CHAPTER XIII-DIVIDENDS/PURCHASE BY C OF SHARES Nielson & Co. v. LEPANTO CONSOLIDATED (1968) 1) In its MR before SC, LEPANTO that this Court erred in ordering Lepanto to issue and deliver to Nielson shares of stock together with fruits thereof. 2) In Our decision, We declared that pursuant to the modified agreement regarding the compensation of Nielson which provides, among others, that Nielson would receive 10% of any dividends declared and paid, when and as paid, Nielson should be paid 10% of the stock dividends declared by Lepanto during the period of extension of the contract. 3) It is not denied that on November 29, 1949, Lepanto declared stock dividends worth P1M and on August 22, 1950, it declared stock dividends worth P2M. In other words, during the period of extension Lepanto had declared stock dividends worth P3M. We held in Our decision that Nielson is entitled to receive 10% of the stock dividends declared, or shares of stocks, worth P300T at the par value of PO.10 per share. We ordered Lepanto to issue and deliver to Nielson those shares of stocks as well as all the fruits or dividends that accrued to said shares. 4)
Lepanto contends in its MR that: the payment to Nielson of stock dividends as compensation for its services under the management contract is a violation of the Corporation Law, and that it was not, and it could not be, the intention of Lepanto and Nielson-as contracting parties-that the services of Nielson should be paid in shares of stock taken out of stock dividends declared by Lepanto.
HELD: Under Section 16 of the Corporation Law stock dividends can not be issued to a person who is not a stockholder in payment of services rendered. And so, in the case at bar Nielson can not be paid in shares of stock which form part of the stock dividends of Lepanto for services it rendered under the management contract. We sustain the contention of Lepanto that the understanding between Lepanto and Nielson was simply to make the cash value of the stock dividends declared as the basis for determining the amount of compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the stock dividends declared. And this conclusion of Ours finds support in the record. RATIO: The term "dividend" both in the technical sense and its ordinary acceptation, is that part or portion of the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division among the holders of the capital stock. It means the fund actually set aside, and declared by the directors of the corporation as a dividends, and duly ordered by the director,
or by the stockholders at a corporate meeting, to be divided or distributed among the stockholders according to their respective interests. BERKS BROADCASTING CORP. v. Craumer (Pennsylvania, 1947) 1) C, now under the control of new SHs, sued to recover for its treasury the $13,000 w/c it alleged Defendants had unlawfully declared and paid out as dividends. 2) End of 1943- the balance sheet of the C showed assets in excess of the liabilities and the issued capital stock in the amount of $2,545. However, the existence of the alleged surplus depended on the inclusion in the assets of the “write-ups” of $26,000 (represented an unrealized appreciation in the value of the Plaintiff C’s fixed assets), w/c still remained on the balance sheets, for if that amount were eliminated, there would be a deficiency of $23,454. 3) Defendants (who are the incorporators and Directors) declared cash dividends of $13,000 based on the record sheet w/c included in the assets the “write-ups” of $26,000 (represented an unrealized appreciation in the value of the Plaintiff C’s fixed assets). 4)
Defendants sold their stocks.
