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profits that a decree was justified compelling the declaration of a special dividend.

So, it has been held 126 that, where the business of a trading corporation has by successful management been brought to a condition of financial prosperity until the profits, after payment of all assets, are more than twenty times the amount of the original capital, and there is no proof of any honest purpose to enlarge the business, but the withholding of dividends is a mere pretext by the majority of the directors and stockholders to absorb the profits by fraudulent devices, a minority stockholder may properly resort to a court of equity to compel the application of a reasonable share of the net earnings to the payment of dividends. And the rule that a board of directors has no right arbitrarily and unjustifiably to refuse to declare a dividend from net profits, and that if they do so a court of equity may intervene and compel the declaration and payment of such dividend at the instance of a minority stockholder,

126 Laurel Springs Land Co. V. Fougeray (1893) 50 N. J. Eq. 756, 26 Atl. 886. The case was one where three stockholders in a real estate speculation, each held equal amounts of stock; two fraudulently combined against the third to prevent him from getting any share of the profits; and the court made a decree that there should be a dividend. The decree settling the account was modified on other ground in (1898) 57 N. J. Eq. 318, 41 Atl. 694.

And in Lawton v. Bedell (1908) N. J. Eq. 71 Atl. 490, it was held that a court of equity should interfere at the instance of a minority stockholder to compel declaration of a dividend, where the stock was held by three stockholders who were also the directors, one of these being merely a dummy in the control of the majority stockholder, and the circumstances were such as to show that the majority of the board were not acting in good faith in setting apart a large sum as working capital under a charter provision giving the directors power to fix the amount reserved for this purpose, but were acting fraudulently in discharging the minority stockhold

was applied in an Illinois case, 127 where a company which for many years had been doing a large and profitable business was dominated by the majority stockholder, who was of advanced years, and who had stated that he would never declare any further dividend while he lived, and it appeared that the company without justification was carrying large sums as a reserve for depreciation of stock on hand and for a building fund, without taking any steps for a number of years towards building, and that it was amply able to pay a dividend without impairing its financial condition. It seems, also, that a holder of nearly two fifths of the stock in an industrial corporation which has been prosperous for many years during which no dividends have been paid, but the business enlarged, is not obliged indefinitely to remain without any return on his investment,-especially where he is not employed in any capacity, while the majority stockholder is receiving a salary as manager. And it has been held 129 that, if direct

128

er from employment, increasing the majority stockholder's salary, and attempting to tie up the large surplus so that the minority stockholder would be unable to obtain any dividends from it.

127 Channon

V. H. Channon Co. (1920) 218 Ill. App. 397.

128 Tefft v. Schaefer (1925) 136 Wash. 302, 239 Pac. 837, 1119. It was held, however, in this instance that a change in the condition of the business made it unwise for the court to order the declaration of a dividend, the company being engaged in the manufacture of ice, and the installation of a new system being necessary which might leave the corporation in such condition that it would experience difficulty in meeting its obligations. Under these conditions, the ordering of a declaration of a dividend was held erroneous, although the court said that, had conditions with the company remained practically the same up to the time of the trial, it would not have felt justified in interfering with the lower court's order that a dividend should be declared.

129 Re Brantman (1917) 156 C. C. A. 529, 244 Fed. 101.

ors of a corporation fraudulently collude with a bankrupt in withholding a division of profits in the company to which he is entitled, by failing to declare a dividend and thus prevent a creditor from reaching it, a suit may be maintained by the trustee in bankruptcy to compel the corporation to turn over to him the share of the undivided profits to which the bankrupt is entitled.

Where directors have a large personal interest at stake in the accumulation of profits instead of paying them out as dividends, as, where they hold shares in trust and, on the death of the parties entitled to the income on dividends for life, would receive a substantial portion of the stock, it seems that slighter evidence of hardship and unfairness may justify intervention by a court of equity than in ordinary cases; in other words, it is proper for the court to look with suspicion upon the conduct of directors who have a personal interest adverse to the declaration of dividends. 130 But bad faith on the part of directors of a corporation in distributing as dividends stock in another corporation which they hold as surplus is not shown merely because such distribution may result in injury to minority. stockholders in respect to control, through depriving them of the power to name a part of the directors. 131

It has been held that a court is warranted in limiting the amount of a special dividend which it finds should be declared, at the instance of a minority stockholder, to 10 per cent, where future profits are not assured, and the situation is such that conservative management requires the keeping of an ample surplus, although

130 See Murray v. Beattie Mfg. Co. (1911) 79 N. J. Eq. 322, 82 Atl. 1041, reversed as to the conclusion warranted from the facts, in (1912) 79 N. J. Eq. 604, 82 Atl. 1038.

