Source: https://supreme.justia.com/cases/federal/us/136/549/
Timestamp: 2019-04-23 09:57:05+00:00

Document:
Under a will bequeathing stock in a corporation and government bonds in trust to pay "the dividends of said stock and the interest of said bonds as they accrue" to a daughter of the testator "during her lifetime, without percentage of commission or diminution of principal," and directing that upon her death, "the said stocks, bonds and income shall revert to the estate" of the trustee, "without encumbrance or impeachment of waste," a stock dividend declared by a corporation which from time to time, before and after the death of the testator, has invested accumulated earnings in its permanent works and plant, and which, since his death, has been authorized by statute to increase its capital stock, is an accretion to capital, and the income thereof only is payable to the tenant for life.
This was a bill in equity by Mary Ann Gibbons against Jane Owen Mahon to compel the transfer to the plaintiff of shares in the Washington Gaslight Company held by the defendant as trustee under the will of Ann W. Smith. The case was heard upon bill and answer by which, and by thee acts of Congress concerning that company, the facts appeared to be as follows.
part of my said estate, to have and to hold the same in and upon the trusts and provisions following, that is to say, in trust for the advantage and behoof of my said daughter, Mary Ann Gibbons, and that after my decease the said Jane Owen Mahon, her heirs and assigns, shall cause the dividends of said stock and the interest of said bonds as they accrue to be paid to my said daughter, Mary Ann Gibbons, during her lifetime, without percentage of commission or diminution of principal, and in case of the death of the said Mary Ann Gibbons, then the said stocks, bonds and income shall revert to the estate of my said daughter, Jane Owen Mahon, without encumbrance or impeachment of waste."
The Washington Gaslight Company was incorporated by the Act of Congress of July 8, 1848, c. 96, with a capital of $50,000, divided into shares of $20 each. 9 Stat. 722. It was authorized to increase its capital stock to $350,000 by the Act of August 2, 1852, c. 79, and to $500,000 by the Act of January 3, 1855, c. 22, 10 Stat. 734, 835. At the death of the testatrix, the capital stock amounted to $500,000, consisting of 25,000 shares of $20 each. By the Act of May 24, 1866, c. 97, the capital stock was increased to $1,000,000. 14 Stat. 53.
The company from time to time declared and paid dividends in money upon its stock, and such dividends were paid by the defendant to the plaintiff.
Before and after the death of Mrs. Smith, and before and after the passage of the act of 1866, and before November 1, 1868, the company from time to time invested portions of its net earnings, income, and profits in the enlargement and extension of its permanent works and plant employed in its legitimate business under its charter, and the actual cost of its works and plant, as shown by its construction account, amounted on January 1, 1865, to $842,623.02; on January 1, 1866, to $892,224.08; on January 1, 1867, to $935,039.55; on January 1, 1868, to $963,803.37; on July 1, 1868, to $988,914.84, and on January 1, 1869, to $1,039,287.17, and amounted in fact at the time of the passage of the act of 1866, to not less than $900,000, and on October 1, 1868, to more than $1,000,000.
"Whereas the construction account of this company exceeds one million of dollars, and as the capital of the company has been increased by an act of Congress to one million of dollars, therefore be it resolved that the increased stock be awarded among the stockholders, share for share, as they stood on the first of October, 1868."
On September 29, 1868, the defendant surrendered to the company the certificate for the two hundred and eighty shares mentioned in Mrs. Smith's will, and those shares were transferred on the books of the company to the name of the defendant, as trustee, and on November 17, 1868, the company made out and delivered to the defendant, as trustee, a certificate for the five hundred and sixty shares.
The defendant paid to the plaintiff from time to time the dividends afterwards declared on the five hundred and sixty shares, but never transferred to her the two hundred and eighty new shares.
The court dismissed the bill, and delivered an opinion reported in 4 Mackey 130, and the plaintiff appealed to this Court.
