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The leading case cited in support of the wasting asset doctrine is the English case of Lee v. Neuchatel Asphalte Co. (1889) L. R. 41 Ch. Div. 1. It is upon this decision that the other cases, including some in this country, are very largely based. The other cases and text-books cited are the following: Excelsior Water & Min. Co. v. Pierce (1891) 90 Cal. 131, 27 Pac. 44; People ex rel. United Verde Copper Co. v. Roberts (1898) 156 N. Y. 585, 51 N. E. 293; Boothe v. Summit Coal Min. Co. (1909) 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. (1911) 129 La. 406, 56 So. 343; Stratton's Independence v. Howbert (Dist. Ct. Colo. 1912) 207 Fed. 419; Morawetz Priv. Corp. § 442 (1886); 2 Clark & M. Priv. Corp. 1593 (1901); 10 Cyc. (1904) 553; Thompson, Priv. Corp. (1910) 118; 14 C. J. (1919) 802; Fletcher, Cyc. Corp. (1919) 6104; 2 Cook, Priv. Corp. (1923) 8th ed. 1903; Hatfield, Modern Accounting (1919) 215.

We will not attempt to analyse the authorities cited in support of the wasting asset rule, and it is not necessary to do so because it has been very thoroughly done by the Chancellor in his opinion, Del. Ch. -, 133 Atl. 48.

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ciding that the wasting asset doctrine is applicable to the present case. So far we have said only, that such a doctrine has been approved and declared by courts in this country and England. The complainants say the Lee-Neuchatel Asphalte Co. Case has no application to the case at bar, for the reason, among others, that in that case there was no capital deficit, and no preference given to any stock except in the payment of dividends. It is sought to distinguish all of the other cases cited by the defendant on the ground that the facts or statutes involved were different from those in the present case, or because they were decided on different grounds. In some it did not appear that the capital was impaired, or that there was a preferential stock. Some were tax cases, and in others there was no such contract as existed between preferred stockholders and the company in the case before this court in respect to the application of asests in the event of dissolution.

There is one case, however, that is more analogous to the one before the court than any other. It is the New Jersey case of Mellon v. Mississippi Wire Glass Co. 77 N. J. Eq. 498, 78 Atl. 710, decided by the Court of Chancery in 1910, and upon this the defendant seems to rely with much confidence.

The corresponding statute law of that state is strikingly similar to our own. The Vice Chancellor relied on the principle decided in the LeeNeuchatel Asphalte Co. Case, and held that there was no obligation by law or statute to create a reserve fund out of revenue to recoup the wasting nature of the capital. More extended reference will be made to this case later in our opinion.

We have spoken of the wasting asset doctrine at some length so as to present clearly the contentions of the defendant, and the basis of its argument, because it is upon such doctrine alone that reliance is placed. In our view of this case it is immaterial that the doctrine contended for by the defendant has

(- Del. - 138 Atl. 347.)

been recognized by courts where the statute law is essentially different from ours. Neither it is of importance in the decision of the case that such recognition preceded the enactment of our General Corporation Law. The authorities cited might be very persuasive if the question before us was the wisdom or propriety of adopting, by judicial decision, the wasting asset doctrine in this state. But the crucial question, we think, is whether corporations known as wasting asset corporations are excepted from the operation of our statute law with respect to the payment of dividends.

We have stated the pertinent'statute law of the state in presenting the contentions of the complainants. Such law does not by its language except from its operation and effect any class of corporations created thereunder. But the defendant claims that the wasting asset doctrine, which has been recognized as an exception to the rule of the common law, and, therefore, became a part of the common law, was ingrafted upon the statute law at the time of its enactment; or, that the statute law was a codification of preexisting common law and subject to the exception.

In reply to such contention or argument we say:

1. The recognition of said doctrine by an eminent text-writer, Mr. Morawetz, as well as by one or two courts in England and a like number in this country, before the enactment of the pertinent statute law, does not convince us that such doctrine was thereby established as a part of the common law of this state.

2. Even if the doctrine or rule contended for was the common law of the state when the statute was enacted it cannot be regarded as engrafted upon or read into a statute that is clearly opposed to the doctrine. There cannot be an effective and operative common law that is essentially different

Common laweffect of statute.

from a clearly expressed statute

law. We think the position of the complainants in this regard is sound, viz.:

"That there being no exception in the Delaware statute in favor of wasting asset corporations, the court cannot usurp the function of the legislature by reading into the language of the legislature an exception that is not expressed"-and we may say, an exception that is clearly at variance with the language used.

