Hay v.
Hay o (b) corp may, from time to timeredeem the whole/part of its
38 Wn. 2d 513 / May 1, 1951/ Donworth, J./FINANCING THE CORP/FVARGAS
NATURE Appeal
PETITIONERS Raymond M. Hay
RESPONDENTS Edward T. Hay
SUMMARY. When the corporation was being liquidated due to its
dissolution, an issue arose as to the rights of preferred shareholders to
dividends. Under BBLCs amended AoI, it was agreed that the preferred
stockholders (SHs) should receive the par value of their stock plus an
amount equal to all accrued unpaid dividends thereon before any assets
should be distributed to common SHs. The Ct construed such amendment
and said that dividends, if not regularly paid out of available earnings, may
be amassed or stored up, whether earned/not, at the regular dividend
dates, and attach to the shares of such stock until conditions arise when
they may be declared and paid. The appellees argued that such preference
does not apply in case of the dissolution of a corporation.
DOCTRINE. They differentiated a going-concern corp and a corp in
liquidation and said that Art VI (d) involves the latter case hence Rem. Rev.
Stat. Sec. 3823 (which prohibits the declaration of dividends out of capital)
inapplicable. It also differentiated preferred and common SHs and
preferred stockholders.
FACTS.
Background
Big Bend Land Co (BBLC) was created in 1901 by brothers M.E. Hay
and E.T. Hay with W.W. Ashley. (A/N: ET Hay is the father of respondent
Edward. Edward inherited his dads shares. Raymond is one of M.E.
Hays children). The corporation was to conduct a general real-estate
business, borrow and loan money, operate farms, and buy and sell
goods, wares, and merchandise. It later adopted the mercantile
business of the bros.
The liquidating trustees of The Big Bend Land Company, instituted this
action to secure a declaratory judgment construing Article VI of its
amended articles of incorporation.
Prior to Dec. 27, 1921, the capital stock of BBLC consisted entirely of
common stock. Its articles were then amended on said date to read as
ff (non verbatim):
Art VI: The amount of capital stock..is $1.5M divided into 15k shares of
the par value of $100 each. The stock of this corporation is divided into
2 classes: a) common stock (85k shares, 100 ea); and preferred stock
(6.5k shares, $100 ea). The ff are the character/conditions/limitations
imposed on the shares (essence: preferred before common):
o (a) the holders of the preferred stock shall be entitled to
receivecumulative dividends from the date of issuance of
said preferred stock at the rate of 6% per annum and no more,
payable out of the surplus profits of this corpbefore any
dividend shall be paid or set apart for the common stocks.
preferred stock on any annual dividend date by paying
$101.50/share, and all accrued unpaid dividends thereon at the
date fixed for such redemption
o (c) out of the surplus profit remaining after the payment of full
dividends on the preferred stock for all previous dividend
periods and after full dividends thereon shall have been
declared and paid in full, dividends may be declared upon the
common stock
o (d) in the event of any liquidation, dissolution, or winding up of
the corp the holders of the preferred stock shall be entitled to
be paid in full the par value thereof, and all accrued unpaid
dividends thereon before any sum shall be paid to any assets
distributed among holders of the common stock
While the corp acquired a large amount of real estate, it had no surplus
profits out of which any dividends on either common/preferred stock
could be declared. So they did a survey of the corporate financial
structure and the Board of trustees ended up adopting a resolution
which would reduce the capital assets to cash so that they can
liquidate, distribute, and dissolve the corp. It was found that if the
preferred SHs receive their promised dividends, assets instead of
surplus profits will be used which would result to common SHs not
getting any part of such assets. This caused the liquidating trustees of
the Big Bend Land Co. to institute the said a declaratory judgment to
construe Art VI of its amended Articles of Incorporation.
Trial court rendered a decision in favor of the preference for the holders
of preferred stocks. The defendant Edward T. Hay, individually and as
administrator of the estate of Fayette H. Imhoff (his sister), deceased,
= appealed.
Note: There are NO corporate creditors involved!!! (if there were, sila muna
babayaran). The holders of the preferred stock have received from the
liquidating trustees the par value thereof. No dividends on the cumulative
preferred stock have ever been declared or paid. No surplus profits are
available with which to pay the accumulated dividends. There is a
substantial number of assets on hand, but they would all be absorbed if
they should be applied in payment of accrued dividends on the preferred
stock.
