Case Name: Frank Merz, App'lt and Resp't, v. Interior Conduit and Insulation Company et al., App'lts and Resp'ts
Court: New York Supreme Court, General Term
Jurisdiction: New York
Decision Date: 1895-06-14
Citations: 68 N.Y. St. Rep. 63
Docket Number: 
Parties: Frank Merz, App’lt and Resp’t, v. Interior Conduit and Insulation Company et al., App’lts and Resp’ts.
Judges: 
Reporter: New York State Reporter
Volume: 68
Pages: 63–72

Head Matter:
Frank Merz, App’lt and Resp’t, v. Interior Conduit and Insulation Company et al., App’lts and Resp’ts.
(Supreme Court, General Term, First Department,
Filed June 14, 1895.)
Corporations — Bonds—Scrip dividends.
A corporation cannot, under section 42, chap. 688 of 1892, issue bonds, to pay scrip dividends.
Appeal from an order denying in part a motion to continue an injunction.
A. J. Dittenhoefer and David Gerber, for pl’ff; Eugene H. Lewis, for def’ts.

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, 1925, with interest at six per cent, per annum, payable on the first days of April and October in each year, which are not to be issued " for money, labor done, or property actually received for the use and lawful purposes of the corporation," but for the following purposes :
12-| per cent, of the bonds to be devoted to paying.....
scrip...................................... $62,500
50 per cent, of bonds to reduction of stock of corporation . 250,000
37£ per cent, of bonds for cash...................... 187,500
$500,000
In Jhne, 1894, the directors of the corporation declared a scrip dividend of 5 per cent, on its capital stock of $1,250,000, the total amount of which dividend being $62,500. At the same time it declared a scrip dividend of 5 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 $75,000, 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."
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 part. 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 forty-second section of the stock corporation law provides :
" Ro corporation shall issue either stock or bonds except for money, labor done or property actually received for the use and lawful purposes of such corporations. Ro stock will be issued for less than its par value. Ro 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 disbursements 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., concurs.