The question presented by the claims made in the bill and answer and by the arguments of counsel is whether the two hundred and eighty new shares of stock in the Washington Gaslight Company are to be treated as dividends, to the whole or part of the principal of which the plaintiff is entitled under the will, or are to be treated as an increase of the capital of the trust fund, and the plaintiff therefore entitled to receive only the income thereof. The court below held that the new shares must be treated as capital, the income only of which was payable to the plaintiff. She contends that the new shares are in the nature of a dividend to the whole of which she is entitled, or, if that position should not be maintained, that so much of the new shares as represents earnings made by the corporation since the death of the testatrix should be held to be income payable to her. Upon full consideration of the case, on reason and authority, this Court is of opinion that the decision below is correct.
v. Whitworth, 117 U. S. 129, 117 U. S. 136; New Orleans v. Houston, 119 U. S. 265, 119 U. S. 277.
Money earned by a corporation remains the property of the corporation, and does not become the property of the stockholders unless and until it is distributed among them by the corporation. The corporation may treat it and deal with it either as profits of its business or as an addition to its capital. Acting in good faith and for the best interests of all concerned, the corporation may distribute its earnings at once to the stockholders as income, or it may reserve part of the earnings of a prosperous year to make up for a possible lack of profits in future years, or it may retain portions of its earnings and allow them to accumulate, and then invest them in its own works and plant so as to secure and increase the permanent value of its property.
from any participation therein, is a question to be determined by the action of the corporation itself at such times and in such manner as the fair and honest administration of its whole property and business may require or permit, and by a rule applicable to all holders of like shares of its stock, and cannot, without producing great embarrassment and inconvenience, be left open to be tried and determined by the courts as often as it may be litigated between persons claiming successive interests under a trust created by the will of a single shareholder, and by a distinct and separate investigation, through a master in chancery or otherwise, of the affairs and accounts of the corporation, as of the dates when the provisions of the will of that shareholder take effect, and with regard to his shares only.
In ascertaining the rights of such persons, the intention of the testator, so far as manifested by him, must, of course, control, but when he has given no special direction upon the question as to what shall be considered principal and what income, he must be presumed to have had in view the lawful power of the corporation over the use and apportionment of its earnings, and to have intended that the determination of that question should depend upon the regular action of the corporation with regard to all its shares.
Therefore when a distribution of earnings is made by a corporation among its stockholders, the question whether such distribution is an apportionment of additional stock representing capital or a division of profits and income depends upon the substance and intent of the action of the corporation as manifested by its vote or resolution, and ordinarily a dividend declared in stock is to be deemed capital, and a dividend in money is to be deemed income, of each share.
of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of new ones.
"that may have declared any dividend in scrip or money due or payable to its stockholders, . . . as part of the earnings, profits, income, or gains of such company, and all profits of such company carried to the account of any fund, or used for construction, shall be subject to and pay a tax of five percentum on the amount of all such . . . dividends or profits, whenever and wherever the same shall be payable, and to whatsoever party of person the same may be payable."
"such a dividend, if earned and declared, necessarily increases the value of the old stock if new stock is not issued, and in that mode reaches substantially the same result."
22 Wall. 89 U. S. 635-637.
"gives the life interest of his estate to anyone, it can scarcely be his meaning that the life renter should run away with a bonus that may have been accumulating on the floating capital for half a century,"
"not a life renter, but an absolute fiar" -- in other words, not a mere tenant for life, but an owner in fee, although his estate was determinable by his death without issue.
It is unnecessary for the purposes of this case to consider how far the English decisions upon the question whether a dividend in money, not declared to be made out of accumulated earnings, should be considered as capital or as income, can be reconciled with each other or with sound principle. But there are two recent cases of great authority concerning stock dividends which directly bear upon the question before us.
"the company had no power to compel the tenant for life to risk any more in the venture than the shares originally held, and could not be allowed for themselves, by declaring or withholding a dividend out of the profits, to alter the rights as between tenant for life and remainderman."
trustees as to their votes with reference to the proposed arrangement. . . . If a man has his shares placed in settlement, he gives his trustees, in whose names they stand, a power of voting, and he must use his influence to get them to vote as he wishes. But where the company, by a majority of their votes, have said that they will not divide this money, but turn it all into capital, capital it must be from that time. I think that is the true principle, and I must hold that these additional shares formed part of the capital fund under the settlement, and went to the children, and not to the tenant for life (their mother)."
