AMERICAN LAW REPORTS ANNOTATED VOL. 55 FEDERAL MINING & SMELTING COMPANY, Appt., V. ALBERT M. WITTENBERG et al., a Copartnership Trading as H. Content & Company. 1. A wasting asset corporation cannot declare dividends on its common stock to the impairment of its preferred stock, where the statute provides that the directors of every corporation shall have power, after reserving over and above its capital stock paid in such sum as may be fixed by the stockholders, to declare dividends among its stockholders of the whole of its accumulated profits, and the certificate of incorporation entitles the holders of preferred stock to be paid in full in case of liquidation before any payment is made on common stock. [See annotation on this question beginning on page 8.] Common law, § 7 — effect of statute. 2. There cannot be an effective and operative common law that is essentially different from a clearly expressed statute law. [See 5 R. C. L. 814.] Statutes, § 211 construction in 3. The intention of lawmakers is to be ascertained from the language they employ. [See 25 R. C. L. 961; 3 R. C. L. Supp. 1435; 4 R. C. L. Supp. 1611; 5 R. C. L. Supp. 1355; 6 R. C. L. Supp. 1494.] APPEAL by defendant from a decree of the Court of Chancery in and for New Castle County overruling a demurrer to a bill filed to enjoin the payment of dividends on common stock. Affirmed. The facts are stated in the opinion of the court. 55 A.L.R.-1. Messrs. Andrew C. Gray, Elihu Root, Jr., Cloyd Laporte, and Gaylord Davis, for appellant: The common law permits companies engaged in the exploitation of such assets as mines, oil wells, leases, patents, and the like, to pay dividends without regard to deficits caused by the depletion of their mines or the lapse of the period covered by their leases or patents, and this common-law rule has been codified and re-enacted in the statutes of Delaware. Lee v. Neuchatel Asphalte Co. L. R. 41 Ch. Div. 1; Dovey v. Cory [1901] A. C. 477, 6 B. R. C. 179-H. L.; Excelsior Water & Min. Co. v. Pierce, 90 Cal. 131, 27 Pac. 44; People ex rel. United Verde Copper Co. v. Roberts, 156 N. Y. 585, 51 N. E. 293; Boothe v. Summit Coal Min. Co. 55 Wash. 167, 104 Pac. 207, 19 Ann. Cas. 1255; 2 Cook, Corp. 6th ed. § 546, p. 1485; Mellon v. Mississippi Wire Glass Co. 77 N. J. Eq. 498, 78 Atl. 710; Van Vleet v. Evangeline Oil Co. 129 La. 406, 56 So. 343; Stratton's Independence v. Howbert (D. C.) 207 Fed. 419; Morawetz, Priv. Corp. 1886, p. 415; 2 Clark & M. Priv. Corp. p. 1593; Thompson, Priv. Corp. 1910, p. 118; 14 C. J. 802; Fletcher, Cyc. Corp. 1919 p. 6104, § 3670; 2 Cook, Priv. Corp. 8th ed. p. 1903; Hatfield, Modern Accounting, 1919, p. 215. In computing the "surplus or net profits" of wasting asset companies, no deduction need be made for the depletion or expiration of the wasting asset. V. Excelsior Water & Min. Co. Pierce, 90 Cal. 131, 27 Pac. 44; People ex rel. United Verde Copper Co. v. Roberts, 156 N. Y. 585, 51 N. E. 293; Boothe v. Summit Coal Min. Co. 55 Wash. 167, 104 Pac. 207, 19 Ann. Cas. 1255; Mellon v. Mississippi Wire Glass Co. 77 N. J. Eq. 498, 78 Atl. 710; Van Vleet v. Evangeline Oil Co. 129 La. 406, 56 So. 343. The underlying presumption of the common law is that all stockholders have equal rights. Grover v. Cavanagh, 40 Ind. App. 340, 82 N. E. 104; Fryer v. Wiedemann, 148 Ky. 379, 39 L.R.A. (N.S.) 1011, 146 S. W. 752; Spear v. Rockland-Rockport Lime Co. 113 Me. 285, 6 A.L.R. 793, 93 Atl. 754; Warren v. Queen & Co. 240 Pa. 154, 87 Atl. 595; 2 Clark & M. Priv. Corp. § 417. The preferences of the preferred stock are such, and such only, as are expressed in the charter or in the statutes of the state. Mellon v. Mississippi Wire Glass Co. 77 N. J. Eq. 498, 78 Atl. 710; 2 Cook, Priv. Corp. 8th ed. ¶ 546, p. 1903; Lawrence v. West Somerset Mineral R. Co. [1918] 2 Ch. 250. Mr. Robert H. Richards, for appellees: Complainants are entitled, as a matter of contract right, to have injunctive relief against the payment of dividends on defendant's common stock when and so long as the amount of defendant's net assets is less than the amount of its paid-in or invested capital. Peters v. United States Mortg. Co. 13 Del. Ch. 11, 114 Atl. 598; Oregon R. & Nav. Co. v. Oregonian R. Co. 130 U. S. 1, 32 L. ed. 837, 9 Sup. Ct. Rep. 409; Somerville Water Co. v. Somerville, 78 N. J. Eq. 210, 78 Atl. 797; People ex rel. Peabody v. Chicago Gas Trust Co. 130 Ill. 286, 8 L.R.A. 497, 17 Am. St. Rep. 319, 22 N. E. 798; Central Transp. Co. v. Pullman Palace Car Co. 139 U. S. 47, 35 L. ed. 64, 11 Sup. Ct. Rep. 478; Holyoke Water Power Co. v. Lyman, 15 Wall. 500, 21 L. ed. 133; People ex rel. Third Ave. R. Co. v. Newton, 112 N. Y. 396, 3 L.R.A. 174, 19 N. E. 831; Thomas v. West Jersey R. Co. 101 U. S. 71, 25 L. ed. 950; State v. Clement Nat. Bank, 84 Vt. 197, 78 Atl. 944, Ann. Cas. 1912D, 22; Morawetz, Priv. Corp. 2d ed. § 318. Pennewill, Ch. J., delivered the opinion of the court: This case is here on an appeal from the Court of Chancery, in which a decree was made by the Chancellor on May 17, 1926 (— Del. Ch., 133 Atl. 48), overruling a demurrer filed by defendant to complainant's bill of complaint. The only assignment of error is the action of the Chancellor in overruling said demurrer. The material facts are averred at length in the bill of complaint, and their truthfulness admitted by the demurrer filed below. Those