) L. R. 41 Ch. Div. 1; Lever v. Land Securities Co. (1891) 8 Times L. R. 94; Burland v. Earle [1902] A. C. 83-P. C., modifying (1900) 27 Ont. App. Rep. 540.

Ireland. Kehoe v. Waterford & L. R. Co. (1888) Ir. L. R. 21 Eq. 221.

Canada. Re Sarnia Ranching Co. (1915) 8 West. Week. Rep. 697; Denault v. Stewart, D. & Co. (1918) Rap. Jud. Quebec 54 C. S. 209.

Australia.-Phillips v.


& C. Soap & Candle Co. (1890) 16 Vict. L. R. 111.

93 The same rule as to the discretion of the directors in declaring dividends, under which a court of equity will not interfere at the instance of a stockholder when the directors have declined to declare a dividend, unless there is a strong case made out of breach of trust or fraud, applies when the rights of a life tenant and remainderman, respectively, are at is


Brown v. Wisconsin Syndicate

the view that it is only necessary to inquire as to the reasons which control the actions of the directors in failing to declare dividends, where a stockholder seeks to review their action in the courts.95

The whole matter of distribution of profits has been held to be left to the corporation, and not merely the date of declaring dividends, by the New Jersey statute.96

Regarding the general rule, the Fed

(1927; C. C. A. 8th) 19 F. (2d) 198. See also for example Gibbons v. Mahon (1890) 136 U. S. 549, 34 L. ed. 525, 10 Sup. Ct. Rep. 1057; and Minot v. Paine (1868) 99 Mass. 101, 96 Am. Dec. 705. It should be observed, however, that the annotation does not deal with the question of the rights of such parties in general with regard to dividends. See annotations in 24 A.L.R. 9; 42 A.L.R. 448; and 50 A.L.R. 375, on the question of the rights as between life beneficiaries and remaindermen in corporate dividends or distributions during the life interest.

See also, as applying the rule as to the discretion of directors with regard to declaration of dividends in a case of contract for exchange of stock with reservation as to dividends, which the court regarded as analogous to cases involving the question of the respective rights of the life tenant and remainderman, Kaufman V. Charlottesville Woolen Mills (1896) 93 Va. 673, 25 S. E. 1003.

94 Liedman v. Auto-Strop Co. (1926) 241 N. Y. 427, 150 N. E. 505.

95 McLean v. Pittsburgh Plate Glass Co. (1893) 159 Pa. 112, 28 Atl. 211 (a suit to compel declaration of dividends on preferred stock).

96 The exception specified in a statute, declaring that, "unless otherwise provided" in the certificate of incorporation or by-laws adopted by a majority of the stockholders, the directors of every corporation should in January of each year, after reserving, over and above its capital stock paid in, such sum, if any, as working capital as shall have been fixed by the stockholders, declare a dividend of the whole of its accumulated profits exceeding the amount so reserved, and pay the same to the stockholders on demand, has been held to refer not merely to the time for declaring dividends; in other words, not to be in

eral Supreme Court 97 has said: "Money earned by a corporation remains the property of the corporation, and does not become the property of the stockholders, unless and until it is distributed among them by the corporation. The corporation may treat it and deal with it either as profits of its business, or as an addition to its capital. Acting in good faith and for the best interests of all concerned, the corporation may distribute its earnings at once to the stockholders as income; or it may reserve part of the earnings of a prosperous year to make up for a possible lack of profits in future years; or it may retain portions of its earnings and allow them to accumulate, and then invest them in its own works and plant, so as to secure

tended merely to enable stockholders to change the date of payment from that declared by the statute, through a provision in that regard in the charter or by-laws; but the statute has been construed as leaving the whole matter of the distribution of profits to be regulated by the will of a majority of the stockholders expressed in its certificate of incorporation or a by-law. Stevens v. United States Steel Corp. (1905) 68 N. J. Eq. 373, 59 Atl. 905.

97 Gibbons v. Mahon (1890) 136 U. S. 549, 34 L. ed. 525, 10 Sup. Ct. Rep. 1057.

98 In the absence of statutory provision, the granting of dividends from the profits of a trading corporation is in the discretion of the directors, subject to the interference of a court of equity for improper refusal. Wilson v. American Ice Co. (1913; D. C.) 206 Fed. 736.

