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solving such doubt, against the declaration thereof.99

It will be observed that some courts, in the language used at least, appear to take the position that fraud is necessary in order to warrant judicial interference with the discretion of directors where they have declined to declare dividends out of net profits. The weight of authority, however, does not support such a proposition, it being clear, as subsequently shown, that courts of equity may interfere and compel the declaration of dividends in plain. 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.

The authority of directors as to declaration of dividends out of net profits is absolute so long as they act in the exercise of an honest judgment. Blancard v. Blancard & Co. (1924) 96 N. J. Eq. 264, 125 Atl. 337; Murray v. Beattie Mfg. Co. (1912) 79 N. J. Eq. 604, 82 Atl. 1038; Laurel Springs Land Co. v. Fougeray (1893) 50 N. J. Eq. 756, 26 Atl. 886, modified on other grounds in (1898) 57 N. J. Eq. 318, 41 Atl. 694.

And it is held in Burden v. Burden (1899) 159 N. Y. 287, 54 N. E. 17, that, as long as trustees of a corporation are acting honestly and within their discretionary powers in accumulating a surplus, a minority stockholder must submit, and cannot invoke the aid of a court of equity on the ground that the surplus is unnecessarily large and should be reduced in part at least. The court observed, however, that if it could be shown that the trustees were guilty of fraud and bad faith in accumulating a large surplus to the injury of the stockholder, a court of equity would doubtless interfere.

And the rule is laid down in Liebman v. Auto Strop Co. (1926) 241 N. Y. 427, 150 N. E. 505, affirming (1925) 212 App. Div. 306, 208 N. Y. Supp. 589, that courts will not interfere with the discretion of directors to determine when and to what extent a dividend shall be made, unless it is first shown that the directors have acted, or are about to act, in bad faith and for a dishonest purpose.

The directors alone of a corporation may say when and to what extent dividends are to be paid. Hastings v. In

extreme cases of arbitrary or wrongful conduct amounting in effect to a breach of trust, even though no actual fraud is shown.100 There are many cases to the general effect (this point, however, often being merely dictum) that the discretion of directors in declaring or declining to declare dividends is not an unlimited one, and that the directors must act in good faith, and not fraudulently, arbitrarily, or oppressively, in disregard of the rights of minority of stockholders, 101 Various statements and holdternational Paper Co. (1919) 187 App. Div. 404, 175 N. Y. Supp. 815.

Directors of a corporation have a reasonable discretion as to the amount of dividends and as to the circumstances under which they will declare them; they must not act arbitrarily, but within the limits of their authority they have exclusive control. Lean v. Pittsburgh Plate Glass Co. (1893) 159 Pa. 112, 28 Atl. 211.

Mc

There must be fraud, bad faith, or wilful abuse of discretionary power, to warrant interference by the court with the discretion of directors of a corporation, by compelling declaration of a dividend. Wells's Estate (1914) 156 Wis. 294, 144 N. W. 174.

And Bryan v. Sturgis Nat. Bank (1905) 40 Tex. Civ. App. 307, 90 S. W. 704, is to the effect that in the absence of fraud the discretion of the board of directors or other governing body of a corporation, as to the declaration of dividends out of earnings or surplus, will not be controlled by the courts.

A court of equity will not interfere to restrain the payment of dividends, merely on the ground that they are not justified by the pecuniary condition of the company, if the directors are acting within their corporate powers. Gregory v. Patchett (1864) 33 Beav. 595, 55 Eng. Reprint, 499.

99 See Bickel v. Henry Bickel Co. (1919) 184 Ky. 582, 212 S. W. 602.

100 See in this connection notes 124, et seq., infra. Also X. infra, as to remedies and procedure.

101 United States.-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; Knapp v. S. Jarvis Adams Co. (1905) 70 C. C. A. 536,

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Sav. & L. Soc. (1904) 144 Cal. 219, 77 Pac. 910.

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

Illinois. Channon v. H. Channon Co. (1920) 218 Ill. App. 397.

Indiana.-Star Pub. Co. V. Ball (1922) 192 Ind. 158, 134 N. E. 285.

Louisiana.-State v. Bank of Louisiana (1827) 5 Mart. N. S. 327.

Maine.-Belfast & M. L. R. Co. v. Belfast (1885) 77 Me. 445, 1 Atl. 362. Michigan.-Dodge v. Ford Motor Co. (1919) 204 Mich. 459, 3 A.L.R. 413, 170 N. W. 668.

Minnesota.-Anderson v. W. J. Dyer & Bro. (1904) 94 Minn. 30, 101 N. W. 1061; Seitz v. Union Brass & Metal Mfg. Co. (1922) 152 Minn. 460, 27 A.L.R. 293, 189 N. W. 586.