5) C, now under the control of new SHs, sued to recover for its treasury the $13,000 w/c it alleged Defendants had unlawfully declared and paid out as dividends. HELD: Since the “write-ups” of $26,000 represented an unrealized appreciation in the value of the Plaintiff C’s fixed assets, their inclusion in determining the existence of a surplus from w/c dividends might be declared was unlawful and since, when eliminated, there would be, not a surplus, but a revealed deficiency in capital, it would follow that the C is now entitled to recover from these Defendants the amount improperly distributed by them as dividends. Lich v. US RUBBER CO. (US District Court, 1941) 1) Sophia Lich (a holder of non-cumulative preferred stocks of US RUBBER CO.) seeks to enjoin the payment of a dividend on the common stock declared in 1941 contending that: the established preference as to dividends to wit, priority of payment, extends not only to the current year of 1941, but to the prior years of 1935, 1936 and 1937, to the extent of the annual net earnings of the said year, and that dividends may not be paid on the common stock at this time until the dividends are paid to the PS for the years in question, either in full or in connection to the annual net earnings of the said years and that the arrearages must be paid in full
to the holders of the non-cumulative PS before there can be any payment of dividends on the CS even out of the current net profits. 2)
The certificate of PS states:
“The holders of First PS shall be entitled to receive semi-annually or quarterly all net earnings of the C determined and declared as dividends in each fiscal year..” 3) In each of the fiscal years of 1935, 1936, and 1937, the annual net earnings of the defendant C was positive. 4) In each of the said years, however, there was also a deficit respectively and a corresponding impairment of capital. 5) The deficit, representing the accrued losses of prior years, existed in 1934, and was carried over into the succeeding years, varying in each year only as to amount. 6) In each of said years, the annual net earnings were applied to deficit, thereby effecting substantial reductions. There were no dividends declared on either the PS or CS during the said fiscal years. 7) In 1941, the defendant C declared a dividend on both the PS and CS. This declaration of dividends, w/c is herein questioned, specifically contemplates the payment from the net profits of the current year and from no other fund. 8) During the said years, the C, despite the deficit, also maintained adequate reserves. These reserves were maintained both prior to and subsequent to the said period. HELD: In the years in question (1935, 1936, and 1937) no net profits to w/c the inchoate right to dividends, could have attached. There was in each of said years a substantial deficit w/c greatly exceeded the annual net earnings of the corresponding year, and, to the reduction of w/c the annual net earnings were applied. It is manifest therefore that the annual net earnings of each of the said years resulted, not in profits, but in a reduction of the deficit. There was in each of the said years no source from w/c dividends could have been paid lawfully; the payment of dividends under the circumstances would have been unlawful. C maintained in the years in question, adequate reserves for insurance, pensions, and contingencies. It does not appear, however, that the sum retained in this account was disproportionate or that it represented profits withheld from the non-cumulative PS (as was the fact in the Iron Pipe cases). It appears in the immediate case that the reserves are, and have been, maintained in accordance
with sound business policy. Therefore the right to maintain the reserves is not open to challenge. Keough v. ST PAUL MILK CO. (Mnessota, 1939) 1) 1936the C did not declare dividends in spite of the fact that there was an accumulated surplus (about $394T). 2) Keough, a minority SH, sued to have a declaration of cash dividends contending that: Those in charge of the corporate affairs are wrongfully and needlessly withholding profits available for cash dividend and conspiring to retain them for heir benefit and to the prejudice of the majority. HELD: It seems clear, in light of the facts, the C did not have a reasonable need to for the large surplus accumulated and held as bonds or other easily liquidated assets in December 1936. a) b) c) d)
The merchandise inventory was small with an almost daily cash turnover. There were no substantial obligations to be met. The evidence does not disclose any immediate expansion program. Accounts for obsolescence and depreciation were adequately set up.
Hence, the surplus was easily available for dividends if the directors so elected. The large surplus also existed at the time when the Ryans (BOD) were receiving salaries in excess of their worth and draining from the C cash otherwise available for dividends. Viewed in light of these facts, the spectacle takes on a distinct color of fraud and bad faith. Dodge v. FORD MOTOR CO. (Mich, 1919) 1) Dodge (SH) sued the FORD MOTOR Co. to declare dividends. 2) When plaintiffs made their complaint, and demand for further dividends the FORD MOTOR CO. had concluded its most prosperous year of business. The demand for cars at the price of the preceding year continued. 3) C declared no special dividend during the business year except the October 1915 dividend. 4) It had been the practice, under similar circumstances, to declare large dividends.
5)
HELD:
C justified the non-declaration of dividends on: a) a general plan for the expansion of the productive capacity of the concern (the erection of a smelter was considered and engineering and other data secured) b)
the policy of the C for a considerable time to annually reduce the selling price of cars, while improving their quality.
c)
the changes will permit the increased output WE are not persuaded that we should interfere with the discretion of the BOD.