After all, this question resolves itself into a consideration of what the Legislature meant by the statute in question. The intention of the lawmakers is to be ascertained from the struction-inlanguage they em




ployed. It will not be claimed that there is anything in the language of the law that expresses or even indicates an intention to except from its operation, wasting asset corporations. The one fact that makes most of defendant's authorities inapplicable is that the statute laws, or the facts involved, were different from those in the present case. those cases the wasting asset doctrine was adopted, not because it was codified into or ingrafted upon a statute law like ours, but because there was nothing in the statute law that was opposed to its adoption. The decisional law was not contrary to the existing written law. There are but two cases that are not covered by this general statement, viz.: The Excelsior Water & Min. Co. Case in California, and the Mellon Case in New Jersey.

In the former case the statute prohibited the making of dividends except from surplus, and the payment to stockholders of any part of the capital stock. A large part of the plaintiff company's capital consisted of property other than its mine, which had been but slightly encroached upon. The court cited with approval Morawetz and the Lee-Neuchatel Asphalte Co. Case, but said: "There is nothing to show that the capital of plaintiff has been impaired."

In the Mellon Case, while the pertinent statute law was practically the same as ours in respect to the payment of dividends, the specific question before the court was, whether, under the charter contract or the law, the defendant company was required to establish a reserve fund for the protection of preferred stockholders. The question here is, whether the company can pay dividends on its common stock when its net assets are less than the paid-in or invested capital. The setting up of a reserve is not the only way by which the net assets can be kept equal to capital. It may be done, and often is done by the purchase of other properties.

The Vice Chancellor in the Mellon Case relied on the Lee-Neuchatel Asphalte Co. Case, and the New Jersey case of Goodnow v. American Writing Paper Co. 73 N. J. Eq. 692, 69 Atl. 1014, in which he says, the doctrine laid down in the English case "is practically adopted by our Court of Errors and Appeals." In the Goodnow Case, the court said: "The value of the present assets execeded the value of the actual assets with which the company began business."

It will be noted that in the Mellon Case, as in all the cases in this country and in England cited by the defendant, the recognition of the wasting asset doctrine is based on the reasoning of the Lee-Neuchatel Asphalte Co. Case, in which there was no depletion of assets, and nothing in the law that prevented the payment of dividends out of capital. And so Lord Justice Lindley could very well say, in the last

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ment out of capital it was such a payment out of capital as was not prohibited by law."

After a careful examination of the authorities the court conclude that there are none which distinctly hold that it is permissible, in the face of a statute law like ours, to pay dividends on common


stock wasting assets

dividends in

when, as in this right to declare case, there is an depletion of preferred stock. outstanding issue of preferred stock, the capital is greatly depleted and the net assets are less than the paid-in or invested capital.

The court's opinion is based on the particular facts and the statute law applicable thereto.

We hold that under the charter contract existing between the defendant company and the complainants as preferred stockholders, of which contract the petinent statute law forms a part, dividends cannot be paid on the common stock when the capital of the company is greatly depleted and its net assets are less than its paid-in capital. This is the sole question to be determined by this court.

Whether corporations engaged in the exploitation of wasting assets shall be excepted from the operation of our law is a question for the Legislature of the state to decide. It may be fortunate that the Legislature is now in session.

For the reasons above given, the decree of the Chancellor will be affirmed.


Right or duty of corporation to pay dividends; and liability for wrongful

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II. Fund in general from which dividends may be paid:

a. Rule generally, 11.

b. Distinction in England between fixed and floating capital, 20. III. Determination of net profits or surplus available for dividends; factors

to be considered:


a. In general, 23.

b. Debts or interest owing by corporation; sinking fund, 26.

c. Taxes; insurance; rent, 28.

d. Depreciation; maintenance; repairs, 28.

e. Accretions to capital; excess of assets over par value of stock, 30. f. Estimated and unrealized profits; debts owing to corporation, 32. g. Subsequent events as affecting question, 38.

IV. Right of directors to borrow money to pay dividends, 39.

V. Wasting-assets corporations, 41.

VI. Discretion of directors or corporation as to declaring or paying dividends, or as to time, place, and manner of payment; circumstances warranting or not warranting interference, 44.

VII. Discrimination between stockholders, 65.

VIII. Stock or property dividends, 69.

IX. Rights and liabilities in case dividends are wrongfully declared and paid: a. Of directors, in general, 73.

b. Of stockholders, in general, 98.

c. Who may enforce liability:

1. Corporation or its assignee, 108.

2. Stockholders, 111.

3. Receiver, 113.

4. Creditors, 116.

5. Trustee in bankruptcy, 120.

6. Miscellaneous, 121.

d. Pleadings; parties to actions; multifariousness, and improper joinder, 122.

e. Law or equity, 126.

f. Survival and assignability of cause of action, 129.

g. Limitations of action, 129.

X. Remedies and proceedings to restrain or compel declaration of dividends:

a. In general, 133.

b. Duty first to exhaust remedies within corporation, 142.

