Evening star. [volume] (Washington, D.C.) 1854-1972, 1930-01-09
PREFERRED STOCK .
STATUS IS DEFINED
Non-CumuIative Issues Do
Not Carry PropHetorship
in Earnings.
BY CHARLES F. sPEARE.


NEW YORK, January 9-Again the
legal verdict is that the holder of
non-cumulative preferred stock has no
proprietorship over earnings of COM
pany that may not have been paid to
him within the period of regular divi-
dends. This opinion has been pro-
nounced by the United States Supreme
Court in the case affecting back divi-
dends on Wabash Railroad preferred
"A" shares and, in substance, it follows
the decisions of other courts in similar
situations.
One of the latter was that created by
the holders of the per cent preferred
stock of the Southern Railway who car
ried on a long and bitter contest with
the management of that road to compel
them to disgorge $29, 000, 900 of accumu-
lated dividends which, they argued,
rightfully belonged to them. Their
claims were not sustained by the lower
courts and after long legal siege on
the Southern Railway the preferred
shareholders capitulated.
Concession Granted.
They did not lose, however, the en-
tire moral value of their fight, which
dealt with the period from July /. 1895,
to June, 1925, for they we're subse-
quently given the privilege of, sub
scribing, with common stockholders, for
new issue of $10,000,000 of common
stock on the same basis as holders of
the junior shares.
The position Of the owners of a non
cumulative preferred stock frequently
has been an aggravating one, where
holders of junior securities have been
allowed to skim the cream from the re-
turns of a property which the senior
shareholder felt he had done most to
develop. The courts, however, have
been unfriendly to every effort on his
part to get more than was nominated
in the bond" One of the historical
cases Of this sort was that presented a
quarter of century ago by the Union
Pacific per cent shareholders, and, like
all of the others, lost.
There is also a similarity in the atti-
tude of the non-cumulative preferred
shareholder to the holder of the adj
lustment or income bonds, whose in
terest payment has frequently been
made question of management policy
toward applying earnings for capital
improvements rather than following
what might be considered the strict APP
plication of these earnings to interest
numerous legal contentious without a
very high score of victory on the part
of the adjustment bondholder.
The decision just handed down by the
United States Supreme Court in the
Wabash preferred A stock case was
written by Justice Holmes. It leaves
little room for future contests by other
preferred shareholders with similar
grievances. 1t also may have a tendency
- H. -
who buy preferred stocks rather than
common stocks or bonds. for it clearly
indicates that the holder of senior
shares is not entitled to anything more
than the rate stipulated in the contract
drawn up by the company. In order to
make their preferred shares more at
tractive, corporations. more in the past
than at present. made them cumulative,
so that back dividends on the senior
issue had to be paid up before the
junior shares had any claim on earn
ings. This provision, like the sinking
fund bonds, has frequently led to the
commitment Of companies to liability
which in hard times they found difficult
to meet. So there are today con-
siderable number of industrial COM
panies particularly that have been
struggling for years to repay the divi-
dends on their preferred stocks that had
10 De suspended during perioo VI pusl-
ness reaction.
Status Is Declared.
The paragraph in the decision OF Jus
tice Holmes which establishes the status
OF the non-cumulative preferred stock
holder follows:
we believe that 1t has been the COM
mon understanding of lawyers and bust
ness men that in the case of nom
cumulative stock entitled only to divi-
dend If declared out of annual profits,
If those profits are justifiably applied
by the directors to capital Improvements
ard no dividend is declared within
year, the claim for that year is gone
and cannot be asserted at later date"