Burk v. OTAWA GAS & ELECTRIC CO. (Kan, 1912) 1) Preferred SHs of OTAWA GAS & ELECTRIC CO sue the C for it to declare dividends. 2)
The Certificate of Preferred Stock provides: “The PS shall …preferred, non-cumulative dividend, payable semiannually…. out of the net profits of the preceding ..”
3)
C defense: The expenditure in question was for the extensions of the C’s plants
HELD:
Case remanded to the LC to ascertain facts necessary to protect the rights of the P SH. The Directors of the C owed a positive duty to pay a dividend to the P SHs whenever in any year there were net profits available. The funds that might be used for that purpose could not rightfully be expended for extensions merely for the benefit of the business, nor could they be withheld to meet the expenses of the next year. Since the only possible source of profit to the P SH from his investment is the distribution of earnings in the year in w/c they accrue, he has a right to insist that an accounting shall be taken annually, and that the surplus of one year, available for a dividend, shall not be carried over to meet a possible deficiency of the next.
McLaran v. CRESCENT PLANNING (SW, 1906) 1)
C being solvent and possessing ample funds, at a regular meeting of the BOD unanimously adopted a resolution: “Moved and seconded that the company declare a dividend of 6%. Divided into 4 payments of 1.5% each, payable Feb 15, April 1, July 1, and October 1, 1903.”
2)
C was $29,000 surplus.
3)
BOD failed to pass a resolution setting aside a fund for the said dividends.
4)
The 1.5% installment falling due on Feb1 was paid.
5)
However, the 1.5% installment falling due April 1 was not paid and at a meeting of the BOD (held on April 11) it was shown that an error had been discovered in the previous showing of the financial condition of the company and that its assets were actually $6,000 less than had been understood, w/c reduced its surplus from $29,000 to $23,000.
6)
Hence, the BOD issued a resolution (April 11): “…. recalling of dividends payable April 1, July 1, and October 1 be adopted, that payment of said dividends be indefinitely deferred and the said dividends rescinded and recalled.”
7)
C sought to revoke and rescind the former declaration of dividends. The C was perfectly solvent and had ample funds on hand at that time to pay the dividend and retain a comfortable surplus of $20,000.
8)
Plaintiff (McLaran is actually the administrator of the Plaintiff who died during the appeal) requested the payment of his installment of the dividend falling due April 1 but was refused on the ground that its declaration and allowance had been superseded and set aside by the resolution of April 11.
9)
Plaintiff sued C.
10)
Defense: a) there was no declaration of a dividend because the BOD failed at that time, or at any prior time to the institution of the suit, to set apart funds for the payment of the same.
b) April 11 BOD resolution set aside its former action and thereby rescinded and recalled the dividend. HELD: The right of SHs to be paid dividends vests as soon as the same has been lawfully declared by the BOD. From that time, it becomes a debt owing by the C to each stockholder and no revocation of the dividends can be made. RATIO: 1) If the declaration of the dividend is fairly and properly made, out of profits existing at the time it is declared, the relation of debtor and creditor is hereby established between the C and the SHs and a debt is hereby created against the C and in favor of the SH for the amount of the dividend due on the stock held by him. 2) By the mere declaration, the dividend becomes immediately fixed and absolute in the SH and from thenceforth the right of each individual SH is changed by the act of declaration from that of partner and part owner of the C property to a status absolutely adverse to every other SH and to the C itself, in so far as his pro rata proportion of the dividend is concerned. 3) It follows that a cash dividend, properly and fairly declared, cannot be revoked by the subsequent action of the C, for it, by the declaration of the dividend, the C becomes the debtor of the SH, it goes w/o saying that the debtor cannot revoke, recall or rescind the debt or otherwise absolve itself from its payment by any action on its part against or w/o the consent of the creditor, and therefore the resolution of April 11, attempting to do so, was of no force.
