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161 Hay vs.

38 Wn.2d 513
May 1, 1951

Topic: Preferred Stocks Author:

Carrillo, G.A.

The Big Bend Land Company (hereinafter The Corporation) is engaged in real
estate, financing and trading. Upon the early stages of its operations its
capital stock consisted entirely of common stock, but its Articles of
Incorporation was amended:

1) The stock of the corporation was divided into two: A) common stock and B)
preferred stock;
2) In the event dissolution of The Corporation, the holders of the preferred stock
shall be entitled to be paid in full before any sum shall be paid to the holders
of common stock.

The Corporation was dissolved. There are no surplus profits with which to pay
the accumulated dividends. There are substantial assets on hand, but only
enough if they will be applied to pay the dividends of the preferred
stockholders - to the effect that the common stockholders will get no part of
such assets.

Common stockholders argued:

Before there can be a dividend, there must be surplus profits. Since there is
none, no right to such dividends ever accrued and therefore none are

Preferred stock holders argued:

It is authorized by the amendment that the accumulated and unpaid
dividends be paid out of assets regardless if there be no surplus profits

The case was brought before the court to secure a declaratory judgment
because there is confusion as to who is entitled to the remaining assets.

During liquidation and there being no profit, are the preferred stockholders
entitled to dividends from the corporates assets before the common
stockholders are entitled to dividends.

Yes. The inclusion of the provision unpaid dividends accrued granted
exclusively to preferred stockholders is precisely to highlight their advantage
over holders of the common stock. The provision is designed to govern their
rights in the event of a business disaster resulting in a voluntary or
compulsory dissolution of a corporation.
The words `unpaid' and `accrued' modify the word `dividends'. The Court
ruled that the holders of preferred stock are entitled both to the par value of
their stock and to dividends which have not been declared or paid but which
would have been declared and paid if there had been surplus or net profits of
the corporation.

The Preference Clause is designed as the key for the distribution of the
assets of the firm in dissolution, and is not an agreement for the distribution
of profits or surplus. Viewed from this standpoint, it would seem that that
clause `unpaid dividends accrued' would permit of but one interpretation, and
that, to give preference regardless of any considerations of profits or surplus.

The preferred stock holders are entitled under the provisions of the amended
AOI to receive a sum equal to all accrued unpaid dividends as well as the par
value of their cumulative preferred stock in the liquidation of this corporation
before holders of common stock shall be entitled to be paid.