131 Liebman V. Auto Strop Co. (1925) 212 App. Div. 306, 208 N. Y. Supp. 589, affirmed in (1926) 241 N. Y. 427, 150 N. E. 505.

132 Seitz v. Union Brass & Metal Mfg. Co. (1922) 152 Minn. 460, 27 A.L.R. 293, 189 N. W. 586.

132a See note 100, supra.

the accumulated surplus is so large that the payment of the 10 per cent dividend would be only a small fraction thereof, and during the preceding year, which was one of abnormal profits, the surplus had greatly increased. 132

It will be noted that, while some of the above cases rest on the ground apparently of actual fraud on the part of the directors or majority stockholders, this is not true of all of them. And it is apparently impossible to distinguish, so far as the power of the courts to compel declaration of a dividend is concerned, between cases of actual fraud on the part of the majority and cases of such arbitrary or unreasonable conduct on their part so infringing upon the rights of the minority that equity will grant relief.132a It seems clear that, in determining whether or not a dividend is being unreasonably withheld by directors of a corporation, the court should not overlook the distinction between stock in corporations which is readily salable on the market, the price of which is constantly increasing by the accumulation of book value, and stock in a small close industrial company which has no ready market price, and which can be disposed of, if at all, only with difficulty. In the former case, the owner of the stock has an easy means of realizing its increase in value, even without payment of dividends, through a sale of the stock, and is not in the position of a minority stockholder in the latter class of corporations, who, because of failure to declare dividends, may be forced to sacrifice his stock. This distinction has been recognized in a New Jersey case, 133 although the point was not one neces

133 Raynolds v. Diamond Mills Paper Co. (1905) 69 N. J. Eq. 299, 60 Atl. 941. The case was one of a paper-mill company, a close corporation, whose stock did not appear to have any market value, there being nothing to suggest that the owner could have sold the stock for any larger sum than it would have brought several years previous. And the court, while holding that a situation calling for equitable relief was not yet shown, indicated that an indefinite continuation of the

sarily involved in the decision. But a court of equity is not justified in compelling declaration of a dividend at the instance of a minority stockholder merely because the stockholder may be unable to sell his stock without great sacrifice, and it has been depressed in value by the failure to declare dividends and has no ready market value, although the book value is several times the par value of the stock, if the question of slow disposition of its assets (consisting of realty) and of declaration of small dividends, or a total failure for some years to declare any dividends, is merely a matter of corpor ate policy. 134

Where the court orders restoration by di rectors of money wrongfully voted to themselves as salary, it has been held erroneous to include as a part of the order a direction that the same when restored, shall be divided among the stockholders, since, when policy of increasing surplus, to the starvation of the stockholders, could not be tolerated, observing that it was the plain duty of the majority of the stockholders of a corporation of this kind, who also constitute its entire corps of salaried officers and managers, to bear in mind that the only sure benefit to the stockholders to be derived from the successful prosecution of the corporate business must come from the distribution of profit in cash, and that the piling up of a surplus which remained undistributed might in the end go wholly to future creditors of the corporation.

134 Gesell v. Tomahawk Land Co. (1924) 184 Wis. 537, 200 N. W. 550. It was held that, in the absence of fraud, a case calling for equitable relief at the instance of a minority stockholder, by compelling declaration of a dividend on the part of a land company, was not shown, where the holdings of the company were substantially all in real estate or interests arising from the disposition of the same, and the question was largely one of policy in the corporate management, the corporation having embarked upon a policy of slow rather than rapid disposition of assets, although in the twenty years of the company's business it had increased the book value of the assets threefold, and the shares did not have a ready

paid back, the money belongs to the corporation, and whether it shall be distributed as dividends is not a matter to be determined by the court. 135 This view may evidently be supported on the theory that the subsequent distribution of the money as dividends, or its retention for other corporate purposes, is ordinarily a matter resting in the discretion of the directors. However, the proposition is not universally true, but depends apparently somewhat upon the circumstances, there being authority to the effect that where there has been a breach of trust and misappropriation of the funds of a corporation which is practically in the sole control of the wrongdoer, it has been held that a court of equity may not only compel restitution, but at the same time order the distribution of the sum recovered among the stockholders in the form of a dividend. 136