Barton's Trust, L.R. 5 Eq. 238, 243-245.
"When a testator or settlor directs or permits the subject of his disposition to remain as shares or stock in a company, which has the power either of distributing its profits as dividend or of converting them into capital, and the company validly exercises this power, such exercise of its power is binding on all persons interested under him, the testator or settlor, in the shares, and consequently what is paid by the company as dividend goes to the tenant for life, and what is paid by the company to the shareholder as capital, or appropriated as an increase of the capital stock in the concern, inures to the benefit of all who are interested in the capital. In a word, what the company says is income shall be income, and what it says is capital shall be capital. . . . In most if not in all cases, the inquiry as to the time when the profits were earned by the company is an immaterial one as between the tenant for life and remainderman. Their rights have been made dependent on the legitimate action of the company, and [subject to any rights arising from the law of apportionment, which was not in question] are determined by the time, not at which the profits are earned by the company, but at [by] the time at which they are by the action of the company made divisible amongst its members."
Sproule v. Bouch, 29 Ch.D. 635, 653, 658-659; Bouch v. Sproule, 12 App.Cas. 385, 397, 402, 407-408.
The same principle was established in Massachusetts before the case of Sproule v. Bouch had come before the courts of England. Atkins v. Albree, 12 Allen 359; Minot v. Paine, 99 Mass. 101; Daland v. Williams, 101 Mass. 571; Leland v. Hayden, 102 Mass. 542; Rand v. Hubbell, 115 Mass. 461; Gifford v. Thompson, 115 Mass. 478. And in Connecticut, Rhode Island, and Maine, a dividend of new shares, representing accumulated earnings, is held to be capital, and not income. Brinley v. Grou, 50 Conn. 66; In re Brown, 14 R.I. 371; Richardson v. Richardson, 75 Me. 570, 574.
In New York, the recent judgments of the Court of Appeals appear to have practically overruled the decisions of the lower courts in Clarkson v. Clarkson, 18 Barb. 646; Simpson v.
Moore, 30 Barb. 637; Woodruff's Estate, Tucker 58, and In re Pollock, 3 Redfield 100, cited in behalf of the plaintiff, and to have settled the law of that state in accordance with that of England and of Massachusetts.
"A shareholder in a corporation has no legal title to the property or profits of the corporation until a division is made. . . . When, therefore, a contract is made in relation to dividends or profits, it must be deemed to have reference to dividends or profits to be ascertained and declared by the particular company, and not to growing profits from day to day, or month to month, to be ascertained upon an investigation by third persons, or courts of justice, into the accounts and transactions of the company."
much property as it had before. It is just as solvent, and just as capable of meeting all demands upon it. After such a dividend, the aggregate of the stockholders own no more interest in the corporation than before. The whole number of shares before the stock dividend represented the whole property of the corporation, and after the dividend they represent that and no more. A stock dividend does not distribute property, but simply dilutes the shares as they existed before."
"From the shares in question no income could accrue, no profits arise to the holder, until ascertained and declared by the company and allotted to the shareholder, and that act should be deemed to have been in the mind of the testator, and not the earnings or profits as ascertained by a third person, or a court, upon an investigation of the business and affairs of the company, either upon an inspection of their books or otherwise. . . . The rule is a reasonable and proper one, which limits the rights of a stockholder to profits by the action of the managers of a corporation or company. It is their sole and exclusive duty to divide profits and declare dividends whenever, in their judgment, the condition of the affairs of the corporation renders it expedient, and it would lead to great embarrassment and confusion if a court should undertake to interfere with their discretion so long as they do not go beyond the scope of their powers and authority."
