into consideration before the stockholder. The property of a corporation is a trust fund pledged for the payment of its debts. Therefore if there is a bonded, funded, permanent or standing debt, the interest on it must be reckoned out of net earnings. If there is a floating debt which it is not wise and prudent to place in the form of a funded debt or to postpone for later payment, that should also be paid. If the financial situation. of the company is such as to render it expedient to commence or continue the scheme of a sinking fund and for the extintinguishment of the company's indebtedness some day or other, an annual contribution out of the net earnings for that purpose I would be reasonable. These deductions made from the net earnings, the balance will be profits of the company distributable among stockholders."20 It will be noticed that if the definition of profits-" the surplus over and above the capital and debts"—is strictly applied, it would require that each year before dividends may legally be paid, any existing impairment of the capital must be made good. That is, if a company has no reserve of surplus profits and meets with disastrous losses, its profits, possibly for a term of years succeeding, must be employed in the reinstatement of its capital stock and during that period dividends must be deferred until the capital has been restored to its original amount. The courts, however, do not enforce any such harsh rule. On the contrary, provided always that the state statutes, or the provisions of charter or by-laws do not prevent, and that the declaration of a dividend does not render the corporation insolvent or leave it in such an embarrassed condition as to render the dividend manifestly improper, no account need be taken of any impairment of preceding years. Under such circumstances, "in estimating the profits for the year for the purpose of declaring a dividend, it is not necessary to take into 20 Belfast v. Belfast, 77 Me. 445 (1885). account the difference in value of the assets and the impairment of the capital stock of the company prior to that year. in 21 Also profits earned and invested or passed over to surplus years of prosperity do not lose their character as profits but if no profits are made in subsequent years, may be drawn on for dividends.22 Also profits for the current year, although expended upon betterments, or existing in the form of property, may be made the basis of dividends. In this case money may be borrowed to pay such dividends or the dividends may be declared in the form of stock, scrip or bonds.23 An exception to the general rule that dividends impairing the capital stock may not be paid, is found in the case of companies working mines or operating under leases, patent rights, etc. Here the corporation is organized for the express purpose of working out the property which is represented by its capital stock and the impairment and final exhaustion of this property is the object of the corporate operations. In any such case if a company is formed "to acquire and work a property of a wasting nature, for example, a mine, a quarry or a patent, the capital expended in acquiring the property may be regarded as sunk and gone, and if the company retains assets sufficient to pay its debts, it appears to me that there is nothing whatever in the Act to prevent any excess of money obtained by working the property over the cost of working it from being divided amongst the shareholders, and this, in my opinion, is true although some portion of the property itself is sold and in some sense the capital is thereby diminished."24 The decision in the English case from which the foregoing quotation is taken, has been generally followed in this country and is regarded as establishing the rule. It must, however, be noted that in this case the assets of the company 21 Cook on Corps., § 546. 22 Beers v. Bridegport Spring Co., 42 Conn. 17 (1875). 23 Williams v. W. U. Tel. Co., 93 N. Y. 162 (1883); In re Mercantile Trading Co., L. R., 4 Ch. 475 (1869). 24 Lee v. Neuchatel Asphalte Co., L. R. 41 Ch. D. 1 (1889); were ample and there was no question of insolvency or charge of indiscretion in the declaration of dividends which formed the basis of litigation. A difficulty sometimes arises when determining the corporate profits for dividend purposes as to what expenditures may properly be charged to capital stock account and what should be charged to current expenses. Thus if a manufacturing concern purchases machinery and this is charged to capital stock account, the books will show a larger net profit for the year than if the item is charged to expense account. The matter is one of bookkeeping and the actual assets of the company are not affected in either case, but its profits legally available for dividends are directly increased or diminished according to the account to which the item is debited. This question usually arises when the directors are anxious to divert every possible penny into dividends. The problem is a difficult one and its solution will vary with the conditions. "It may be safely said that what losses can be properly charged to capital and what to income is a matter for business men to determine and it is often a matter on which the opinions of honest and competent men will differ."25 Speaking generally, any expenditure for which stock or bonds might be issued with propriety, is properly charged to capital account but not otherwise. § 242. Equality of Dividends. Dividends, as stated, are usually declared as a percentage upon the outstanding capital stock, or as a certain amount on each class of stock, and each stockholder in any class of stock participates according to the stock he holds. This rule is absolute. When they (the directors) undertake to declare a dividend, they are bound to make it equal and just among all who are interested. They would have no right to divide their profits among a few particular friends, neither would they have 25 Gregory v. Patchett, 33 Beav. 595 (1864). authority to say that one class of stockholders should receive a larger amount of the profits or a greater dividend than others. They are but the agents of the stockholders. The profits belong to the stockholders and they must apportion them fairly and justly with due regard of the interests of each and all of them. They cannot make an unjust discrimination, giving one an advantage over another. If they do this, they exceed their powers and the courts have a right to interpose their authority to prevent it."26 The general rule of equality applies, however, only to stockholders of the same class. In the organization of a corporation, or later if the proper formalities are observed, different classes of stock may be created and these may be given different dividend rights.27 Thus preferred stocks are frequently created with preferential dividends which they receive before other classes of stock receive anything at all. The difference is, however, one that was intended and one that is clearly set out in the provisions by which the preferred stock is created and as it is understood and by implication agreed to by every stockholder of the corporation, no injustice results. As between the members of any one class, however, dividends must be paid with absolute impartiality. The number of shares of stock each holds must determine the amount received by him when dividends are paid. The time of payment and the method of payment must be the same for all. Some, unless by consent or agreement, cannot be paid in cash while others are paid in stock or scrip. All must fare alike.28 § 243. Form of Payment. Dividends are usually paid in cash and unless otherwise. stated, cash payment is always understood. Dividends may, however, be declared from existing profits regardless of the form of these profits. "The surplus may be in cash and then Luling v. Atl. Mut. Ins. Co., 45 Barb. (N. Y.) 510 (1865); Miller, J. 27 See Chap. XXXI, "Preferred Stock." 25 Jones v. Terre Haute, etc. R. R., 57 N. Y. 196 (1874); State v. Balt., etc. R. R., 6 Gill (Md.) 272 (1848). it may be divided in cash. It may be in property and if the property is so situated that a division thereof among the stockholders is practicable, a dividend in property may be declared and that may be distributed among the stockholders." Also if the profits are not in the form of cash and not in a form to be distributed directly as property among the stockholders, the property might be sold or be used as a basis for a loan of cash to be used in payment of dividends, or scrip, bonds or stock might be issued against it as dividends. 30 Another method of disbursing profits occasionally practiced, is that of paying these profits to the officers of the corporation under the guise of salaries. The excess amount of these salaries represent the dividends that would otherwise be declared. It is obvious that this practice is only proper when all the stockholders are also officers of the corporation or consent to the otherwise excessive salaries. "So long as all the parties in interest, incorporators, stockholders, directors and officers, assented to the scheme for the distribution of assets by the payment of salaries, the plan was not objectionable."31 But if any interested parties do not consent, the plan becomes not only objectionable but illegal. $244. Cash Dividends. The simplest form of dividends are those paid in cash. Such dividends are usually declared and paid from cash profits on hand. If, however, the profits of the company exist in some other form of property, the directors may, as already stated, sell such property and use the proceeds for the cash payment of dividends, or may borrow the cash on the security of this property or on the general credit of the corporation and pay the dividends from the money thus obtained, or they may, under proper conditions, issue stock, bonds or scrip against the property and secure cash for the payment of dividends from the sale of these securities. 30 Williams v. W. U. Tel. Co., 93 N. Y. 162 (1883). |