CHAPTER XXIV. DIVIDENDS. § 238. What They Are. Dividends are corporate profits which have been set aside by formal action of the directors for distribution among the stockholders. Quarterly, semi-annually or annually, as the case may be, the corporate books are balanced or the profits are otherwise determined and the directors decide what portion, if any, of these profits shall be withdrawn for division among the stockholders. If a dividend is determined upon, it is then formally declared, usually in the shape of a percentage on the par value of the stock but sometimes as a fixed amount on each share. The amount received by each stockholder is therefore determined absolutely by the number of shares he holds. Corporate profits are occasionally disbursed among the stockholders without the formality of a declaration of dividends, and the proceeding is not legally objectionable if all the stockholders consent.1 Where the corporation is small, this is sometimes effected by means of salaries that would otherwise be unreasonably large. In such cases, all the stockholders are usually also officials of the corporation and participate in this informal division of profits. The plan is permissible if all the parties in interest assent2 and no improper ends are to be at 1 Groh's Sons v. Groh, 80 N. Y. App. Div. 85 (1903). 2 Fichett v. Murphy, 46 N. Y. App. Div. 181 (1899); see § 243 infra. 311 tained thereby. When, however, such salaries are paid for the purpose of concealing the actual profits with a more or less directly fraudulent intent, the courts hold them as "dividends of profit under another name and put in that guise for concealment and delusion." § 239. By Whom Declared. It is a well recognized principle of law that "the directors of a corporation and they alone have the power to declare a dividend of the earnings of the corporation and to determine its amount.' This right of the directors to declare dividends is an incident of their general power to manage the affairs of the corporation and is recognized either directly or by implication by the statutes of every state of the Union. The right is, of course, controlled by any statutes, or any charter or by-law provisions which may apply, but beyond this the whole matter is in the directors' discretion.5 The property of the corporation is not the property of the individual members. They are interested in the corporation, but as individuals have no interest in its property. "The individual members of the corporation are no doubt interested in one sense in the property of the corporation, as they may derive individual benefit from its increase or loss from its destruction, but in no legal sense are the individual members owners." When, however, a dividend is declared from net profits, the amount of this dividend is immediately transferred from the corporate ownership to the ownership of the stockholders" 3 Rubber Co. v. Goodyear, 9 Wall. 788 (1869). Hunter v. Roberts, Throp & Co., 83 Mich. 63 (1890). 5 Burden v. Burden, 159 N. Y. 287 (1899); N. Y., etc. R. R. v. Nickals, 119 U. S. 296 (1886). Queen v. Arnaud, 9 Ad. & El. (N. R.) 806 (1846). 7 Matter of Kernochan, 104 N. Y. 618 (1887). and this is true though no definite date or some future date was fixed for its payment at the time it was declared. As soon as the date arrives upon which this dividend is payable, it becomes a debt due from the corporation to the stockholders, who can enforce its payment by legal procedure if withheld. "It is a clear proposition that a dividend declared of the earnings of the company becomes thereupon the individual property of the stockholder to be received by him on demand. It is a severance from the common fund of the company of so much for the use and benefit of each incorporator in his individual right which may be demanded by him, and if refused become the subject of an action for money had and received to his use." The ownership of the profits declared as dividends passes from the corporation to the stockholders as soon as the declaration is made absolute, and such profits cannot be again reclaimed by the corporation. The dividend is then a debt of the corporation which stands on a parity with its other debts, and should the corporation become insolvent before such dividend is paid, the stockholders take their place among the other creditors of the corporation and may enforce their claims as would any other corporate creditor.10 Further than this, if the money to pay a declared dividend is set aside in a separate fund for the purpose, even though merely placed on deposit, it has been held that this particular fund becomes the absolute property of the stockholders—a trust fund held by the corporation for their benefit—and provided only that the dividend is legal and the fund is set aside in good faith, such fund cannot be reclaimed by the corporation nor is it liable to taxation or for the corporate debts.11 However, "simply declaring a dividend does not create a trust fund. To create such a fund some specific sum of money must 8 Beers v. Bridgeport Spring Co., 42 Conn. 17 (1875). King v. Paterson, etc. R. R., 29 N. J. L. 82 (1860). 10 Hunt v. O'Shea, 69 N. H. 600 (1899). 11 Pollard v. First Nat. Bk., 47 Kans. 406 (1891). be set apart for paying the dividend. Until this is done, the relation of the corporation to its stockholders in respect to dividends is that of debtor and creditor."12 A dividend does not, however, become an irrevocable fact until notice of the resolution declaring it has been given, or the fact that it has been adopted has become known. If the directors have voted the dividend but the fact has not been. made public in any way, the transfer has not been consummated and the action of the board up to this point may be rescinded and become a nullity.13 Also under some circumstances a formally declared dividend may be revoked. Thus should the board declare a dividend in defiance of or in ignorance of facts which make it illegal, the action of the board may be rescinded at any time before payment of the dividend has actually been made or its payment may be enjoined at the suit of objecting stockholders.14 As a declared dividend is a debt due from the corporation to the stockholder, any real existing indebtedness of the stockholder to the corporation may be set off against the dividend and be deducted from it, provided the debt is actually due at the time the dividend is payable. Accordingly the corporation has full power to apply dividends in payment of subscriptions due on its stock from the stockholders. 15 It may be noted that a contract between the corporation and a subscriber to its stock that his subscription shall be paid for in dividends, is absolutely invalid both as against the corporation and against corporate creditors. Under such an agreement, any credits of declared dividends actually made would be held a valid payment, but in case of the insolvency of the corporation before the stock was full paid, the stockholder could be called upon to pay in cash all amounts still due on his 12 Hunt v. O'Shea, 69 N. H. 600 (1899). 13 Ford v. Easthampton Rubber Thread Co., 158 Mass. 84 (1893). 14 Marquand v. Federal, etc. Co., 95 Fed. Rep. 725 (1899). 15 Kenton, etc. Co. v. McAlpin, 5 Fed. Rep. 737 (1880). subscription, regardless of the agreement that it was to be paid in dividends.1 16 § 241. Profits and Dividends. Under the common law, dividends may be paid only from profits. This common law has been re-enacted in some form in the statutes of practically every state in the Union. Even where stockholders are entitled to interest on their stock by reason of a contract with the corporation, it has been held that such interest may only be paid from net profits.17 In most of the states the statutes provide that dividends may only be declared from surplus or net profits. In some few states the requirements are much lower, the statutes merely providing that no dividends may be declared that would render the corporation insolvent, or perhaps merely imposing punishment for the declaration of such dividends. It is manifest that this might allow material impairment of the actual capital before the statutory limit was reached. Speaking generally, however, dividends may be paid only from surplus or net profits. It then at times becomes an important point to determine just what are profits, and to what extent these profits are available for dividends. The general rule is that any increased values of the corporate assets in any year are net profits. Or, as stated by the United States Supreme Court,18 "The term 'profits' out of which dividends alone can properly be declared denotes what moneys remain after defraying every expense, including loans falling due as well as the interest on such loans." Or as stated broadly in an early case, 19 "the surplus over and above their capital and debts becomes profits." But several kinds of charges must first come out of net earnings before dividends are declared. The creditor comes 16 Hawkins v. Citizens', etc. Co., 38 Ore. 544 (1901). |