Corporations

dividends.

preferred stock. of, in preference to others. New York, L. E. & W. R. Co. v. Nickals, 119 U. S. 296, 30 L. ed. 363, 7 Sup. Ct. Rep. 209. It represents a preference only in case there shall be profits to divide (Taft v. Hartford, P. & F. R. Co. 8 R. I. 310, 332, 5 Am. Rep. 575), and a declaration of a dividend out of net profits, con-duty to declare trary to the judgment of the directors, is not required by the fact that they have guaranteed payment of dividends on preferred shares under a statute permitting a guaranty of such dividends payable cumulatively out of net profits (Field v. Lamson & G. Mfg. Co. 162 Mass. 388, 27 L.R.A. 136, 38 N. E. 1126), and the right of preferred shareholders to dividends is ordinarily confined to the profits in each particular year, and, unless it is expressly so provided, such dividends do not accumulate, so that, if they cannot be paid in any year, they are not chargeable on the profits of a succeeding year so as to be payable thereout, to the prejudice of the common stockholders. Staples v. Eastman Photographic Materials Co. 65 L. J. Ch. N. S. 682; Hazeltine v. Belfast & M. L. R. Co. 79 Me. 411, 1 Am. St. Rep. 330, 10 Atl. 328.

-cumulation of preferred dividends.

standing the use of that provision, the applicable statute or by-law or stock certificate may have the effect to create a charge upon the annual earnings in favor of the preferred stockholders. Thus in Moran v. United States Cast Iron Pipe & Foundry Co. 95 N. J. Eq. 389, 123 Atl. 546, affirmed in 96 N. J. Eq. 698, 126 Atl. 329, the Corporation Act imposed upon the corporation the duty of paying the preferred stockholders a fixed yearly dividend to be expressed in the certificate not exceeding 8 per cent per annum. This was held binding upon the corporation, notwithstanding that the stock certificate declared that the preferred stockholders should be entitled out of surplus net profits whenever declared by the directors "to noncumulative dividends at the rate not to exceed 7 per cent." The statute was held controlling. statute of Oregon affects the questions involved in the present cases. They depend wholly upon the articles of incorporation and the terms and provisions of the stock certificates. Therein it is expressly provided that the dividends upon the second preferred stock shall not be cumulative. In 1 Cook on Corporations, § 273, it is said:

No

"When preferred stock is issued it is generally specified . . . whether it is 'cumulative' or 'noncumulative.' In the former case all arrears of dividends must be paid on the preferred stock before any dividend is paid on the common. In the latter case the contrary is the rule."

In 7 R. C. L. p. 287, it is said: "When the contract of preferred stock provides that dividends shall be noncumulative, it is plain that, if the holders of such stock do not get their dividends in each particular year, they never can have them. But even when the stock is specified as noncumulative, the holders may be entitled to arrearages of dividends when the contract provides that the shareholders shall be absolutely entitled to dividends whenever in any year the net earnings are sufficient for the payment there

of, since under these circumstances the stockholders whose rights are fixed are entitled to their dividends whether the directors declare it or not. It requires, however, the specification of but few words to induce the courts to interpret the preferred dividends as noncumulative."

The expressions so quoted from the text-writers and other like expressions found in the decisions, to the effect that, if the holders of stock which is subject to the restriction that dividends thereon shall be noncumulative "do not get their dividends in each particular year, they can never have them," or that "the arrearages of one year cannot be paid out of the earnings of a subsequent year," are asserted by the respective parties to this appeal to have two irreconcilable meanings. For the appellant it is claimed that, notwithstanding that there may be net profits out of which dividends might have been declarable in favor of such stockholders, yet, if the directors failed to declare the same, the arrearages may not be carried forward subject to distribution in a subsequent year. On the other hand, the cross-appellants contend that the meaning of the term "noncumulative" as here applied is that the holders of such stock are entitled to the stipulated dividends in each year, provided there are net profits out of which to pay the same, and that the failure of the directors to declare such dividends cannot affect their contractual rights, and that the directors in a subsequent year may lawfully declare the dividends for preceding years in which there has been failure to declare them; that the right to such dividends having become fixed, a subsequent recognition thereof is not violative of the provision that the dividends are noncumulative.

