If transfers prior to the declaration of the dividend have not been recorded, they are, of course, shut out, and to secure the dividend which rightfully belongs to such unrecorded stockholders, they must file due notice and evidence of the facts with the treasurer.

As soon as the stock books are closed, the treasurer is furnished by the secretary with a list of the stockholders of record as they appear on the date of closing, or otherwise the stock books are turned over to him and he secures the names and the addresses of the stockholders himself. The treasurer then makes up his dividend statement, showing the amount of stock held by each stockholder and the amount of dividends due him. The checks for dividends are made out and on the appointed date are mailed to the parties to whom they are due, or if dividend checks are not mailed, the stockholders are notified to call and receive their dividends in person.

In the smaller corporations the dividend check is usually nothing more than the ordinary check of the corporation, either marked or stamped "Dividend Check," or accompanied by a brief notice stating that the check is in payment of the specified dividend. In the larger corporations special checks are usually printed, with the words "Dividend Check" or "Dividend No." or some other identifying phrase appearing on the face of the check. (See Form 10.)

Where the stockholders call in person for dividends, they are usually required to sign the regular receipt form upon the dividend book. If the checks are mailed, receipt forms are sometimes sent with them, to be signed and returned by the stockholders. Usually and preferably, however, the check itself is deemed an all sufficient receipt. When stamped "Dividend No. -" or with some equivalent identifying phrase, as is usually the case, and endorsed by the recipient as must be done before the check can be collected, and stamped or cancelled by the drawee bank when paid, the check itself undoubtedly does afford the best possible evidence of the payment of

the dividend. The check is usually accompanied by a notice either that a receipt is or is not required, as the case may be.

The dividend check is in no wise different in its nature from any other corporate check. It should be deposited or otherwise presented for payment promptly and if this is not done, the recipient must bear any loss accreditable to such delay in presentation. The dividend check is also subject to all the usual customs and requirements relating to checks, as set forth in preceding chapters.

§ 254. Compelling Declaration of Dividends.

As already stated, the charter or by-laws of the company may provide more or less specifically as to when or under what condition dividends shall be declared, and as long as such requirements are in harmony with the state laws, the directors must observe them. If they do not, the stockholders may compel such observance by legal procedure.

In the absence of any such provisions or within their limits, the directors have wide discretion as to dividends. They are responsible for the proper management of the corporation and, particularly in the matter of dividends, are held to strict accountability by the law, and they are therefore entitled to the free exercise of their judgment as to when and to what amount these dividends shall be declared.

"As a general rule the officers of a corporation are the sole judges as to the propriety of declaring dividends and the courts will not interfere with the proper exercise of their discretion."12"When a corporation has a surplus, whether a dividend shall be made and how much it shall be and when and where it shall be payable, rests in the fair and honest discretion of the directors uncontrollable by the courts."13 "The courts have, no doubt, in many cases overruled the directors who proposed to pay dividends, but I am not aware of any case in

12 Belfast, etc. R. R. v. Belfast, 57 Me. 445 (1885).

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

which the court has compelled them to pay when they have expressed their opinion that the state of the accounts did not admit of any such payment. In a matter depending upon evidence and expert opinion it would be a very strong measure for the court to override the directors in such a manner.14

Even where there is a specific agreement to pay dividends or interest out of profits and profits exist, the courts are slow to enforce the agreement. Thus in a case of this kind it was held: “There must be profits adequate not only for the payment of the claims of the plaintiffs in the cause, but for the payment of all other stockholders having like claims, and there must be a surplus fund over and above what was requisite for the payment of current expenses, for discharging amounts due creditors, and over and above what reasonable prudence would require to be kept in the treasury to meet the accidents, risks and contingencies incident to the business of operating a railroad."15 In this case the court decided in favor of the stockholders but in a very similar case16 the decision was adverse.

