Lead Opinion
Opinion by
For the second time this case is before us. In the first case, reported in
Following our decision the trustee sold 89 shares of preferred stock, series A; 89 shares of preferred stock, series B, and 1000 shares of common stock, and thereafter filed its second and partial account. The court below ruled that there should be no apportionment until all of the stock received in the merger had been sold.
On appeal the life tenant repeated all her rejected arguments made in the former appeal respecting her right to apportionment of the stock held by the trustee as part of the trust. She made the additional contention that the provisions of the Uniform Principal and Income Act of May 3, 1945, P. L. 416 (No. 171), 20 PS, section 3471 et seq., were intended to apply retroactively. The effective date of this act was May 3, 1945. The decision of the court below was made on April 25,1945, eight days before the act became effective. Appellant also contended that there should be an apportionment of the proceeds of the stock which had been sold by the trustee.
Concerning apportionment of the stock still forming part of the trust, we see no reason to overrule what we have already decided in this case. It is not pretended that any such right existed prior to the merger. The exchange of stock, in the merger, was
not
in payment of defaulted accrued dividends on the preferred stock. The trustee exchanged common and preferred stock which had paid no dividends for a number of years, for new stock which has paid and is still paying dividends. We said in our previous decision, pages 28 and 29: “Each trust contained shares of common and preferred stock of a corporation. The preferred stock had arrearages for dividends undeclared. The corporation effected a recapitalization and merger with two of its wholly owned subsidiaries. The trustee exchanged each share of pre
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ferred stock, with accrued dividend arrearages, for one-half share of 5% cumulative preferred stock, Series A, one-half share 5% cumulative convertible preferred stock, Series B, and one and one-quarter shares of no-par common stock; each share of $100 par common stock was exchanged for one share of no-par common stock. The recapitalization and merger did not affect the capital nor increase or decrease the surplus. The assets and financial situation of the corporation remained unchanged. The trustee, owner of the stock, neither gained nor lost by the transaction. The same property interest was represented by the new certificates of stock that had been indicated by the old. There have been no stock dividends declared, no corporate dissolution, no distribution of corporate assets, and no sale of any of the new stock by the trustee.” No sound reason is advanced why we should now overrule what we have decided in this case, and in the numerous cases stemming from
Earp’s Appeal,
It is urged that the provisions of the Uniform Principal and Income Act of 1945, supra, are retroactive. Under the Statutory Construction Act of May 28, 1937, P. L. 1019, art. IV, section 56, 46 PS, section 556, it is provided: “No law shall be construed to be retroactive unless clearly and manifestly so intended by the Legislature.” See
Painter v. Baltimore & O. R. R. Co.,
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We are not in accord, however, with the ruling of the learned court below that no apportionment may be had until
all
the stock is sold or distributed. On the contrary, upon the sale or distribution of
any
of the stock,- the time is appropriate for an apportionment respecting
that
stock or its proceeds. Nothing which we said in our prior decision is susceptible of, or intended to have, any other meaning. We said in that case, page 29: “There is probably no more difficult and intricate branch of the law than the
application
of what is termed the Pennsylvania, or American, Rule of Apportionment. The principle of equitable apportionment was early established (see Earp’s Appeal,
Prima facie, intact value is the corporate book value and this standard remains fixed unless it can be established that the elements making up the book value are not true values. Ordinarily the courts will accept the company’s manner and method of charging items as correct when it is done in good faith. The value of assets carried at a nominal value is the subject of proof:
Baird’s Estate,
Nothing appears in any reported case which requires withholding apportionment until all of the stock has been sold and distributed, in order to ascertain and preserve intact value of all the stock. This would be contrary to the very essence of the reason behind the doctrine of apportionment. It is the life tenant’s right to receive accumulated profits and earnings no matter in what form they may appear. But he is only entitled to receive them on a stock or cash dividend, a corporate liquidation, or a sale or distribution in kind, and then only to the extent that the intact value of principal is not impaired. Each individual share of stock possesses an intact value. Upon a sale or distribution of a portion of corporate stock held in a trust, the life tenant is entitled to receive his share of the accumulated profits and earnings upon that portion of the stock which may be sold or distributed.
No formula can be prescribed to fix with mathematical accuracy the amount due a life tenant upon an apportionment. Bemaindermen are not entitled to an enhancement in value which is occasioned or reflected by such accumulations, and which would have passed to the life tenant had they been distributed. It is the application of the rule which is so frequently difficult. But difficulty in application is no reason for discarding a just and equitable rule. The intact value of the shares as of the date of the death of testator must first be ascertained. It must then be determined what, if any, accumulated profits and income existed as of the date of the merger. An ascertainment is necessary as to how accu *70 mulations of profits and income, if any, affected or were reflected in the value of the stock received in the exchange or merger. On the sale or distribution of any portion of the exchanged stock, the life tenant is entitled to receive whatever income was thus accumulated and withheld from him, less .any amount necessary to preserve the intact value of the principal. This problem is largely in the mathematical, accounting or actuarial field, which should be brought to judicial aid in determining the correct figures in the apportionment.