ISSUES & RATIO.
1. Whether the holders of cumulative preferred stock upon
liquidation of the corporation are entitled to be paid accrued
dividends from the corporate assets before the common
stockholders are entitled to participate in the distribution
thereof, the corporation having no earned surplus or net
profits YES
The distribution of dividends to preferred shares first is
authorized by the Articles of the corporation.
Apellant Edward: all accrued unpaid dividends (in
paragraph D of Art VI of articles) means that before there can be a
dividend, there must be surplus profits, and that since none has
ever existed, the right to such dividends never accrued, and
therefore none are payable.
The minority opinion in Pennington case states that, its hard to
see any correlation between going concern and in liquidation, or
why the interpretation of dividends; in the going-concern clause
should concern dividends in the liquidation clause. Investors place
their money in cumulative preferred stock cos it has a guaranteed
dividend and certain preferences as set forth in the stock
agreement. If the agreement gives preferences as to dividends in
liquidation proceedings, the stock would normally be considered as
a better business risk. (ie. No diff between going concern and in
liquidation so dapat bawal either way)
Respondent Raymond: (a) (b) (c) Art VI deals with payment of
dividends to preferred SHs out of surplus profits while the corps is
a going concern (d) on the other hand, authorizes payment of
accumulated and unpaid dividends out of assets upon liquidation of
the corporation even though theres no surplus profits available (no
impairment of capital means no point in restricting payment of
dividends to the surplus profits).
Ct: First, the articles dont contain any condition that the surplus
profits must be equal to or greater than the total of all accrued
unpaid dividends before such distributions made. They were
contracting re: future liquidation which doesnt fall under
the statutory prohibition against declaration of dividends
out of capital.
Second, Edwards contention that theres an implied condition
(applicable only on a going concern) is contrary to the concept of
the law of corporations. Theres a diff between a corp which is a
going concern and one which is in liquidation. While it's true that
no dividends can be declared by a corporation in financial
distress/destitute of surplus or net profits, there is an
express provision in this case which precisely governs such
a situation (ie. Art VI (d)).
Unpaid dividends accrued: unpaid and accrued modify available again)
dividends. This means that dividends, if not regularly paid out of
available earnings, may be amassed or stored up, whether
earned/not, at the regular dividend dates, and attach to the shares
of such stock until conditions arise when they may be declared and
paid. These conditions may never arise. In this case, the Ct finds
that the holders of preferred stock are entitled both to the par value
of their stock and to dividends which havent been declared or paid
(but wouldve had there been surplus or net profits).
J. GLADY DISSENTS
Schools of thought:
1. A dividend can come into being and exist only by affirmative
declaration of the corps trustees, and then only if the corp has on
hand surplus net profits. If they dont have that surplus, the right to
a dividend never accrued, hence same cant be demanded out of
the capital account on liquidation. What he believes is the right
one.
2. Dividends, if not regularly paid out of available earnings,
may be amassed or stored up, whether earned/not, at regular
dividend dates, and in the absence of a controlling statute, may be
paid out of assets when the corpns liquidated if the AoI provides.
What majority followed.
J. Glady essentially states that the cases used by the Majority as
basis for the decision arent applicable here because there, the cts
werent guided by a statute like Rem Rev Stat Sec 3823. Such
statute contains 2 inhibitions: (1) against making any dividend,
except from net profits arising from the business (relates to making
dividends); (2) against any division, withdrawal or payment to the
SHs of any part of the capital stock of the corpn (relates to dividing
assets of the corp). The subjects of the 2 inhibitions are unrelated.
He also differentiated the preferred SHs and common SHs in this
particular case:
Preferred Common
Loaned money to corp/bought shares and then Own the capital stoc
received the shares
Couldve received dividends from the same source Couldve received di
but on an annual percentage basis made by the trus
secondary to preferr
If at end of year net profits hadnt been earned out He wouldnt necess
of which the dividends couldve been made in though there might b
whole/part, he would have a preference (hed be
entitled to dividends as soon as net profits are
He emphasized that a dividend can NEVER be derived out of assets
and that its only source is net profits. He also said that a dissolution
only involves the division of assets among SHs.