What amount of working capital, in addition to that subscribed, is necessary to the successful operation of the company's business, depends upon the character of the enterprise, the facilities for production, the cost of operation, the condition of existing markets, both as to demand and ability to make prompt settlement, and a forecast of what the market in the immediate future is likely to require; these and other considerations may impel an honest, competent directorate to withhold dividends; and the court will not interfere in such determination, in the absence of clear and

and increase the permanent value of its property. Which of these courses shall be pursued is to be determined by the directors, with due regard to the condition of the company's property and affairs as a whole; and, unless in case of fraud or bad faith on their part, their discretion in this respect cannot be controlled by the courts, even at the suit of owners of preferred stock, entitled by express agreement with the corporation to dividends."

And to show more specifically the views taken by the courts on this important phase of the question under annotation, attention is called in the footnote to various statements and holdings of the court on the point.98 unambiguous allegations showing wilful neglect or bad faith. Ibid.

The accumulation of a surplus does not of itself entitle stockholders to dividends; the granting of dividends. is entirely in the discretion of the directors, and, in the absence of fraud, their action is not subject to review by the court. 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.

The fact that net profits accumulate to a corporation during a designated period does not make it the duty of the directors to declare dividends; and the courts will not interfere with the decision of directors not to declare dividends, unless their action appears to be fraudulent, oppressive, or unreasonable. Mitchell v. Des Moines & Ft. D. R. Co. (1920; C. C. A. 2d) 270 Fed. 465.

It is only in a case where a stockholder can satisfy a court of equity, in an action for a dividend not declared, that the directors unreasonably and wrongfully refused or neglected to declare a dividend when there were surplus profits out of which it might be declared, and there is no good reason for their failure, that it will compel by decree the declaration of dividends. Ibid.

There must be bad faith or clear abuse of discretion before a court of equity can interfere with the directors' prerogative as to declaring dividends. Wabash R. Co. v. American

It seems that, if there is any doubt about the propriety of declaring divi

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).

It is said, also, in Smith v. Plattville Mfg. Co. (1857) 29 Ala. 503, that the managers of a corporation are clothed with a large discretion in relation to the declaration of dividends, and that, while they may be compelled to exercise that discretion if they improperly fail or refuse to exercise it, yet when they have exercised it without any violation of the charter or constitution of the company, their action cannot be disregarded or controlled by a court, at the instance of a stockholder, unless it is shown to have been a wilful abuse of their discretion, or the result of bad faith or of a wilful neglect or breach of a known duty. It was held in this case that, where the board of directors of a corporation had acted on the application of a stockholder for the declaration of a dividend, and had resolved against such declaration, on the ground that the best interests of the company did not warrant it, a court of equity would not interfere to compel the declaration of a dividend at the instance of the stockholder, in the absence of bad faith or fraud on the part of the directors, especially where the constitution of the corporation declared that its board of managers should declare such dividends and such only as in their discretion they might think the true interests of the company warranted.

If there is a contest between the rights of creditors and stockholders, a holder of common stock, who, in the absence of fraud, is not entitled to dividends until the same are duly declared in an amount resting in the sound discretion of the directors, cannot compel declaration of a dividend prior to payment of the debts. Mobile Towing & Wrecking Co. v. Hartwell (1922) 208 Ala. 420, 95 So. 191.

The fact that profits have accrued in the prosecution of the corporate business does not necessarily impose upon the directors the duty of distributing them as dividends to the stockholders; they are under the duty to the stockholders to exercise their judgment and discretion in the conduct of the business of the corporation; and on questions of business policy and management their decisions 55 A.L.R.-4.

are controlling, and their acts will not be disturbed or interfered with by the courts, at the instance of a stockholder, unless they are guilty of a wilful abuse of their discretion, or act in bad faith, or in disregard of the duties imposed upon them by law. Wolfe v. Underwood (1892) 96 Ala. 329, 11 So. 344.

The apportionment of net earnings of a corporation to the payment of cash dividends is largely one of policy, intrusted to the discretion of the directors, which, when honestly and intelligently exercised, will not be lightly overruled. Excelsior Water & Min. Co. v. Pierce (1891) 90 Cal. 131, 27 Pac. 44; Zellerbach v. Allenberg (1893) 99 Cal. 57, 33 Pac. 786.

Courts of equity are loath to interfere with the discretion which the directors of a private corporation have in declaring dividends, and a strong case must be made for their interposition. Rollins v. Denver Club (1908) 43 Colo. 345, 18 L.R.A. (N.S.) 733, 96 Pac. 188.

A corporation has a right, within reasonable grounds and in good faith, to reserve and apply its profits to the increasing of the plant, and the stockholders hold their stock subject to this right; the latter are entitled to the profits only when the company, acting in good faith and reasonably, shall divide them. Gibbons V. Mahon (1885) 4 Mackey (D. C.) 130, 54 Am. Rep. 262, affirmed in (1890) 136 U. S. 549, 34 L. ed. 525, 10 Sup. Ct. Rep. 1057.

