Court Opinion

ID: 5295673
Source: CourtListenerOpinion
Date Created: 2022-01-08 02:46:11.963282+00
Date Added: 2024-06-11T08:29:00.034899
License: Public Domain

Davis, J.
(dissenting). The common-law rule is that stockholders, common and preferred, share alike in the assets of a *47liquidating corporation, if the preference is only as to dividends or unless the certificate of incorporation provides a different rule. (Continental Ins. Co. v. United States, 259 U. S. 156, 181; Hamlin v. Toledo, St. L. & K. C. R. Co., 78 Fed. 664; Toledo, St. L. & K. C. R. Co. v. Continental Trust Co., 95 id. 497, 531; Guaranty Trust Co. v. Galveston City R. Co., 107 id. 311, 318.)
The certificate of incorporation is the contract between the different classes of stockholders, and their rights to dividends must be determined by the language of that instrument. (Lockwood v. General Abrasive Co., 210 App. Div. 141; affd., 240 N. Y. 592.)
The original certificate here provides: “ The number of shares of which the capital stock shall consist is 20,000 of the par value of $100 each of which 6,000 shall be preferred stock and 14,000 shall be common stock.” The preferred stock was given preference as to dividends to the extent of eight per cent; “ and in addition, after the common stock shall have' received in any year out of the earnings of the corporation declared as dividends * * * eight percentum on the outstanding common stock, the remainder of the earnings declared as dividends shall be participated in by both preferred and common stock in the same proportion. Upon the dissolution of the corporation and distribution of its assets the preferred stock shall be paid in full at par before any amount shall be paid on account of the common stock.”
Subsequently an amended certificate of incorporation was duly executed and filed adding another class of. stock known as “ first preferred stock,” consisting of 3,000 shares of the par value of $100 each. This was given preference over the former preferred stock, now called “ second preferred,” and the common stock, making it entitled to cumulative dividends at the rate of eight per cent but without any right expressed to share further in dividends. It was provided further: “ Upon any dissolution of the corporation and distribution of its assets, it shall be paid off and redeemed in full at par, together with any unpaid cumulative dividends thereon before any payment or distribution shall be made on account of the second preferred or the common stock.”
It was also provided that “ the whole of said first preferred stock, or any part thereof at any time outstanding, shall be redeemable at the option of this corporation on any dividend date after the expiration of one year from the first day of February, 1919, on ninety days’ notice in writing to the holders thereof, * * * at the rate of $105 per share plus any unpaid cumulative dividends thereon; * * * and that the outstanding certificates of such first preferred stock shall be duly surrendered * * *.”
The incorporators under the first certificate and the officers *48executing the amended certificate seem to be to a large extent identical.
It will be observed that the preferred and common stockholders obtained shares of the same par value. After the preferred had received a non-cumulative dividend of eight per cent and the common stockholders an equal amount, they shared equally in the earnings and profits of the company. On dissolution, as in the case of dividends, the preferred shareholders were entitled to be paid in full the amount of their investment before distribution was made, to the common shareholders. The certificate is silent on the subject of the surplus remaining. If such surplus had arisen from profits of the business and had been distributed in the form of dividends it would have been paid first to the preferred shareholders to the extent of eight per cent, second to the common shareholders to an equal amount, and any remaining amount equally divided between the two classes, carrying out the expressed plan of making equal dividends between preferred and common shareholders, if the earnings amounted to more than sixteen per cent. The surplus remaining for distribution must be made up either of undistributed earnings or an unearned increment on the capital of the company.
The general plan seems to indicate that an equal diyision was contemplated. There was no restrictive language unless the words “ paid in full at par ” may be so construed. In construing language relative to preference of dividends, it will not be construed to the advantage of the preferred shareholders. (Lockwood v. General Abrasive Co., supra; Niles v. Ludlow Valve Mfg. Co., 196 Fed. 994; affd., 202 id. 141; writ denied, 231 U. S. 748.) The same rule may be applied here as to the common shareholders. There is no reason why they should be more entitled to take the surplus after paying the preferred shareholders than they were to take all of the earnings after paying the preferred dividend. The whole intent of the instrument is to the contrary.
This construction is given added significance by comparing the language used in defining the original preference with that used by the same parties in the amended certificate relative to the “ first preferred stock.” There was no provision in the latter for further sharing in earnings after the eight per cent dividend was paid; and the language was expressed that upon dissolution the stock “ shall be paid off and redeemed in full at par.” That differs materially from the provision in the original certificate as to the “ second preferred ” which upon dissolution “ shall be paid in full at par before any amount shall be paid on account of the common stock.” I interpret the expression “ paid in full at par ” to signify *49that the preferred shareholders should receive the full amount they had invested before payment on the investment of the common shareholders. There was no definite exclusion of the former from further participation in the surplus.
Where there is a limitation on the original investors in the shares of the company, whether they held stock preferred as to dividends or in distribution, it must be plainly stated in the certificate. Different language is used to make clear such restrictions, as “no further dividend or distribution ” (Russell v. American G. & E. Co., 152 App. Div. 136); “ entitled to no other or further share of the profits ” (Equitable L. A. Soc. v. U. P. R. R. Co., 212 N. Y. 360); “ no other participation in profits ” (Matter of National Telephone Co., L. R. [1914] 1 Ch. 755). This certificate lacks such definite restrictive terms, although as I have said the same parties used language in the amended certificate well adapted to exclude the “ first preferred ” from participating in distribution of surplus.
Under the circumstances, the silence in the certificate on the distribution of surplus upon dissolution may not be construed in favor of the common shareholders. I favor reversal.
Judgment affirmed, with costs.