The question of recovery of declared market value so as to enable a stockholder who disapproved of the majority's policy to obtain relief by a sale, and during the five years preceding the bringing of the suit no dividends had been declared.

125 Miller v. Crown Perfumery Co. (1908) 125 App. Div. 881, 110 N. Y. Supp. 806. See in this connection note 38, supra.

136 In Ritchie v. People's Teleph. Co. (1909) 22 S. D. 598, 119 N. W. 990, the rule that a court of equity has power to compel a corporation to make a division of its profits among its stockholders was approved, and minority stockholders were held entitled to a distribution of the money recovered from a majority stockholder and director as salary and expenses over that to which he was entitled, where it appeared that the plaintiff had purchased his stock under a contract with the principal stockholder that the expenses of the corporation should not exceed a certain sum per month, and it was shown that a sum larger than this amount had been paid to the mapority stockholder by way of salary, together with other sums for rent, fuel, etc., that the business of the company was managed entirely by him and his wife; that no proper account was kept; that money collected for the corporation was mingled by such stockholder with his own funds;

dividends, or of the validity of resolutions declaring the dividends, is not within the scope of the annotation. So, without attempting to cover generally this specific question, it may be noted. that not only have directors ordinarily a discretion as to whether any dividends at all shall be declared and the

and that the entire business was practically run for his benefit.

And in Eaton v. Robinson (1895) 19 R. I. 146, 29 L.R.A. 100, 31 Atl. 1058, 32 Atl. 339, the court, without discussing the question of judicial control of the directors' discretion as to declaring a dividend, held that stockholders who are officers of a corporation may be compelled, upon a bill properly framed, to pay directly to other stockholders their share of money which the officers had fraudulently retained as salaries. It was said that relief in this form was appropriate to the circumstances of the case, and a better form than to require payment into the treasury of the company, and thereby, perhaps, make it necessary for the complainant to resort to another bill to compel the payment of a dividend; that the corporation existed for the benefit of its shareholders; that there was no sequestration of its property; and that no injustice would be done to anyone.

137 Directors of a corporation have a discretionary power as to the time and manner of distributing the profits. Speer v. Rockland-Rockport Lime Co. (1915) 113 Me. 285, 6 A.L.R. 793, 93 Atl. 754; Tooker v. National Sugar Ref. Co. (1912) 80 N. J. Eq. 305, 84 Atl. 10.

If, after providing for all of its liabilities upon a full adjustment of all its affairs, including a proper charge for depreciation and renewals, a corporation has sufficient money or property with which to pay a proposed dividend without in any way, or to any extent, impinging upon the capital of the corporation, the questions of the declaration of a dividend, and of its amount, time, and terms of payment, are fairly within the honest discretion of the board of directors. Hyams v. Old Dominion Copper Min. 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.

The directors, as the agents of the

amount thereof, but they generally have a discretion also as to the time, place, and manner of payment. This proposition is recognized in some of the cases already cited on the general question of the directors' discretion as to declaring dividends, and in cases cited in the footnote. 137 However, the corporation, have a discretion not only as to the amount of dividends, but as to the time and place of payment, so that the time fixed is reasonable and is determined in good faith, and the place of payment is within a reasonably convenient distance from their place of business or that of the stockholders; in the absence of any fraudulent design, the directors, in their resolution declaring a dividend, may impose the terms of payment as to the time and place, and each stockholder who would claim his share of the dividend must claim and take it sub modo. King v. Patterson & H. River R. Co. (1860) 29 N. J. L. 82 (opinion of Haines, J.), affirmed in (1861) 29 N. J. L. 504.

