184 N.Y. 257 | NY | 1906
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *259
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *260 From the foregoing facts, which the parties have stipulated as resuming the whole situation, it is apparent that our consideration of this appeal is, in no degree, embarrassed by any question of the power of the directors to increase the capitalization of this company in 1898, or to reduce it in 1904. In each case, we may assume, it was duly and legally effected and the only question is whether when, subsequently to the reduction of the capital stock in June, 1904, a distribution of the surplus profits was declared, the plaintiff, as a preferred stockholder, was entitled to be paid for arrears of dividends, payable during the years prior to the reduction, upon the 167 shares of preferred stock, of which she was then the actual holder, or upon the 250 shares of which she had previously been the holder.
When, in 1898, the capital stock was increased to 3,000 shares, or $300,000, the plaintiff became the holder of 250 shares of preferred stock and she received the six per cent dividends thereon down to July 1st, 1901. From that time down to June, 1904, the company made no surplus profits from its business; the capital had become impaired to the extent of upwards of $90,000 and no dividends had been declared to its stockholders. A reduction of the capital stock being then resolved upon, it was accomplished, so as to establish it at its former amount of 2,000 shares, or $200,000. Thereafter, the business prospered; so that, in the following six months, the earnings had so increased as to show a surplus of profits accumulated in the corporate treasury and the directors resolved to distribute them by way of a dividend. By their resolution, a payment was to be made of "the amount due to the preferred stockholders in full of dividends and accrued interest thereon to December 1, 1904, upon the *263 $50,000 preferred stock of this company," etc., and a further dividend of one per cent was declared upon the common stock. The payment to the preferred stockholders, however, as to arrears of dividends being made upon the number of shares as reduced, the complaint of this appellant, in effect, is that the defendant has measured its obligation to its preferred stockholders, with respect to the past, by the amount of their present holdings; whereas its obligation upon that much of the preferred stock, which had been theirs prior to the reduction of the capital stock, had never been fulfilled, nor released.
In the charter and in the certificates issued to the preferred stockholders, it was stated, most explicitly, what was the nature of the preference, which was accorded to that class of stockholders; namely, to be paid "out of the surplus profits arising from the business of the corporation * * * a dividend equal to six per cent per annum on the preferred stock, payable in equal semi-annual payments, before any dividend shall be paid on the common stock; such dividend on the preferred stock shall be cumulative and in case of non-payment shall bear interest at the rate of six per cent per annum from the date when payable." This was a valid contract between the company and the preferred stockholders, which was binding upon all other stockholders. (Kent v. Quicksilver Mining Co.,
The preferred stockholders, as the result of the reduction of capital stock, would hold a less number of shares; but they would still be creditors for the arrears of dividends due by *265 the company on the shares of preferred stock, which they had previously held. They may not have been creditors of the corporation, in a technical sense; but, as between themselves and other stockholders, they were as creditors, with demands to be fully paid certain arrears of dividends before any of the surplus profits should be appropriated to a dividend upon the common stock. The common stockholders held their shares of stock subject to that prior charge upon the net earnings. No acts of theirs could destroy that right and it, of course, in no wise, depended upon any declaration of the board of directors. Directors have a wide discretion in the management of the corporate affairs and their declaration of a dividend from surplus assets, when honestly exercised, will not be interfered with by the courts; but that does not mean that they have the power to discriminate in the division of the surplus to the impairment of any prior right thereto.
When the defendant's directors met, in December, 1904, to act upon the question of dividends, their duty was, in dividing the surplus profits, to apply them, in first order, to the satisfaction of the debt to the preferred stockholders for arrears of dividends on the whole number of their shares, which were outstanding during the three years prior to July, 1904, before the capital stock was reduced. For the purpose of such a dividend, however, only such surplus as represented the profits of the business could, legally, be availed of, and this brings us to consider the question of the disposition of the surplus of capital, left upon the reduction of the capital stock, which the appellant claims to be equivalent to surplus profits and, hence, to be applicable upon the company's debt to the preferred stockholders for arrears of dividends. As it has been stated, the capital of the defendant had become impaired, by June, 1904, to the extent of $90,861.85, and this necessitated the reduction as then effected. The reduction to $200,000, thus, left the sum of $9,138.15, which was an excess, or surplus, of capital. Whether it consisted in funds, or in property, we are not informed and it is not material to our consideration. We may assume that the directors could *266
have converted it into cash and have distributed it by way of dividends; but the preferential right of the preferred stockholders did not reach to a distribution of that which was capital, nor create any charge upon capital. That which constitutes the capital stock of a corporation belongs to all of its stockholders, proportionately to their holdings. It is divided into shares and each share represents the holder's proportionate interest. (Jermain v. L.S. M.S.R. Co.,
*267
(
I have, therefore, reached the conclusion as to this surplus of capital, left on hand after the reduction of the capital stock from $300,000 to $200,000, that it was not applicable to the claim of the preferred stockholders for the arrears of unpaid dividends. I am, equally, clear in the conclusion that, in making the distribution of the surplus profits arising from the conduct of the business, the directors were obliged to apply them, in first order, towards the satisfaction of all claims, which the preferred stockholders, at any time, held against the company, based upon arrears of unpaid dividends and the stipulated interest accrued thereon. Such was the express obligation of the corporation; which, so far as the record shows, has never been discharged or released.
I advise the reversal of the judgment appealed from and that the plaintiff appellant have judgment against the defendant respondent entitling her to be paid, from the surplus profits arising from the corporate business, the annual dividends of six per cent per annum in arrears upon her 250 shares, or $25,000, of preferred stock up to June 25th, 1904, and on her 167 shares, or $16,700, of such stock thereafter, with interest at the rate of six per cent per annum from the date *268 when each dividend was payable until the date of payment, before any dividend is paid upon the common stock, with costs to the appellant in both courts.
CULLEN, Ch. J., HAIGHT, VANN, WILLARD BARTLETT and CHASE, JJ., concur; EDWARD T. BARTLETT, J., dissents.
Judgment accordingly.