The decree of the court below is affirmed in part and reversed in part and the record remitted to make an apportionment of the proceeds of the stock which has been sold, in accordance with this opinion. Costs to be paid out of the corpus.
Dissenting Opinion
Dissenting Opinion by
If the dictum in
King Estate,
The presently applicable rule has to do with the allocation (not apportionment) between corpus and income of securities received by a fiduciary stockholder in exchange for its former holdings as the result of a merger of the issuing corporation with wholly owned subsidiaries where the securities so received in exchange did not embrace any shares representing a distribution of earnings or profits but some of them did extinguish on a quid pro quo contractual basis accumulated and unpaid dividends on old preferred stock exchanged for new preferred of equal par. In no sense does the case involve any distribution of earnings or profits by way of stock issuance or exchange. No such distribution was made either in furtherance of or as a result of the merger. The capital of the corporation was not changed nor was its surplus increased or decreased by so much as a penny.
So far as the rights of the stockholders of the old preferred shares (with their accumulated but unpaid dividends of $45.75 per share) were concerned, all that happened as a result of the merger was that for one share of old cumulative preferred stock, $100 par, the stockholders received in exchange one share, in the aggregate, (viz., one-half share Series A and one-half share Series B) 1 of new cumulative preferred stock, $100 par, and one and one-quarter shares of new, no par, common stoclc. The common stock so distributed to the preferred *72 stockholders did not represent either earned surplus set over to capital, or contributions of new capital, or an increase in the intrinsic value of capital assets. The incorporated worth ascribable to the additional common stock given in connection with the exchange of the preferred shares was contributed by the common stockholders of the corporation. By approving the plan of merger, they, i.e., common stockholders, permitted their interest in the equity in the corporation’s assets to be diminished by the issuance of an increased number of common shares of no par value whereof they received one share for each share of their old $100 par value common stock. The residue of the new no par common stock issue, after the exchange of the old $100 par common on a share for share basis, provided the block of new common that was given in the merger to the preferred stockholders in addition to (i.e., over and above) the cumulative preferred $100 par shares they received, share for share, in the exchange. 2 The common stock thus received by the stockholders on account of their *73 preferred was given in extinguishment of the unpaid accumulated dividends on the old preferred. And, that is precisely what the issuing corporation intended the merger to accomplish. That was its stated important effect. 3 The stock therefore represented payment of the accumulated preferred dividends to which the life tenant, as the income beneficiary, was, and still is, entitled. This Court directly so ruled in Fisher’s Estate, supra, where the contested securities were received in exchange under a plan of merger of the Crucible Steel Corporation which does not differ in any material respect from the merger plan here involved.
In the Crucible Steel merger, involved in Fisher’s Estate, supra, the additional stock received was four- *74 tenths of a share of new preferred on each share of old preferred exchanged and, just as in this case, the additional stock was contributed by the common stockholders of that company who, by approving the plan of merger, had permitted their equity (common stock) interest to be further subordinated by the issuance of the additional priority stock. As to that, Mr. Justice Parker appropriately pointed out (pp. 612-613) that “Here the values which form the basis for issuing 40% additional preferred stock were furnished by the common stockholders and were supplied for the purpose of discharging the arrearages in preferred dividends. . . . The additional values assigned to the preferred stock issue did not come from the corpus of the estate or affect it but were supplied by another class of stockholders [viz., common] for the purpose of paying the arrearages in dividends”. It was consonantly held (p. 612) that “As between life tenant and remaindermen the additional stock was in fact given in discharge of dividends and must be so treated(Emphasis above supplied). The learned Justice further aptly observed (p. 615) that “The intact value of cumulative preferred shares will ordinarily ... be the par value, if the capital is not impaired”. That means, and correctly so, that, upon an exchange of preferred shares for preferred shares on a share for share basis and both of the same par .value, no question of intact value of the preferred arises if the capital is not impaired. And, here, indisputably the capital was not impaired by the stock distribution. As I believe the above-quoted statements from FisheFs Estate correctly interpreted a situation identical with the one with which we are now concerned, I am compelled, to disagree with the ruling in the majority opinion that this is an' “apportionment” case and that “The exchange of stock, in the merger, was not in payment of defaulted accrued dividends on the preferred stock”.
