§ 245. Dividends Not in Cash.

If corporate profits available for dividends are in the form of property and the directors do not care to sell or encumber this property, or if they wish to reserve the cash profits for the use of the corporation, dividends may be declared in several different forms. (a) The capital stock may be increased and this increase be distributed as a stock dividend, or any unissued or treasury stock on hand may be used for the purpose. (b) Bonds may be issued to the amount of the dividend and these bonds be distributed. (c) Scrip may be issued against the profits and the scrip be distributed as dividends. (d) If the property is in such shape as to permit, it may itself be distributed as a property dividend.

Dividends in all these different forms, if issued under proper conditions, are held to be legal and are sustained by the courts. 32

In the case of dividends paid in other forms than cash the same general rules apply as to cash dividends. There must be an equality among the stockholders, and the proportionate amount, the time of payment and the form in which the dividend is paid must be the same for all.

It may be noted that preferred stockholders share with holders of common stock in dividends paid in other forms than cash exactly as they would if the dividends were paid in cash.33 § 246. (a) Stock Dividends.

In some few states stock dividends are prohibited by law, as in Massachusetts. Even here, however, the end is practically accomplished by the declaration of a dividend to the stockholders. These dividends are then a debt due from the corporation to its stockholders. A simultaneous offering of stock to an equal amount is made and this stock is purchased

32 Williams v. W. U. Tel. Co., 93 N. Y. 162 (1883).

33 Howell v. Chicago, etc. Ry. Co., 51 Barb. 378 (1868); Gordon v. Richmond, etc. R. R., 78 Va. 501 (1884).

by the stockholders, their indebtedness therefor being offset by the dividends due them.34

In most of the states, however, no such restriction exists and stock dividends are not uncommon, and, under proper conditions, are not legally objectionable. If the directors wish to retain the corporate profits to increase the capital of the corporation, "it becomes immaterial whether such increase is made by awarding the stock to stockholders as dividends in lieu of money, retaining the money for the purposes of the company, or by paying the stockholders the dividends in cash from the earnings of the company and selling the stock in the market to raise money for the use of the corporation."35 Or as stated in a later case, "So long as every dollar of stock issued by a corporation is represented by a dollar of property, no harm can result to individuals or the public from distributing stock to the stockholders. * * All that can be required in any case is that there shall be an actual capital in property representing the amount of share capital issued."

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A stock dividend issued against actual corporate property of at least equal value is held to be full paid37 but, if not so issued in good faith, is not.38

It will be observed that a stock dividend of the kind here considered is entirely different from that derived from "stock watering," in which the new stock does not represent profits at all but is merely a dilution of the existing capital and is illegal and objectionable.

§ 247. (b) Bond Dividends.

The corporate bonds may take the place of cash in payment of dividends at the discretion of the directors, provided only that they are issued against actual profits. The argument

34 Jones v. Brown, 171 Mass. 318 (1898).

35 Howell v. Chicago, etc. Ry. Co., 51 Barb. (N. Y.) 378 (1868).

36 Williams v. W. U. Tel. Co., 93 N. Y. 162 (1883); Earl, J.; Rose v. Barclay, 191 Pa. St. 594 (1899).

Kenton, etc. Co. v. McAlpin, 5 Fed. Rep. 737 (1880); Berwind-White Coal Co. v. Ewart, 11 Misc. (N. Y.) 490 (1895).

38 Shaw v. Gilbert, 111 Wis. 165 (1901).

for their issue is the same as for the issue of stock as dividends. If the company has profits available for dividends, it may take these profits for the corporate purposes and replace them with the bonds and distribute these bonds as dividends. The bond dividend is held legal when issued against actually existing corporate profits.39

From the practical standpoint it must, however, be observed that bonds carry interest which becomes a fixed charge against the company and must be paid thereafter whether profits are made or not. Also the bond itself is an absolute obligation of the company which must be paid at maturity. Both these features may be objectionable, and do not exist in the case of stock.

§ 248. (c) Scrip Dividends.