The purpose of the New Jersey statute in prescribing that at a fixed time each year the directors shall make and declare dividends out of the profits has been said to be to safeguard the rights of the stockholders to have a just participation in the gains of the company, and not to invalidate dividends declared at other times, provided they are declared out of actual profits. Breslin v. FriesBreslin Co. (1904) 70 N. J. L. 274, 58 Atl. 313.

That dividends on the common stock cannot be declared under the New Jersey statute previous to the close of the fiscal year, where the charter of the company provides that dividends shall be declared "after the close of any fiscal year," see Marquand v. Federal Steel Co. (1899; C. C.) 95 Fed. 725.

Under the Companies Causes Consolidated Act of England, giving to directors general powers as to management and superintendence of the affairs of the company, although specifying that certain powers, including declaration of dividends, shall be exercised only at a general meeting of the company, it has been held that directors have power to fix, within reasonable limits, the date at which, and the mode in which, the dividends shall be paid, subject to the control of the

time of payment of a dividend has been held not to be a matter depending upon the discretionary future action of the board of directors, but the latter have merely a reasonable time to make the necessary arrangements for its payment, where the financial condition of the corporation justifies a dividend and its board of directors declare a dividend of 6 per cent payable "at such time as the finances of the corporation will, in the judgment of the board, warrant." 138

It has been held 139 that a court will not, at the instance of a stockholder of a manufacturing company, order that its manufactured products on hand be sold and the proceeds applied to the payment of dividends declared and unpaid, since this would involve, without necessity, an invasion of the legitimate functions of the board of directors, and wrest from it the determination of the wisdom, policy, or practicability of making such sale and the application under the existing circumstances, regard being had to the form and the amount of the corporate general meeting. Thairlwall v. Great Northern R. Co. [1910] 2 K. B. (Eng.) 509-Div. Ct.

It is held in State v. Bank of Louisiana (1827) 5 Mart. N. S. (La.) 327, that a profit derived by the Bank of Louisiana from the sale of state bonds should be distributed at the same time and in the same manner as any other profits made by the bank in its ordinary transactions. See also State v. Bank of Louisiana (1834) 6 La. 745.

138 Northwestern Marble & Tile Co. v. Carlson (1912) 116 Minn. 438, 133 N. W. 1014, Ann. Cas. 1913B, 552. But it should be observed that the real question in such cases is as to whether there was a declaration of a dividend i. e., whether the action of the board amounted to such declaration, -a question which in general is beyond the scope of the annotation.

139 Carson v. Allegany Window Glass Co. (1911; C. C.) 189 Fed. 791.

140 See notes 169, 170, infra. 141 See State v. Baltimore & Ohio R. Co. (Md.) in note 148, infra.

141a See Seeley v. New York Nat. Exch. Bank. (N. Y.) note 20, supra. 142 Alabama.-Gulf Coal & Coke Co. 55 A.L.R.-5.

assets, and the obligations and liabilities of the company.

The question of the discretion of directors to declare a property or stock dividend, instead of making payment in cash, is treated elsewhere in the annotation. 140 Questions have also arisen, and are considered in other places in the annotation, as to the right of directors of a corporation to discriminate as to the manner of payment of a dividend, between the large and the small stockholders, 141 and as to discretion of directors to return capital to stockholders on a reduction of the capital stock. 141a

VII. Discrimination between stockhold

ers.

The rule is well settled that, in the declaring and paying of dividends, directors of a corporation have no legal right to discriminate between stockholders of the same class, but all are entitled to participate equally in the distribution of the net profits, unless otherwise provided by the terms of their contract with the corporation. 142 Discrimination in the pay

v. Musgrove (1915) 195 Ala. 219, 70 So. 179.

Illinois. Ryder v. Alton & S. R. Co. (1851) 13 Ill. 516; Cratty v. Peoria Law Library Asso. (1906) 219 Ill. 516, 76 N. E. 707.

Iowa.-Redhead v. Iowa Nat. Bank (1905) 127 Iowa, 572, 103 N. W. 796.

Kansas. See Hale v. Republican River Bridge Co. (1871) 8 Kan. 466.

Kentucky.-Etna L. Ins. Co. v. Hartley (1902) 24 Ky. L. Rep. 57, 67 S. W. 19, 68 S. W. 1081; Mutual Ben. L. Ins. Co. v. Davis (1903) 115 Ky. 404, 73 S. W. 1020.

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