The Republican journal. [volume] (Belfast, Me.) 1829-current, 1885-08-27

such as are applicable to dividends. In gen.
eral sense, net earnings are the gross receipts
less the expenses of operating the road to earn
such receipts. But several kinds of charges
must first come out of net earnings before
dividend. are declared. The creditor comes In
for consideration before the stakeholder. The
property of a corporation is trust fund pledg-
ed for the payment of its debts. Therefore, il
there is bonded, funded, permanent or stand
ing debt the interest on it must be reckoued
out OF net earnings. If there is floating debt,
which it Is not wise and prudent to place in the
form OF a funded debt, or to postpone for later
payment, that should also be paid. If the
financial situation Of the company is such as to
render 1t eXpedient to commence or continue
the scheme of a sinking fund for the extin-
guisbment of the company's Indebtedness some
day or other, an annual contribution out of the
net earnings for that purpose would be reason
able. These deductions made from the net
earnings, the balance will be the profits of the
company distributable among stockholders. In
Pierce on Railroads 1885, it is said: ''rhe divi-
bends on preferred stock are payable only out
OF net earnings which are applicable to the pay
ment of dividends; and the interest on the
bonded or other interest-bearing debt, even
though contracted after the issue of the prefer
red stock, and the rent upon leases made after
the issue thereof, should be first paid" The
definition of net earnings, above given. is sup
ported BY the authorities. Chaffee V. Railroad,
supra, and cases cited Taft V. Railroad. r.
/. $40. st. John V. Erie Railway Co.. 10
Batch. 2.l. S. q. % Wall 1876. Union Pac.
X. K. V. United States, 80 U. S. 400.
But 1t does not necessarily follow that debts
should be first wholly paid, before declaration
OF dividends. merely because they are of
floating character. 1t may be that it would be
reasonable and proper to convert such iabili-
ties INTO a funded debt. Nor does it follow
that all of the income of road NAV not be
needed for the payment of its funded or stand
ing debt. All depends upon the financial re-
sources and abilities of the corporation and the
prospects of its road. Where it can be safely
done, considering the interests of the COM
pany's creditors and of all persons concerned,
the general practice of railroads has been to in
cude with expenses chargeable to capital those
which are incurred in the original construction
OF the road. And the courts have admitted
the reasonabeness Of the rule. The idea is
that the capital paid in and the capital borrow
ed unitedly preIuce the earnings, and that
share of the same should be accorded to each
The distinction between expenses for con
struction and ordinary expenses is maintained
IL the leading catts. See cases Supra. Cory v.
Rsiiway Co., % Beav. 1858 Bouch V. Railway
Co., L. r. Elk. Div. 1873. Mills V. Northern H.
Co., l.. X. Oh. App. 621. Pierce II. r.. 1875.
and cases in notes. In the case last cited mills
Y; Railway Coz, Lord Hatherly, L. G., said
MIR. Dickinson started a very curious theory.
which, | apprehend, never found its way into
any mercantile arrangement-that there never
can be any available income, or any profit, so
long as there is any debt remaining unpaid If
that be SO, ] suppose there is hardly railway
in the kingdom which could pay any dividends
at all to their stockholders" The whole
scheme of railway arrangements, as under
stand them. has always been this that the com
panies are authorized to raise part of their
capital by shares, and to raise further capital
by means of borrowing to the amount of one
third of the whole capital"
In the case before us the company has no or
binary expenses beyond small sum necessary
TO support It's organization. What sum then
snail be taken from its earnings TO be paid to or
be sci aside for its creditors? One side saws.
all Its earnings: and the other side saws set
aside annually a sum which with accommodations
VIII insure the payment of all the corporate
Indebtedness by 1920, the date of the end of the
lease.
As general rule, the officers of corporation
are the sole judges as to the prop iety of de-
caring dividends, and the courts will not inter
1ere With proper exercise of their discretion.