facts are clearly and sufficiently stated in the Chancellor's opinion, and it is not deemed necessary to repeat them here at length. The defendant company is what is known in the law as a "wasting asset corporation." It was incor (- Del. - porated under the General Incor- On the date last mentioned, notwithstanding there was a capital deficit admitted by the defendant, the board of directors of the defendant company adopted a resolution authorizing the payment of accrued dividends (nineteen and one-fourth per cent), and the current quarterly dividend of one and three-fourths per cent, on the preferred stock, and a dividend of $10 per share on the common stock, out of earnings prior 1926; and it further resolved that until further action of the board, it should be the policy of the corporation that one-half of current net profits for each year including 1926, remaining after all charges except depletion, and after the payment of all accrued and unpaid dividends on the preferred stock, be paid out as dividends on the common stock. The preamble to these resolutions recited that the company's net profits for 1925 amounting to $3,440,000 after all charges except depletion, are available for dividends on the preferred and common stock despite the fact that the books of the company show a deficit, and that after preferred stock dividends were provided for the company might from time to time distribute its remaining net profits as a dividend on the common stock without first making any deductions for depletion or establishing a reserve sufficient, in the event of liquidation of the company, to pay off the preferred stock at the par value thereof and unpaid dividends. The complainants prayed for an injunction against the payment of the declared dividend of $10 a share on the common stock; and that the defendant be enjoined from hereafter paying any dividends on the common stock until it shall have set up and accumulated a reserve equal to the sum by which the invested capital has been impaired by the depletion of the ore bodies and that thereafter the defendant be enjoined from paying any dividends on the common stock when such payment would impair the invested capital. An alternative prayer asked for an injunction against the payment of common stock dividends until a reserve has been set up equal to the difference between the net value of the present assets and the par value of all outstanding preferred stock and thereafter that no common stock dividends shall be paid if as a result thereof net assets will be reduced below the par of all the outstanding preferred stock. The defendant's business is that of mining, smelting, etc., of mineral ores and marketing the finished products. Since its inception, the company has acquired numerous mines many of which have been exhausted. Its certificate of incorporation shows that the company has general powers other than mining but its operations have been confined to that business. From 1904 to 1908, inclusive, dividends were paid on the common stock aggregating forty-seven and one-half per cent of par. Since then, nothing has been paid on the common stock. Since its organization, the defendant corporation has paid as dividends on its preferred stock the sum of $16,072,213.16. At the present time there are accumulated unpaid back dividends on the preferred stock amounting to $19.25 per share. The contention of the complainants is, "that the defendant has no legal right so long as any shares of its preferred stock are outstanding, to pay dividends on its common stock when and so long as the amount of the defendant's net assets is less than the amount of its paid-in or invested capital." The complainants claim they are entitled to the injunctive relief prayed for because of contract rights growing out of the relation between the preferred stockholder and the corporation. They say: "There is impliedly written into every corporate charter of this state, as a constituent part thereof, every pertinent provision of our Constitution and statutes." And they claim that the pertinent provisions of the Delaware statutes and the defendant's certificate of incorporation are the following: Section 34 of the General Corporation Law (Rev. Code 1915, § 1948), which provides that "the directors of every corporation created under this chapter shall have power, after reserving over and above its capital stock paid in, such sum, if any, as shall have been fixed by the stockholders, to declare a dividend among its stockholders of the whole of its accumulated profits, in excess of the amount so reserved, and pay the same to such stockholders on demand; provided, that the corporation may, in its certificate of incorporation, or in its by-laws, give the directors power to fix the amount to be reserved." And the following provision from defendant's certificate of incorporation: "In the event of any liquidation, or dissolution, or winding up, whether voluntary or involuntary, of the corporation, the holders of the preferred stock shall be entitled to be paid in full both the par amount of their shares and the unpaid dividends accrued thereon before any amount shall be paid to the holders of the common stock, and after the payment to the holders of the preferred stock of its par value and the unpaid accrued dividends thereon the remaining assets shall be divided and paid to the holders of