Case Name: Franz Merz, Suing on Behalf of Himself and Other Stockholders of the Interior Conduit and Insulation Company Similarly Situated, etc., Appellant and Respondent, v. Interior Conduit and Insulation Company and Others, Respondents and Appellants
Court: New York Supreme Court, General Term
Jurisdiction: New York
Decision Date: 1895-06
Citations: 94 N.Y. Sup. Ct. 430
Docket Number: 
Parties: Franz Merz, Suing on Behalf of Himself and Other Stockholders of the Interior Conduit and Insulation Company Similarly Situated, etc., Appellant and Respondent, v. Interior Conduit and Insulation Company and Others, Respondents and Appellants.
Judges: Van Brunt, P. J., concurred.
Reporter: Supreme Court Reports (Hun)
Volume: 94
Pages: 430–443

Head Matter:
Franz Merz, Suing on Behalf of Himself and Other Stockholders of the Interior Conduit and Insulation Company Similarly Situated, etc., Appellant and Respondent, v. Interior Conduit and Insulation Company and Others, Respondents and Appellants.
Corporation — issue of bonds to pay a scrip dividend, forbidden — bonds cannot be issued merely to reduce the capital stock — Laws of 1892, chap. 688, §§ 23, 42.
Under section 23 of the Stock Corporation Law (Chap. 688 of the Laws of 1892), providing that the directors of a stock corporation shall not make dividends except from the surplus profits arising from the business of the corporation, nor divide, withdraw, or in any way pay to the stockholders, or any of them, any part of the capital of the corporation, or reduce its capital stock except as authorized by law, a corporation has no authority to make a scrip dividend in one year and in the succeeding year issue bonds to pay such dividend. Section 42 of the Stock Corporation Law forbids the issue of bonds by a corporation to reduce its capital stock or to pay scrip dividends.
O’Brien, J., dissenting.
Appeal by the plaintiff, Franz Merz, suing on behalf of himself and other stockholders of the Interior Conduit and Insulation Company similarly situated, from an order of the Supreme Court, made at the New York Special Term and entered in the office of the clerk of the county of New York on the 5th day of April, 1895, denying his motion for an order continuing an injunction heretofore granted, enjoining and restraining' the defendants during the pendency of the above-entitled , action from issuing certain so-called gold debenture bonds.
Also an appeal by the defendants, the Interior Conduit and Insulation Company and others, from so much of the said order, entered in said clerk’s office on the 5th day of April, 1895, as orders and directs that the injunction heretofore granted in the above-entitled action be continued to the extent that the plaintiff shall not be called upon to surrender any part of Kis stock for retirement or to subscribe for the debenture bonds unless he so desires.
A. J. Dittenhoefer and David Gerber, for plaintiff.
Eugene H. Lewis, for defendants.

Opinion:
Follett, J.:
Stripped of unnecessary words the scheme of the corporation is to issue $500,000 of its bonds, payable in gold coin April 1, 1,925, with interest at six per cent per annum, payable on the first days of April and October in each year, which are to be issued, not "for money, labor done or property actually received for the use and lawful purposes of such corporation," but for the following purposes:
Twelve and one-half per cent of the bonds to be devoted to paying scrip................................. $62,500
Fifty per cent of bonds to reduction of stock of corporation......................................... 250,000
Thirty-seven and one-half per cent of bonds for cash.... 181,500
$500,000
In June, 1894, the directors of the corporation declared a scrip dividend of five per cent on its capital stock of $1,250,000, the total amount of which dividend was $62,500. At the same time it declared a scrip dividend of five per cent on $500,000 on capital stock not then issued, but which it is alleged ought to have been issued to the Johnson Standardizing Company. This scrip, amounting to $12,500, was" turned over to the latter company. The total amount of dividend scrip outstanding is $15,000, besides interest, $62,500 of which is to be paid by exchanging it for the bonds to be issued.
Section 23 of the Stock Corporation Law provides: " The directors of a stock corporation shall not make dividends, except from the surplus profits arising from the business of such corporation; nor divide, withdraw or in any way pay to the stockholders, or any of them, any part of the capital of such corporation, or reduce its capital stock, except as authorized by law." (Laws of 1892, chap. 688.)
There is no authority for making a scrip dividend in one year, and in the succeeding year issuing bonds to pay such dividend in whole or in ¡Dart. This seems to me to be a plain violation of the statute. If this is sanctioned the entire capital stock of a corporation can be wiped out by the declaration of dividends and subsequently issuing bonds wherewith to pay the dividends.
I fail to find any provision in the statute authorizing the capital stock of the corporation to be reduced by the substitution of bonds therefor. The 42d section of the Stock Corporation Law provides : " No corporation shall issue either stock or bonds except for money, labor done, or property actually received for the use and lawful purposes of such corporation. No such stock shall be issued for less than its par value. No such bonds shall be issued for less than the fair market value thereof." Under this section the corporation cannot issue bonds to pay scrip dividends or for the purpose of reducing its capital stock.
This is in no sense a scheme for the reduction of the capital stock of the corporation, and for a division among the shareholders of the property of the corporation in excess of the amount of the capital stock as reduced, and the cases sanctioning such reductions and distributions are not in point.
'Whether the proposed scheme will advance the interests of the corporation or not is a question with which we have nothing to do. The statute prescribes the purposes for which stock and bonds may be issued, and every stockholder has the right to compel the directors to observe the statute.
That part of the order which vacated the original injunction should be reversed and the original order restored, with costs to the plaintiff.
Van Brunt, P. J., concurred.