New Jersey.-Laurel Springs Land Co. v. Fougeray (1893) 50 N. J. Eq. 756, 26 Atl. 886, modified on other grounds in (1898) 57 N. J. Eq. 318, 41 Atl. 694; Stevens v. United States Steel Corp. (1905) 68 N. J. Eq. 373, 59 Atl. 905; Lawton v. Bedell (1908) N. J. Eq. —, 71 Atl. 490; Murray v. Beattie Mfg. Co. (1911) 79 N. J. Eq. 322, 82 Atl. 1041, reversed on other grounds in (1912) 79 N. J. Eq. 604, 82 Atl. 1038; Tooker v. National Sugar Ref. Co. (1912) 80 N. J. Eq. 305, 84 Atl. 10.

New York. Scott v. Eagle Fire Co. (1838) 7 Paige, 198; Re Rogers (1899) 161 N. Y. 108, 55 N. E. 393; Liebman v. Auto Strop Co. (1926) 241 N. Y. 427, 150 N. E. 505; Hiscock v. Lacy (1894) 9 Misc. 578, 30 N. Y. Supp. 860; Kassel v. Empire Tinware Co. (1917) 178 App. Div. 176, 164 N. Y. Supp. 1033.

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.

Wisconsin. Morey v. Fish Bros.

discretion in declaring or withholding dividends.

The rule that directors of a corpora

Wagon Co. (1901) 108 Wis. 520, 84 N. W. 862.

102 See in this connection X. a, infra. While it is largely a matter of discretion with the board of directors of a corporation as to what use they will put the profits to, whether to declare a dividend or use the profits in the business of the company, there is a limit to this discretion; and the courts will not allow the directors to use their powers unreasonably or oppressively by refusing to declare a dividend when the net profits and character of the business clearly warrants it. 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) 43 L. ed. 1187, 19 Sup. Ct. Rep. 887.

There is a limit to the discretion of the directors of a trading corporation with regard to the declaration of dividends; and it seems that, if the accumulated profits are sufficiently large, as where they exceed the total capital stock of the company, this fact may be regarded as showing sufficient equity, in a suit by a minority stockholder against the corporation and its directors to compel the declaration of dividends, to require the defendant to make answer. Wilson v. American Ice Co. (1913; D. C.) 206 Fed. 736.

Directors of a corporation may be compelled by a stockholder to declare and pay a dividend if they unreasonably and wrongfully refuse or neglect to declare the same when there are surplus profits out of which it may be declared, and there is no good reason for their failure to do so. Re Brantman (1917) 156 C. C. A. 529, 244 Fed. 101.

It is said in Wolfe v. Underwood (1892) 96 Ala. 329, 11 So. 344, that profits earned by an ordinary business corporation cannot be arbitrarily withheld from the stockholders; that the directors will not be permitted to deprive the stockholders of the benefit of the success of the scheme for the transaction of which they associate themselves together; and that only the furtherance of some legitimate public enterprise can justify the exclusion of stockholders from the enjoyment of net profits.

And in Holcomb v. Forsyth (1927)

tion have a large measure of discretion as to the declaration or withholding of dividends, and that courts of

216 Ala. 486, 113 So. 516, the court says that, while it is largely a matter of discretion with the board of directors as to what use they will put the profits of the corporate business to, whether to declare dividends or use them in the business of the company, there is a limit to this discretion; and the courts will not allow the directors to use their power oppressively by refusing to declare dividends when the net profits and the character of the business warrants.

The rule is recognized also in Mulcahy v. Hibernia Sav. & L. Soc. (1904) 144 Cal. 219, 77 Pac. 910 (dictum), that the discretion which directors have to accumulate a surplus, instead of paying dividends, is not an arbitrary one, but must be exercised fairly and honestly, and that, when it appears that the proceedings of the corporation are unfair, and that its officers are acting wantonly and in bad faith, or in disregard of the rights of the members of the corporation relative to such reserve fund, the courts will interfere.

And in Star Pub. Co. v. Ball (1922) 192 Ind. 158, 134 N. E. 285, the court recognized the rule that, while directors of a corporation have a large discretion with respect to declaring dividends, they will not be allowed to exercise this power oppressively by refusing to declare dividends where the net profits and condition of the business clearly warrant it.

Directors of a corporation will not be allowed by the court to use their discretion as to declaration of dividends, illegally, wantonly, or oppressively. Belfast & M. L. R. Co. v. Belfast (1885) 77 Me. 445, 1 Atl. 362.