after having accumulated large surplus profits for many years before and since the death of the testator, increased its capital stock, and issued additional shares to the stockholders, so much of the surplus profits as had accumulated in the lifetime of the testator should be deemed capital, and so much as had accumulated since his death should be deemed income, and in Wiltbank's Appeal, 64 Penn.Stat. 256, where a corporation voted to increase its capital stock by an issue of new shares to be subscribed and paid for by the stockholders, and a trustee holding shares sold the right to take some new shares, and took others and sold them at an advance, that rule was carried so far as to hold that the sums so received by the trustee were income of the old shares, for the reason that the right to subscribe to new shares, the court thought, "was not a part of the capital of the old stock, but a mere product of an advantage belonging to it," "a right incidental to the stock, and therefore income." The rule upon which those two cases proceeded has since been treated as settled in Pennsylvania, although there has been some difficulty, if not inconsistency, in applying it, and in one case Mr. Justice Paxson, now Chief Justice of Pennsylvania, spoke of both those cases as exceptional and depending on peculiar circumstances. Moss' Appeal, 83 Penn.St. 264, 269-270; Biddle's Appeal, 99 Penn.St. 278; Vinton's Appeal, 99 Penn.St. 434. The only other states, so far as we are informed, in which the Pennsylvania rule prevails are New Jersey and New Hampshire. Van Doren v. Olden, 19 N.J.Eq. 176; Ashhurst v. Field, 26 N.J.Eq. 1; Van Blarcom v. Dager, 31 N.J.Eq. 783, 793; Lord v. Brooks, 52 N.H. 72; Peirce v. Burroughs, 58 N.H. 302, 303. Upon the grounds already stated, that rule appears to us to be open to grave objections, both in principle and in application, as well as opposed to the weight of authority.
"cause the dividends of said stock and the interest of said bonds, as they accrue, to be paid to my said daughter, Mary Ann Gibbons, during her lifetime, without percentage of commission, or diminution of principal. And in case of the death of the said Mary Ann Gibbons, then the said stock, bonds, and income shall revert to the estate of my said daughter, Jane Owen Mahon, without encumbrance or impeachment of waste."
Upon the face of the will, it is manifest that the testatrix used the word "dividends" as having the same scope and meaning as "income" and "interest," and nothing more, and intended that the plaintiff, as equitable legatee for life, should take the income, and the income only, of the shares owned by the testatrix at the time of her death, and that the whole capital of those shares, unimpaired, should go to the defendant, as legatee in remainder.
The admitted facts present the following state of things: the accumulated earnings of the company were kept undivided, and actually added to the capital of the corporation, by investing them from time to time in its permanent works and plant until the value of the works and plant amounted to $1,000,000; no owner of particular shares, or of any interest therein, had the right to compel the company to divide or apportion those earnings, and while they remained so undivided and invested the capital stock of the company was increased to the same amount by the act of Congress of May 24, 1866. The greater part of the earnings in question had been so invested before the making of the will and the death of the testatrix in 1865, a still larger proportion before the passage of the act of Congress of 1866, and the whole before the resolution of the directors of November 1, 1868, under which the new shares were issued to the defendant, and in which it was recited, in accordance with the truth, that the construction account of the company exceeded $1,000,000, and that its capital had been increased by act of Congress to that amount, and it was therefore "resolved, that the increased stock be awarded among the stockholders, share for share, as they stood on the 1st of October, 1868."
To hold the plaintiff to be entitled to the whole of the new shares issued to the defendant would be to allow the plaintiff the exclusive benefit of earnings, the greater part of which had accrued and had been invested by the company as capital before her interest began, and would be contrary to all the authorities. To award to her a proportion of those shares, based upon an account of how much of those earnings actually accrued after the death of the testatrix, would be to substitute the estimate of the court for the discretion of the corporation, lawfully exercised through its directors, and would be open to the practical inconveniences already stated.
"Certificates of stock are simply the representative of the interest which the stockholder has in the capital of the corporation. Before the issue of these two hundred and eighty new shares, this trustee held precisely the same interest in this increased plant in the capital of the corporation that she held afterwards. She merely had a new representative of an interest that she already owned, and which was not increased by the issue of the new shares. A dividend is something with which the corporation parts, but it parted with nothing in issuing this new stock. It simply gave a new evidence of ownership which already existed. They were not in any sense, therefore, dividends for which this trustee had to account to the cestui que trust. She stood, after the issue of the new shares, just as she had stood before, and the trustee was obliged to treat them just as she did -- namely as a part of the original, and to pay the dividends to the cestui que trust."
MR. JUSTICE BREWER, not having been a member of the Court when this case was argued, took no part in the decision.

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