While the courts are reluctant to compel dividends, there is a point at which they will intervene to prevent undue or improper retention of profits. "The directors must act in good faith. If they fail to do so and it clearly appears that they have accumulated earnings not required in the prosecution of the business which they withhold from the stockholders for illegitimate purposes, a court of equity may interfere and compel a distribution of such earnings."17 "Courts of equity will not interfere in the management of the directors unless it is clearly made to appear that they are guilty of fraud or misappropriation of the corporate funds or refuse to declare a dividend when the corporation has a surplus of net profits which it can, without detriment to its business, divide among its stockholders, and when a refusal to do so would amount to

14 Bond v. Barrow, etc. Co., 86 L. T. Rep. 10 (1902); Farlow, J.

15 Richardson v. Vt., etc. R. R., 44 Vt. 613 (1879).

18 Park v. Grant, etc. Works, 40 N. J. Eq. 114 (1885).

17 Matter of Rogers, 161 N. Y. 108 (1899).

such an abuse of discretion as would constitute a fraud or breach of that good faith which they are bound to exercise towards the stockholders."18

Cases sometimes arise, however, where a refusal to declare dividends, even where apparently reasonable on its face, is inequitable because of the conditions. For instance, preferred stock not infrequently carries non-cumulative dividends and if these dividends are not declared in any year, they are lost to the preferred stock entirely. It is obvious, then, that if profits exist from which the dividends might be paid but the directors instead of declaring these dividends, carry them over in surplus until the following year, the preferred stock has been juggled out of a dividend that properly belongs to it and there is a distinct advantage to the holders of the common stock.

Thus if a company has a capitalization of $200,000, of which $50,000 is preferred non-participating stock carrying a seven per cent., non-cumulative dividend, and the remainder is common stock, and the directors pay no dividends for five years although profits sufficient to pay the preferred dividends were made, these dividends, amounting to $17,500, are lost absolutely to the preferred stock. Then in the sixth year, the directors, should they so desire, might declare a seven per cent. dividend on the preferred stock amounting to $3,500, which is all the preferred stock is entitled to for that year, and thereafter declare the entire remaining profits as a dividend on the common stock. This latter then receives $14,000 that really belongs to the preferred stock.

In cases of this kind the courts are much less reluctant to intervene and will usually compel payment of the dividends on the preferred stock for any year if satisfactory proof is adduced that profits exist sufficient for the purpose, which can be used without injury to the corporation. Even here, however, the court scrutinizes the condition of the corporation closely and refuses the dividend unless it is clearly and unmis

18 Hunter v. Roberts, Throp & Co., 83 Mich. 63 (1890).

takably withheld wrongfully and to the injury of the preferred stock. 19

§ 255. Illegal Dividends.

The declaration of an illegal dividend or the payment of an illegal dividend already declared may be enjoined and stopped by proper action of the stockholders.

Illegal dividends may be of three characters:

(1) Those declared in disregard of the rights of some of the stockholders.

(2) Dividends declared in violation of charter or by-law provisions of the particular corporation.

(3) Those which either impair the capital stock or threaten the insolvency of the corporation.

(1) Dividends which are unequal among stockholders of the same class are absolutely in disregard of the rights of the stockholders discriminated against,20-so much so that cases directly involving the principle but seldom arise. When inequalities are attempted it is usually by means of diversions. of the profits, such as payments of excessive salaries or unnecessary expenditures.

Another instance of dividends in disregard of the rights of stockholders is sometimes found when the directors declare dividends on common stock while cumulated dividends due on preferred stock have not been paid. In such case the courts will compel a readjustment of the dividends.2

21

(2) Dividends declared in violation of charter or bylaw provisions may be perfectly proper in themselves but illegal merely because of their prohibition. Thus the charter or by-laws may provide that no dividend shall be declared until after surplus funds have been accumulated to some specified amount. Then if dividends are declared before this surplus

19 Belfast, etc. R. R. v. Belfast, 77 Me. 445 (1885).

20 See $242.

21 Luling v. Atl. Mut. Ins. Co., 45 Barb. 510 (1865).