In Stevens v. United States Steel Corp. (1905) 68 N. J. Eq. 373, 59 Atl. 905, the court says that the discretionary power of directors to say whether profits shall be distributed to stockholders or retained for purposes of the corporate business is not absolute, and that, when the directors improperly refuse to make a dividend of unused profits, a court of equity will interfere on behalf of any stockholder who may complain.

While directors are vested with a discretionary power with regard to the time and manner of making distribution of profits, they cannot improperly

equity will not interfere therewith at the instance of minority stockholders, in the absence of bad faith or such withhold them. Tooker v. National Sugar Ref. Co. (1912) 80 N. J. Eq. 305, 84 Atl. 10.

.Stockholders are not without remedy if, without reasonable cause, directors of the corporation refuse to divide what is actually surplus profits. Scott v. Eagle Fire Co. (1838) 7 Paige (N. Y.) 198 (dictum).

And it is said in Re Rogers (1899) 161 N. Y. 108, 55 N. E. 393, that directors must act in good faith, and, if they fail to do so and it clearly appears that they have accumulated earnings not required in the prosecution of the business, which they withhold from the stockholders for illegitimate purposes, a court of equity may interfere and compel distribution of such earnings.

It is said, also, in Liebman v. Auto Strop Co. (1926) 241 N. Y. 427, 150 N. E. 505, that the action of majority directors in declaring a dividend must not amount to a fraudulent destruction or impairment of the rights of minority directors or nonassenting stockholders; that the declaration of a dividend must be for the benefit of all; and if it is done solely for the purpose of benefiting the majority, to the detriment of the minority, a court of equity will never hesitate to exercise its equitable power to prevent a perpetration of the wrong by which the majority are seeking to impose upon the minority.

The rule of law which confides to the directors of a corporation the power to determine what dividends shall be declared will not avail to confer on them the power to commit a fraud by the withholding of dividends. Kassel v. Empire Tinware Co. (1917) 178 App. Div. 176, 164 N. Y. Supp. 1033.

In Baillie v. Columbia Gold Min. Co. (1917) 86 Or. 1, 166 Pac. 965, 167 Pac. 1167, the court (dictum) approved the doctrine that equity will grant relief to a minority stockholder where he clearly shows that the directors are guilty of bad faith in accumulating a large surplus and refusing to pay dividends, or where they use their power illegally, wantonly, or oppressively.

Directors of a corporation must not act arbitrarily in withholding dividends; and their action or refusal to act is undoubtedly subject to review by the courts. McLean v. Pittsburgh

clear abuse of power as amounts to a
breach of trust, is illustrated in many

Plate Glass Co. (1893) 159 Pa. 112, 28
Atl. 211.

And the rule is approved in Morey v. Fish Bros. Wagon Co. (1901) 108 Wis. 520, 84 N. W. 862, that, while the courts will not as a general rule interfere with the discretion of the directors of a corporation as to the declaration of a dividend, yet, when it appears that they are guilty of fraud or bad faith, or of a wilful abuse of their discretionary powers, either in declaring or refusing to declare a dividend, a court of equity will interfere and compel the proper action. And it was held that the complaint in this instance stated a cause of action, In that it charged that the failure to declare dividends had been in bad faith, for the purpose of defrauding the plaintiff.

103 The doctrine that courts equity will not interfere with the disof cretion which the directors of a corporation have in failing or refusing to declare dividends, unless a strong case is made out, is recognized and applied in Rollins v. Denver Club (1908) 43 Colo. 345, 18 L.R.A. (N.S.) 733, 96 Pac. 188, in holding that a member of a social club who had advanced money for the construction of a clubhouse could not enforce a certificate by which the club undertook to pay the money out of surplus revenues which could be prudently applied to that purpose, at the discretion of the directors, on the theory that funds properly applicable to said payment had been wrongfully diverted.

were

It was held in 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, that, in view of the large business carried on by the company, could not be said that the directors of it a manufacturing corporation acting unreasonably or capriciously in declining to order a larger dividend than that which was being paid to the stockholders, and that a court of equity would not interfere at the instance of a minority stockholder to compel the declaration of a larger dividend, where the surplus maintained by the company was profitably employed in purchasing the material used by it in the course of its manufactures, and the directors were acting in good faith, believing that it was

cases. 103 Thus, although dividends have not been declared for many years,

for the best interests of the company that the surplus should not be distributed to the stockholders, although the company, whose nominal capital consisted of $150,000, had been prosperous for many years, had during the preceding eight years earned net profits annually of about $100,000, and dividends averaging only about 25 per cent had been declared.