In support of this view, the crossappellants cite Wood v. Lary, 47 Hun, 550, where the certificates provided that the holders thereof were

entitled to dividends not exceeding 6 per cent and noncumulative, whenever in any year the net earnings, after payment of all interest charges, should suffice for the payment thereof. After passing dividends for four years and accumulating a considerable sum which had been expended for construction which sum otherwise would have been available for dividends, a dividend was declared, payable in bonds of the company. The court held that the provision of the certificate above quoted placed the question of the stockholders' rights beyond the discretion of the directors, and gave them the right to the profits as dividends. Other cases are cited such as Moran v. United States Cast Iron Pipe & Foundry Co. 95 N. J. Eq. 389, 123 Atl. 546, holding that dividends earned but not paid upon preferred stock are not lost because of the failure of the directors to declare them within the year in which they are earned, but may be declared and paid in subsequent years, but the value of those cases as precedents here is limited somewhat by the fact that such a ruling was indicated in a controlling statutory provision. There are cases, on the other hand, holding in general terms that, in the absence of an agreement, expressed or implied, dividends shall be cumulative, unpaid dividends in the past cannot be claimed. Lockwood v. General Abrasive Co. 210 App. Div. 141, 205 N. Y. Supp. 511; Englander v. Osborne, 261 Pa. 366, 6 A.L.R. 800, 104 Atl. 614; Dent v. London Tram- . ways Co. L. R. 16 Ch. Div. 344, 353. But there is little in those decisions to throw light on the question of the power of directors subsequently to declare a dividend out of the earnings of a prior year, when in fact there were net profits for that year out of which the dividend ought to have been paid.

The appellant relies upon Norwich Water Power Co. v. Southern R. Co. a decision of the law and equity court of the city of Rich

the right to the dividend is measured by the action of the board of directors in any one year, and the failure to declare the dividend in any one year prevents it from accumulating as a further charge upon the earnings of the company then existing, or which may be subsequently acquired."

But the court added the qualifying statement that, when the directors fail to declare dividends for the benefit of preferred stockholders in any year in which the earnings were sufficient for that purpose, "and in the bona fide exercise of their discretion allow those earnings not declared as dividends to be used for general corporate purposes as they deem best, such failure to declare a dividend settled the question as to the right of any class of stockholders to demand payment out of the then existing or future earnings of the railroad company of any such passed dividend." It thus appears that, in the view of the court, if the directors fail to declare noncumulative dividends on preferred stock within the year, they have the right to do this voluntarily at a later date, but that the preferred stockholders have no right to demand such action where the directors have, in the exercise of their discretion, devoted the earnings to appropriate corporate purposes.

In the light of the authorities, we

1 Opinion rendered by Judge Beverley T. Crump. A petition was presented to the Supreme Court of Appeals, which was refused. An oral hearing was later granted to the petitioners to argue the right for an appeal, and the court still refused the appeal. No opinion.

appropriation ferred dividends.

of profits to pre

think the fair and reasonable construction of the contract here involved is that the applicable inhibition against the declaration of dividends is that which is expressed in 14 C. J. 421, that, where the dividends are noncumulative and no profits are made in a particular year, "the preferred stockholders are not entitled to have the dividends for that year made up out of the profits made in subsequent years." Conversely, it follows that, where profits are made in a particular year, and they are not devoted to some corporate purpose, there is no reason why directors may not in a subsequent year declare dividends. and pay them. While the directors in the case at bar disregarded the inhibition, as the court below found, in declaring dividends for the year 1920, payable out of the profits of subsequent years, it is otherwise with their declaration of dividends for the years 1921 and 1923, for the dividends for those years were made up of the profits of those years, and they may be regarded as belated dividends which might have been declared at the end of each of those years, the power to declare the same not having been lost by the delay.

This view of the meaning of the contract here involved is implied in the leading case of New York, L. E. & W. R. Co. v. Nickals, 119 U. S. 296, 30 L. ed. 363, 7 Sup. Ct. Rep. 209, where the court held that a stock contract entitling the holders thereof to noncumulative dividends at 6 per cent per annum in preference to the payment of dividends on the common stock, but dependent on the profits of each particular year as declared by the board of directors, did not of right entitle the stockholders to dividends payable out of the net profits of any year, "unless the directors of the company formally declare, or ought to declare a dividend payable out of such

profits," and that, "whether a dividend should be declared in any year is a matter belonging in the first instance to the directors to determine, with reference to the condition of the company's property and affairs as a whole."

In the present case, the directors, by declaring dividends for the years 1921 and 1923 have recognized that the dividends ought to have been declared for those years, and that the condition of the company's property and affairs as a whole justified their later action in declaring them.

We are not convinced that the court below was in error in construing, as it did, the "six months" clause of the contract, and in hold

This annotation is supplementary to earlier annotations in 6 A.L.R. 802, and 13 A.L.R. 426.

The relation between the corporation and a preferred stockholder rests wholly on contract. Allen v. Montana Ref. Co. (1924) 71 Mont. 105, 227 Pac. 582.