The company usually establishes its financial
policy for itself. Yet when the right to a eiyi-
dend Is clear, and there are funds from which
1t can properly be made, a court of equity will
interfere to compel the company to declare it,
Directors are not allowed to use their power
illegally, Wantony or oppreSsvelv. See cases
supra. Also Wiiston V. Railroad Co.. 10 Allen
400: Boardman V. Railroad, 81 n. Y. l51. Jer-
main V. Railroad, 81 n. Y. 1873. In the present
case we are by ali the parties invited to accept
jurisdiction; the facts are agreed and all tech
nlchiltles are waived. We NAV adopt such
standard of judgment, in determining the ques-
ton as we think would and should regulate the
exercise OF me sound discretion of directors,
acting in good faith. in deciding the same cues
ton. Barnard V. Railroad, Allen 512, sci
Two factS are very much relied upon by the
preferred stockholders as favoring their con
tentlon. One is an amendment to the 18th bv-
law, passed by the corporation in july. 1879.
which Is this: The words met earnings as
used in this section (by-law), shall he construed
10 mean all the surplus remaining after the
payment of the necessary incidental charges
and expenses, the interest on the mortgage and
funded debt, and such provision for payment
OF the maturing obligations of the CORPORATION
as III the Judgment OF the directors NAV be
necessary; and for this latter purpose the d.
rectors shall establish sinking fund. TO be
maintained in such form and manner as thev
may deem Tor the best interest and safety of the
corporation" This in 1882 was repealed.
The other fact is, that when the subscribers
Tor preferred stock. not including the city of
Belfast. paid their subscriptions, not being I'M
der strict legal obligation TO do so, they were
induced 10 make the payment, by the corpora
ton securing to them semi-annual six per cent.
dividends, and the final payment of their stock
by means of bonds With coupons. covered bv a
second mortgage on the road (which bonds and
coupons We're taken collateral to the stock
and dividends. This mortgage was however
afterwards cancelled for prudential reasons and
with the consent of all parties interested.
Inc counsel for the city contends that those
proceedings, afterwards annueu, are TO have
no more effect upon the present question than
II never existing. we do not concur in that
position fully. We think as admissions, as
expressions Of a policy inaugurated and for
long time acted upon by the company they
serve to impress upon the claim of the prefer
red stockholders at least an appearance of
equity.
After full consideration of all the evidence
and theories presented to US, we incline to the
conclusion that the directors would be justified
In refusing to make any further dividends,
until enough money has been accumulated
from the rent and the sinking fund, to pay the
note to the city of Belfast. When the company
receives from its lessee the rent due In MAY,
1870, 1t VIII have money enough with which to
pay the note. and few thousands more
There are quite significant reasons for draw
ing line at the point indicated. The note
may well be considered as given for temporary
purposes, in anticipation of rents receivable
The company really has no credit which would
enable 1t TO renew the note, inasmuch as its
outstanding mortgage covers all its property.
1t looks as if the note represents sort of
forced loan from the City, and as given for
money that could not have been obtained from
any other source, the city borrowing it for the
| purpose OF loaning it, being induced to do so
on account of her immense interests involved
as shareholder. She now asks for her money!
being unwilling to renew the note, and she is
entitled to its payment. The corporation
would lind it difficult to borrow it elsewhere.
1t would look like borrowing money to paw
dividends.
There are much more forcible reasons for
the corporation to hold its moneyed resources
in reserve until the note to the city is paid than
there are for afterwards continuing the same
policy until the debt of $50 900, due in 1890. is
paid The two debts stand upon different
| footing. The latter is bonded mortgage debt
| no part of which is DUE and which undoubted-
y can be wholly or partially renewed when it
becomes due. 1t fairly represents Il part Of
the original cost of constructing the road The
| company has thirtytive years or more of
assured rent with which it can pay the amount
1t has no other debt, after paying the note to
the city, present CT prospective. 1t has evident
! ly regarded that amount as permanent or
standing, interest-bearing Indebtedness To
| renew the mortgage or a portion of it. when 1t
becomes due, we think would be regarded in a
mercantile sense as reasonable, safe and con-
| servatve calculation. The preferred stock
holders were to have sem-annual dividends,
if earned. They should have them. if they can
be declared without the least peril to the
company or any of its creditors Belfast her.
| self owns all the preferred stock but about
100000, there being over $3S0,000 of it in all.
| We think that, after the note is paid, the
directors may well make some reasonable pro-
vision for the final eXtingushment of the mort
gage debt by reserving therefor a portion of
the rent to be received under the lease, and
| divide the balance among stockholders.
scheme could be perfected by an expert in
such matters, by which there may be a yearly
contribution to sinking fund, which, with its
1 49,.