It was held, also, in Kranich v. Bach Supp. 320, that the carrying to surplus (1924) 209 App. Div. 52, 204 N. Y. of sums sufficient to keep the same induring a period of depreciation, out in tact, instead of paying the earnings, dividends, was a matter within the discretion of the directors, acting in good faith, where the conditions in the trade were changing, and new equipment was required, the surplus consisted largely of property and bills receivable, and the company would have to borrow money in order to pay dividends.

And it was held in Beeler v. Standard Invest. Co. (1919) 107 Wash. 442, 5 A.L.R. 363, 181 Pac. 896, that the question whether debts of the corporation should be paid or dividends declared or its property improved was the governing trustees, with which the one of policy within the discretion of court should not interfere at the instance of minority stockholders.

Under a statute declaring that directors of every corporation should at certain times, after reserving over and above its capital stock paid in, as working capital for the corporation, such an amount, if any, as had been fixed by the stockholders, declare a dividend of the whole amount of its accumulated profits, it has been held that the power given to the stockholders to fix the amount of the reserve is absolute and discretionary, and that, so long as the capital is reserved for the benefit of the whole company, and not distributed to the majority stockholders at the expense of the minority, a court of equity will not interfere with nor question the action of the majority stockholders, because of an alleged motive on their part in reserving the profits, instead of declaring dividends, to depress the value of the stock of the minority stockholders. Lillard v. Oil, Paint & Drug Co. (1903) 70 N. J. Eq. 197, 56 Atl. 254, 58 Atl. 188.

and the surplus largely exceeds the par value of the capital stock, a court of equity, at the instance of a minority stockholder, will not compel directors to declare a dividend, where it is not shown that any of the corporate funds have been diverted from the object for which the corporation was formed, nor that the directors were undertaking to expand the scope of the enterprise beyond the limit contemplated when it was started, nor that the affairs of the corporation are not in such a condition that there is no occasion or necessity to withhold the accrued profits in order to meet legitimate demands and requirements of the business, and to provide for its continued operation and prosperity.104 And a minority stockholder who needs dividends for living expenses may not compel the corporation to declare dividends, instead of enlarging the plant so as to increase the business, if there is no fraud and the proposed expenditures are not clearly extravagant or dispro

104 Gehrt v. Collins Plow Co. (1910) 156 Ill. App. 98. This decision illustrates the extent to which the courts have gone in refusing to control the discretion of directors where they have refused to declare a dividend, the case being one where it seems that no dividends had been declared for 18 years, and that the surplus was more than double the par value of the stock; nevertheless, the court held that a case calling for judicial interference with the discretion of the directors was not shown. The court took the view that, in determining the disposition to be made of the gains of a business, the directors are invested with a very liberal discretion; that they may reserve of them whatever their judgment approves as necessary or judicious for repairs and improvements, and for the purpose of meeting contingencies both present and prospective; that they may also, in the exercise of a sound discretion, increase the assets of a company beyond their nominal amount by retaining and accumulating profits or earnings and applying them to the purchase of property or other purposes not beyond he corporate powers; and that, if there is a large surplus, and, in the opinion of the directors, the interests

portioned to the amount of capital stock.105

An ice company authorized to gather natural, and to manufacture artificial, ice, may take such steps to avert an ice famine, or to extend its capacity to handle a growing business, as in its discretion may be necessary; and, if in so doing it appropriates some, or all, of the accumulated profits in increasing the capacity of existing, or in the acquisition of new, storehouses or manufacturing plants, this will be presumed, in an action against it by a stockholder to compel the declaration of a dividend, in the absence of evidence to the contrary, to have been necessary for the protection or betterment of the company's business.106 And the fact that dividends paid by such a manufacturing company during a decade were few and scant, and that large expenditures on new plant, equipment, etc., were made during the same period, does not prove that this procedure of the directors of the corporation make it necessary or advisable, they may expend the same in improvements or in extending the business of the corporation.

105 Pratt v. Pratt & R. Co. (1866) 33 Conn. 446. It was held that the court could not interfere at the instance of minority stockholders of a joint stock company to compel it to pay to the stockholders a dividend out of its surplus earnings, and enjoin it from making further expenditures in the erection of a large factory building, for the purpose of enlarging its business, thereby exhausting its surplus funds, where the proposed extension of the business was within the corporate purposes, there was no fraud, malice, or improper motive toward the petitioner, and in the management of the business the directors were exercising what they believed to be sound and reasonable judgment; and, although the surplus was large as compared with the nominal capital, this was not true when compared with the actual assets, and a considerable surplus above the nominal capital was required to conduct the business successfully.

106 Wilson V. American Ice Co. (1913; D. C.) 206 Fed. 736.

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