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In the opinion on the former
(King Estate)
appeal,
Fisher’s Estate
was distinguished (p. 31) on the ground that “[that] case involved an accounting of the proceeds from the
sale of the stock
(p. 610). It was therefore quite proper to consider
there
all those matters that are alleged to be involved in this case. It would have been premature in that case to have considered such matters unless there had been a sale.” I respectfully submit that it was wholly immaterial to the decision in
Fisher’s Estate
that the preferred stock there received in the exchange (including the additional stock in extinction of the accumulated and unpaid cash dividends) was later sold and that the question of the life tenant’s right to the stock arose on the trustee’s accounting for the proceeds of the sale. Had none of the stock been sold, the question of the life tenant’s right to it would not have been premature and the decision would have been the same. As was stated in
Buist’s Estate,
It seems obvious that
a sale■
of securities received through exchange in a merger can not be made to determine the time when such of the securities as were given in discharge of accumulated dividend arrearages are allocable to the life tenant. A subsequent sale of securities, so received by a trustee, is an administrative matter occurring after the event which established the ownership. The rights of the parties are fixed at the time
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of tlie distribution, made pursuant to an approved merger. And, if a portion of the distributed securities are issued and received in discharge of a dividend arrearage liability, then they belong to the life tenant whether or not they have been converted:
McKeown’s Estate,
The rule as to apportionment laid down in
Earp’s Appeal,
Intact value is, prima facie, book value:
Baird’s Estate,
Incidentally, the trustee has already sold 1,000 shares of the new no par common stock received in the merger (part on its common stock exchange). Among those shares were the 972 ear-marked shares received in payment of the dividend arrearages on the old preferred stock. So that, there has been a sale if that were important. Hence, even under the majority opinion the time for the determination of the life tenant’s right *78 to the proceeds of the common (dividend) stock has arrived. If, however, the requirement of the majority opinion means that there must also he a sale of the preferred stock received in the exchange, no basis for the ruling is apparent. The sale price of the preferred (i.e., its market value at the time sold) would have no materiality in establishing its intact value after the exchange distribution. Market value is not evidence of intact value: see Baird’s Estate, supra, at p. 42.
There is one more matter which the trustee urgently presses upon us for decision. The life tenant objected to the trustee’s espousal of the remaindermen’s claim to the dividend stock. The learned court below ruled, correctly, I believe, that the trustee was but a stakeholder and therefore not permitted to take sides between the life tenant and the remaindermen: see
Buist’s Estate,
supra, at p. 542;
Thompson’s Estate,
Notes
The dividend rate on the old preferred was 7% and on the new preferred, 5%. The difference in the dividend rate could affect only ■ the income beneficiary and not the remaindermen. In fact,.the stock with the lower dividend rate, on which the dividends were paid currently, would likely have a higher market or asset value than- a stock with a higher dividend rate but, upon which, unpaid dividends. had accumulated for years. Also,, the Series B cumulative preferred stock was convertible, as well, which is equally immaterial.to.the., present inquiry.
The increase in the number of common shares under the merger without a change in the common stock capital is readily apparent from the following summary:
Capital Value
Before the Merger No. of Shares (Par)
Common stock ($100 par), outstanding, 576,320 $57,632,000.
Capital Value
After the Merger No. of Shares (Stated.)
Common stock (no par) issued with the exchange of the preferred stock, 733,920
Common stock (no par) issued in exchange for old common ($100 par), share for share, 576,320
$57,632,000.
In the case of the preferred, a total of 293,568 shares of 5% cumulative preferred stock, $100 par (Series A and B), were given in exchange for the 293,568 shares of old 7% cumulative preferred stock, $100 par, with a fixed capital value for tlie preferred stock both before eftd after tbe merger of $29,85(3,800,
From the letter of Jones & Laughlin Steel Corporation dated June 10, 1941, to its preferred and common stockholders recommending their approval of the plan of merger at the special stockholders’ meeting called for July 22, 1941, the following is taken:
“An important effect of the conversion of the present preferred stock is the removal of the present burden of accumulated dividends
“The Board of Directors of the Corporation after thorough study and consideration has come to the conclusion that it is both impracticable and unwise from the standpoint of the preferred shareholders, the common shareholders, and the Corporation as a whole, to attempt over any reasonable period of time to pay off in cash the total sum of the accumulations on the preferred stock. . . .
“Under the proposed plan the present preferred shareholders will not receive their accrued and unpaid dividends ... in cash, . . . However they will be compensated for their stock and accrued dividends as hereinafter set out.” (Emphasis supplied).
Then followed a statement of the shares of new preferred and common that each preferred stockholder would receive.
In the corporation’s Proxy Statement to its stockholders in connection with the special meeting of July 22,1941, it is stated that,—
“. . . Under the Plan of Merger, each share of the old preferred and all rights in respect thereof (including accrued but unpaid dividends) is converted into the new securities on the basis above outlined, thereby removing and eliminating the arrears of preferred dividends.” (Emphasis supplied).