The favorite method of paying dividends when neither stock nor bonds are available or expedient, is by means of scrip. This is practically a deferred dividend, scrip being a certificate stating that the owner or holder is entitled to certain rights or privileges specified in the certificate,—usually a certain amount of cash payable at some fixed future date. In the issue of scrip dividends the same rule obtains as in the case of any other dividends. Profits either present or prospective must exist as a basis for their issue.

Usually scrip represents existing profits which are not in the form of money but which may be realized upon at some future date and the money then be used to pay off this scrip. Or there may be no intention that the corporate property shall be realized upon, the expectation being that at the time the scrip becomes due, cash will be on hand for its payment without regard to whether the property in question is sold or not.

Sometimes, however, scrip represents an absolute reservation of cash profits as in the case of the scrip dividend declared

20 Wood v. Lary, 124 N. Y. 83 (1891); S. C., 47 Hun. 550; N. Y., etc. R. R. v. Nickals, 119 U. Š. 296 (1886).

by the Erie Railroad in 1907. Here cash profits had supposedly been earned and were available to the extent of some millions of dollars. Dividends were due amounting to $1,915,696 on the first preferred stock and $640,000 on the second preferred stock. These amounts would ordinarily have been paid out in cash but the directors determined that this cash would be employed to greater advantage in betterments than in payment of dividends. They thereupon declared a dividend in scrip in lieu of cash, to the full amount of the dividends due upon both preferred stocks, the scrip to be payable in 1914 and to bear interest at the rate of four per cent. per annum until its due date.

A scrip dividend of this kind partakes much of the nature of a forced loan. The stockholders would undoubtedly prefer cash, but are compelled to take the long-time scrip assigned them. It may be noted that the rights to the Erie scrip were selling within a few days of the declaration of the dividend. at a discount of from forty to fifty per cent. from face value. The payment date on scrip may be made absolute as in the case of the Erie scrip just mentioned, or may be made contingent, as where it is provided that scrip shall be payable as soon as the company accumulates sufficient surplus funds for the purpose or when specific property upon which the scrip is based shall be sold.

Scrip is issued in many different forms. Sometimes the certificates are convertible, being exchangeable at a certain time for stock or bonds of the company on demand of the holder. Sometimes they are payable at a date certain; sometimes not until net profits are earned sufficient for the purpose or until the money for their payment is received from some specified source. At times scrip certificates entitle the holders to dividends as would stock to the same value. The scrip then par

NOTE. The Erie scrip dividend above referred to, though duly declared, had not been issued on the publication date of the present volume-March 2, 1908-authorization therefor having been refused by the Public Service Commission.

takes much of the nature of stock save that it has no voting power.

Scrip certificates, though issued as a dividend and in lieu of certain property in the possession of the corporation, do not fix the ownership of that property in the holders of the certificates. They do give the holders a claim against the corporation-not the absolute claim which the ordinary declared dividend gives, but a conditional claim dependent upon the terms of the scrip certificate. In the case of the Erie scrip referred to, the claim is absolute, both for interest, and, at the redemption period, for principal as well. It is in fact merely a deferred interest-bearing dividend.

Provided only that the principal and any interest to be paid on corporate scrip are either represented by corporate profits actually on hand, or are payable only from future profits, or profits for such payments actually exist at the time or will exist when the demands fall due, the scrip dividend is not legally objectionable.

$ 249. (d) Property Dividends.

Dividends may consist of actual property, though, except in the case of corporate securities, there are obvious difficulties in the way of distribution which make such dividends rare. Thus a company whose profits were in land, might divide this land among its stockholders as a dividend, if it could do so equitably, and no objection could be raised. The more usual form of property dividends is, however, that of securities of other corporations received, when the corporation sells property or rights of some kind to another corporation, taking the stocks and bonds of that other corporation in payment. Or securities may have been bought outright at some previous time from profits. The stock and bonds so received are then divided among the stockholders of the receiving company as dividends. There are no objections to such dividends provided they represent actual profits.