The earnings of a corporation are not income to the stockholders until a dividend is declared, however great an accumulation of earnings there may be; and the corporation may retain its earnings to a reasonable extent, which is generally held to be a very great extent, for use as capital, instead of paying them out as dividends. Carter v. Crehore (1900) 12 Haw. 309.

It is said in Gehrt v. Collins Plow Co. (1910) 156 Ill. App. 98, that it requires a very strong case to induce a court of equity to order directors to declare a dividend, inasmuch as equity has no jurisdiction unless fraud or a breach of trust is involved; that the directors' discretion will not be controlled or interfered with by the court unless they act oppressively or unreasonably.

Unless directors are guilty of bad

dends, directors should resolve the doubt, or at least are justified in re

faith or wilful abuse of discretion, the courts will not interfere. Smith v. Southern Foundry Co. (1915) 166 Ky. 208, 179 S. W. 205.

It is said in Taylor v. Com. (1903) 119 Ky. 731, 75 S. W. 244, that if a corporation is solvent when it pays dividends to stockholders, and their payment does not impair its capital and resources set aside to pay its debts, then the discretion of its directors in declaring and paying dividends will not be questioned. But the obligation of the corporation, it is held, is first to pay its creditors their demands in full, or to provide therefor, before the stockholders are entitled to distribute anything among themselves as dividends, or otherwise than in legitimate expenses actually incurred in the business.

It is said in Marks v. American Brewing Co. (1910) 126 La. 666, 52 So. 983, that the court will not interfere at the instance of a stockholder in the affairs of a corporation, and cause a distribution of its surplus, unless it is manifestly evident that the interference is necessary in the interest of the corporation and the stockholders; that it must be shown in order to justify interference that there is capricious, arbitrary, or discriminating management; that honest error will not be rectified if the probabilities are that the board of directors will be equal to correcting its mistakes.

It is said, also, in Hunter v. Roberts, T. & Co. (1890) 83 Mich. 63, 47 N. W. 131, that courts of equity will not interfere in the management of directors unless it is clearly made to appear that they are guilty of fraud or misappropriation of the corporate funds, or refuse to declare a dividend when the corporation has a surplus of net profits which it can, without detriment to the business, divide among its stockholders, and when a refusal to do so would amount to such an abuse of discretion as would constitute a fraud or breach of good faith which they are bound to exercise towards the stockholders.

Earnings and profits of a corporation remain the property of the corporation until severed from corporate assets and distributed as dividends; until that time stockholders have no property interest therein; control of the corporation is intrusted to its board of directors; and of necessity they must be left free to deal with the

corporate property as prudent management and the exigencies of the enterprise may suggest, so long as they act in good faith; net profits may be paid out as dividends, or held against a rainy day, or treated as floating capital and invested in additional property, or, if permanent expansion of capital is desired, the profits may be transferred to the corporation's fixed capital and a stock dividend declared. Hayes v. St. Louis Union Trust Co. (1927) Mo.-, - A.L.R., 298 S. W. 91. See, as to the latter point, VIII. infra.


And it is said (dictum) in Park v. Grant Locomotive Works (1885) 40 N. J. Eq. 114, 3 Atl. 162, affirmed on opinion of lower court in (1888) 45 N. J. Eq. 244, 19 Atl. 621, that in cases where the power of the directors of a corporation is without limitation and free from restrictions, they are at liberty to exercise a very liberal discretion as to what disposition shall be made of the gains of the business of the corporation; that their power over the same is absolute so long as they act in the exercise of an honest judgment; that they may reserve of them whatever their judgment approves as necessary or judicious for repairs and improvements and for meeting all contingencies, both present and prospective; and their determination in respect to these matters, if made in good faith and for honest ends, though the results may show that it was injudicious, is final, and not subject to judicial revision. In this instance the court held, however, that the directors had no such power, and that the disposition of the net profits must be governed not by the discretion or judgment of the directors, but by the rule prescribed by the contract. The views above expressed as to the discretion of the directors were approved in Blanchard v. Prudential Ins. Co. (1912) 80 N. J. Eq. 209, 83 Atl. 220.

Where there is no charge of bad faith or fraud, but the contention is that the directors are unreasonably refraining from declaring a dividend, and that it is unfair to the stockholders that there should not be a partial distribution, the court should not interfere if there is room for doubt; the court ought not to take the place of the board of directors and control the business which is committed to their discretion, unless the case is perfectly

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