In Continental Ins. Co. v. Minneapolis, St. P. & S. Ste. M. R. Co. (1923; C. C. A. 8th) 31 A.L.R. 1320, 290 Fed. 87, writ of certiorari denied in (1923) 263 U. S. 703, 68 L. ed. 515, 44 Sup. Ct. Rep. 33, the rule that the terms of the certificate are not the sole and exclusive evidence of the stockholder's rights (see annotation in 31 A.L.R. 1326 [Corporations, §§ 224, 225]) was applied in holding that, under the bylaws, after the current dividend on noncumulative preferred stock had been paid, a dividend from the surplus of past years could be divided pro rata among the holders of preferred and common stock.

The corporation cannot make a valid contract to pay dividends on preferred stock otherwise than from profits. Guaranty Mortg. Co. v. Flint (1925) Utah,, 240 Pac. 175.

But a provision for making up the

deficiency out of assets on dissolution of the corporation appears to be good. Langben v. Goodman (1925) Tex. Civ. App., 275 S. W. 841.

"The general rule is that a holder of preferred stock, even though the preferred dividend is guaranteed, is not regarded as a creditor of the corporation, and entitled as such to share with the other creditors in the distribution of the assets. He is, like the holders of the common stock, merely a stockholder, but with this difference-that he is entitled to priority of payment out of the assets which remain after all debts are paid; the holders of the common stock sharing in such assets as are left." Hazel Atlas Glass Co. v. Van Dyk & Reeves (1925); C. C. A. 2d) 8 F. (2d) 716. See to the same effect, Star Pub. Co. v. Ball (1922) 192 Ind. 158, 134 N. E. 285.

Preferred stockholders have no absolute right to have profits distributed as dividends, the declaring of dividends resting in the sound discretion of the directors. 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. But accrued profits which should be

appropriated to dividends on preferred stock cannot be appropriated by the corporation to the retirement of stock. General Invest. Co. v. American Hide & Leather Co. (1925) 98 N. J. Eq. 326, 44 A.L.R. 60, 129 Atl. 244.

And a preferred stockholder may, where dividends on his stock are in arrears, enjoin the payment of unlawfully voted salaries and bonuses to corporate officers. Smallwood v. Smith (1921) 197 App. Div. 533, 189 N. Y. Supp. 427.

Where a corporation declaring dividends on its preferred stock deposits in a special fund the money to pay them, the deposit is a trust fund for the stockholders, and does not pass to the corporation's trustee in bankruptcy. Re Interborough Consol. Corp. (1920; D. C.) 267 Fed. 914.

It has been held that dividends are not cumulative; that is, if unpaid for any year, they are not to be added to the amount due in the following year, unless it is so agreed. Lockwood v. General Abrasive Co. (1924) 210 App. Div. 141, 205 N. Y. Supp. 511, affirmed ́in (1925) 240 N. Y. 592, 148 N. E. 719. But in Hazel Atlas Glass Co. v. Van Dyk & Reeves (1925; C. C. A. 2d) 8 F. (2d) 716, a contrary rule was laid down.

The earnings for a year should be first applied to the payment of current dividends on preferred stock, rather than to arrears for past years on cumulative preferred stock, though all

such arrears must be paid before any dividend is paid on common stock. Kennedy v. Carolina Pub. Serv. Co. (1920; D. C.) 262 Fed. 803.

And a surplus from past earnings may be distributed ratably without regard to the fact that there are arrearages on noncumulative stock. Lockwood v. General Abrasive Co. (N. Y.) supra.

Past dividends may be paid on preferred stock out of a surplus accumulated in past years during which dividends were not paid, though the stock is noncumulative and the right to such dividends is prior to that of the holders of common stock. Moran v. United States Cast Iron Pipe & Foundry Co. (1924) 95 N. J. Eq. 389, 123 Atl. 546, affirmed by a divided court in (1924) 96 N. J. Eq. 698, 126 Atl. 302. See also the reported case (COLLINS v. PORTLAND ELECTRIC POWER Co. ante, 73).

Where the contract evidenced by the certificates so provides, excess profits, after payment of 5 per cent on the common stock, may be awarded as additional dividends on the preferred stock. Star Pub. Co. v. Ball (Ind.) supra.

Under the terms of a particular agreement the preferred stockholders have been held to be entitled to participate ratably with the holders of the common stock in a distribution of the assets on dissolution. AngloFrench Music Co. v. Nicoll [1921] 1 Ch. (Eng.) 386. W. A. S.

48 A.L.R.-6.