the tommon stock according to their respective shares." Because of these provisions of statute and charter it is insisted that the preferred stockholders of the corporation derived two rights, viz.: "First, the right that no dividends shall be paid to the common stockholders of the defendant except out of some amount of money which exists 'over and above' the paid-in capital of the defendant. "Second, the right that there shall be no distribution of the defendant's paid-in or invested capital to its common stockholders until after such distribution has been made to preferred stockholders to the extent of the par value of their shares and the unpaid dividends accrued thereon." It is contended that where the statute under which a corporation is created and organized contains a specific grant of power to corporations to pay dividends, such grant contains the full measure of power acquired by corporations created under the statute with respect to the subject of the payment of dividends, and they possess no other or greater power in this regard than such as is granted by the statute, with all the limitations that are attached to the grant. The proposition of law as stated is sound if it means that the powers of a corporation may be implied as well as expressed. As was said by Chief Justice Marshall in the Dartmouth College Case, 4 Wheat. 518, 636, 4 L. ed. 629, 659: "A corporation being the mere creature of law, posseses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence." In another cited case, the court said: "Conceding the rule applica (- Del. - 138 Atl. 347.) ble to all statutes, that what is fairly implied is as much granted as what is expressed, it remains that the charter of a corporation is the measure of its powers, and that the enumeration of these powers implies the exclusion of all others." Thomas v. West Jersey R. Co. 101 U. S. 71. 25 L. ed. 950. We do not understand that the defendant disputes these general propositions of law. We think the defendant not only concedes the soundness of these general propositions relied on by complainants, but agrees that it would not have the right to pay any dividends on its common stock when such payment would make the net assets less than the paid-in capital, unless the doctrine known as the "wasting asset doctrine" is the law of the state, and applicable to this case. We understand the argument of the defendant on this point to be that the pertinent statute law of this state is but a codification or enactment of the common law; that there was at the time of the enactment of our General Corporation Law a well-recognized exception to the common law respecting the payment of dividends on corporation stock which exception permitted the payment of dividends on the stock of a wasting asset corporation, such as a mining company, even though the paid-in or invested capital of the corporation was impaired; and that such exception being a part of the common law was engrafted upon the pertinent statute law, and must be so treated by the court when considering whether dividends can be legally paid on the stock of such a corporation. The defendant says that § 34 is an affirmative provision permitting the payment of dividends under certain circumstances, it is permissive but not exclusive; that § 35 of the General Corporation Law (Rev. Code 1915, § 1949) is the only statute that contains a prohibition against the payment of dividends on corporation stock, and it provides that "no corporation created under the provisions of this chapter, nor the directors thereof, shall make dividends except from the surplus or net profits." The complainant's reply to this is that, "inasmuch as § 34 is the section to which resort must be had to determine whether the financial condition of a Delaware corporation is such as to permit the payment of dividends (Peters v. United States Mortg. Co. 13 Del. Ch. 11, 114 Atl. 598), and the method of ascertaining whether a 'surplus or net profit,' as those words are used in § 35, exists, is prescribed by § 34, it is of no importance whatsoever that the statutes in other American states referred to are similar to § 35 of the Delaware law, inasmuch as that section, for the pertinent purposes of this case, is governed by § 34." Section 13 of the General Corporation Law (29 Del. Laws, chap. 113, § 7), after providing for the payment of preferred dividends, says: "A dividend upon the common stock may then be paid out of the remaining surplus or net profits. The position of the defendant with respect to the payment of dividends is stated in its brief as follows: "It is conceded that the general rule of the common law in the United States forbids the payment of dividends except from an excess of assets over liabilities, including the capital stock. But the defendant appellant contends that this rule of the common law is subject to a well established exception in the case of wasting asset companies, that is to say, companies engaged in the exploitation of such assets as mines, oil wells, leases, patents and the like. The defendant appellant contends that the common law permits such companies to pay dividends without regard to deficits caused by the depletion of their mines or the lapse of the period covered by their leases or patents, and that the common law rule has been codified and re-enacted in the statutes of the state of Delaware." |