XI. Presumptions, 145.

XII. Miscellaneous, 147.

I. Scope.

This annotation is concerned in general with questions relating to the financial condition of a going corporation which will warrant or require the declaration of dividends; the factors which should be taken into account in determining profits or surplus out of which dividends may be declared; the power and duty of courts to order or restrain the declaration of dividends;

1 See annotations in 6 A.L.R. 802; 13 A.L.R. 426; and 48 A.L.R. 80. Only those cases involving preferred stock are included in the present annotation, in which the case would be of value, perhaps as a fortiori authority, had it involved the rights of holders of common stock, as where the right to declare dividends on preferred stock from capital is denied.

and liabilities arising where dividends have been wrongfully declared. Questions distinctive to the rights of holders of preferred stock to the declaration and payment of dividends on their stock are discussed in other annotations and are excluded herefrom. 1 The annotation does not purport to cover cases dealing with special classes of stock, as guaranteed stock, or rights generally which depend on the con

As to the rights of holders of common stock, in case an extra dividend is earned in any year, to be reimbursed for unearned dividends in past years before the holders of preferred stock share in the excess over the dividend provided for that year, see Englander v. Osborne (1918) 261 Pa. 366, 6 A.L.R. 800, 104 Atl. 614.

struction or effect of special agreements.2 The question as to who is entitled to dividends is not within the scope of the annotation;3 nor does the annotation include such questions as the legality or sufficiency of the proceedings by which dividends are declared; the right of the corporation to rescind its action in declaring dividends; and enforcement of payment of declared dividends. Cases dealing with questions distinctive to foreign corporations are discussed in other annotations. And of possible interest in this connection are the annotations dealing with the right of a court to interfere with the amount of salaries voted to officers of private corporations by directors.5

The annotation does not include criminal cases except so far as these

2 That directors of a consolidated railway company cannot be compelled to apply net earnings of the new company to the payment of dividends in arrears on stock of the old company, see Chase v. Vanderbilt (1874) Jones & S. (N. Y.) 334 (affirmed in (1875) 62 N. Y. 307, without discussing this point), a case involving the rights of a holder of guaranteed stock.


Guaranteeing future price of, or dividends on, corporate stock as contrary to public policy, is the subject of annotation in 24 A.L.R. 986.

As to construction of contract which fixes compensation of officer or employee with reference to dividends, see annotation in 41 A.L.R. 871.

3 As to rights as between life beneficiaries and remaindermen in corporate dividends or distributions during the life interest, see annotations in 24 A.L.R. 9; and 42 A.L.R. 448; and 50 A.L.R. 379.

As to whether the investment of the profits of a corporation in permanent works capitalizes them so that, upon a sale of the works, the directors cannot distribute them as a cash dividend which will belong to life tenants, and not to remaindermen, of the stock, see, for example, Smith v. Dana (1905) 77 Conn. 543, 69 L.R.A. 76, 107 Am. St. Rep. 51, 60 Atl. 117.

4 As to jurisdiction of actions or proceedings involving internal affairs of foreign corporations, see annotations in 18 A.L.R. 1383, and 32 A.L.R.

may be of value on the general question indicated in the above title; nor are cases on the question of liabilities for deceit in the declaring of corporate dividends within the scope of annotation.6

Although individual cases involving dividends by special classes of corporations, as building and loan or similar associations, and insurance companies, are set out in the annotation because of their bearing on specific phases of the subject, it is not the purpose of the annotation to cover generally cases of this kind, so far as they depend on special contractual relations between such corporations and subscribers to the stock, or policy holders, or the methods employed for the carrying on of the business of such corporations."

1353, particularly subd. III. b, 8, relating to dividends.

As to unwarranted payment of dividends as ground for ousting foreign corporation, see State ex rel. Spillman v. Brictson Mfg. Co. (1925) 113 Neb. 781, 41 A.L.R. 992, 205 N. W. 246, which appears to be a case of first impression on the subject.

5 As to right of court to interfere with amount of salaries voted to officers of private corporations by directors, see annotations in 27 A.L.R. 300, and 44 A.L.R. 570. See also notes 38, 135, and 136, infra.

6 See, for example, United States v. Britton (1883) 108 U. S. 199, 27 L. ed. 698, 2 Sup. Ct. Rep. 531, as to whether an indictment will lie under the Federal statute, as for wilful misapplication of funds, against directors. of a national bank for procuring declaration of a dividend when there were no net profits to pay the same.

7 Cases involving these particular kinds of corporations are cited in the annotation under the appropriate headings so far as they are of value on the general questions under consideration. As to dividends by insurance companies, see, for example, notes 70, 120, 146, and 147, infra; and as to dividends by building and loan or similar associations, see, for example, notes 70, 119, and 177, infra.

Several illustrative cases may here be referred to which involve questions more or less distinctive to the particular kind of corporation.

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