CHAPTER XIV-
AMENDMENTS TO CHARTER
Marcus v. RH MACY CO. INC. (NY, 1947) 1) Marcus is a registered owner of 50 Common Stocks of RH MACY CO. INC. 2) RH MACY CO. INC. gave formal notice to its SHs that among other matters to be acted upon its annual meeting would be a proposal recommended by the BOD that its certificate of incorporation be so amended as to add to the rights of PS voting rights, equal share or share to those w/c the holders of the C’s Common Stocks are entitled. 3)
Prior to the annual meeting, Marcus sent a written notice to the C that as a Common stockholder that: a) she objected to the proposed amendment of the certificate of incorporation b) demanded payment for the Common Stocks owned by her
4)
The proposal was approved by the SHs w/ Marcus voting against.
5)
Marcus instituted a suit to determine the value of her stock as a basis for the enforcement of payment therefore.
6)
Defense: Marcus application was not made in good faith since the effect of the amendment on her was trivial because she only owns 50 Common Stocks (out of 1,656,000 shares of common stock).
HELD: An alteration or limitation on the voting power of the Common Shares held by Marcus- when considered w/ the facts that she gave to the C formal written notice of her objection to the proposed amendment to the C’s charter w/ a demand for payment of her stock, and thereafter caused her shares to be voted against that amendment at the annual meeting- was sufficient to qualify her to invoke the statutory procedure upon w/c the present proceeding is based. By thus limiting the voting power of Marcus’ common shares to a proportionate extent measured at a given time by the number of Preferred Shares then issued and outstanding, the C action to w/c Marcus objected was of such a character as to afford her a legal basis to invoke a procedure prescribed by law as a means to accomplish the appraisal of her stock and payment therefore.
HELD 2: As to the argument of C, it is enough to say that the legislature has clearly prescribed the conditions under w/c a nonconsenting SH may have hi stock evaluated and enforce payment therefore. We find in those conditions no legislative declaration of a minimum percentage or value of stock w/c must be owned by a nonconsenting SH to qualify him to invoke the prescribed statutory procedure. PHILIPPINE TRUST CO. v. Rivera (1923) 1) PHILIPPINE TRUST CO. (as assignee in insolvency of the CCOOPERATIVE NAVAL FILIPINA) sued Rivera for the purpose of recovering a balance of P22,500 alleged to be due upon his subscription to the capital stock of said insolvent C. 2) COOPERATIVE NAVAL FILIPINA has a capital f P100,000 divided into 1,000 shares of a par value of P100/share. 3) Rivera subscribed for 450 shares (P45,000) and paid only half of it (P22,500). 4) C became insolvent and went into the hands of PHILIPPINE TRUST CO. 5) PHILIPPINE TRUST CO sued Rivera to recover ½ of his stock subscription (P22,500). 6)
Rivera’s Defense: Not long after the COOPERATIVE NAVAL FILIPINA had been incorporated, a meeting of its SHs occurred, at w/c a resolution was adopted that the capital should be reduced by 50% and the subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50% of the same.
7) LC made a finding that the formalities of the Corporation Law relative to the reduction of capital stock in Cs were not observed, and it does not appear that any certificate was at any time filed in the Bureau of Commerce, showing such reduction. HELD: In the case before us, the resolution releasing the shareholders from their obligation to pay 50% of their respective subscriptions was an attempted withdrawal of so much capital from the fund upon w/c the C’s creditors are entitled ultimately to rely and, having been effected w/o compliance w/ the statutory requirements, was wholly ineffectual RATIO: It is the established doctrine that subscriptions to the capital of a C constitute a fund to w/c creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the payment of its debt (Velasco v Poizat). A C has no power to release an original subscriber to its capital stock form the obligation of paying his shares, w/o a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the AOI. Moreover, strict compliance w/ the statutory regulation is necessary. [Campos Note: Did the Court imply that if the statutory requirements had been complied with (i.e. SH’s meeting, 2/3 vote, and filling of certificate), the reduction would have been valid even if the creditors were prejudiced? Whether under the well-settled principles of corporation law or under the express provision of Section 38, this implication cannot be legally supported.]
