Court Opinion

ID: 4010669
Source: CourtListenerOpinion
Date Created: 2016-07-06 11:12:45.475652+00
Date Added: 2024-06-11T07:44:43.437212
License: Public Domain

The entire contract indicates an intention of the parties to place an obligation upon the corporation to pay a dividend for any year during which the earnings were sufficient to warrant such payment of six per cent. I am of the opinion that while the contract *Page 276a 
provided that the directors might make the dividend payment in four instalments in the year following such earnings, the call of the stock, in and of itself, accelerated the obligation of the directors to declare the dividend for the preceding year. The trial court was correct in holding that the corporation was liable to the plaintiffs for the balance of the dividend which had been earned the preceding year.
"Where the directors have actually declared a dividend on preferred stock so as to create a debt due by the corporation to the preferred stockholders, they may maintain actions at law against it to recover the same; and even without declaration of a dividend an action at law has been allowed in some cases on the contract to make a dividend where it appeared that there were net earnings available for the purpose of paying the dividend; but by the weight of authority the relation of debtor and creditor does not exist between a corporation and a preferred stockholder until a dividend has been declared, see supra, sec. 228, and until then an action at law will not lie. Manifestly, such an action does not lie where the nature of the contract or its judicial construction is such as to leave the question the propriety of declaring the dividend to the discretion of the directors.
"Preferred stockholders, however, have a remedy in equity. The contract which gives them a right to the dividend out of the net earnings impresses any net earnings in the hands of the directors, for the particular year, with a trust in their behalf, to the extent required by the terms of the contract, and if the directors refuse to perform that trust by making the distribution, a court of equity will obviously, in a suit in which the parties in interest are made defendants, compel them so to do. However, this is not so where the contract, as judicially construed, leaves the question of declaring and paying the preferred dividend to the discretion of the directors and it cannot be said that their discretion has been abused. In any case, no recovery can be had under a complaint not averring that there were in the hands of the corporation earnings or profits sufficient to pay dividends." 18 C.J.S., Corporations, p. 666, sec. 235.
It appears clearly from the entire contract that the right of the preferred stockholders to the dividend was dependent upon *Page 276b 
earnings in any one year sufficient to pay it. The time of payment during the following year was discretionary with the directors. That discretion, however, is not broad enough to defeat the right completely. It would appear cumbersome to require the stockholders to bring an action in equity to compel the declaration before the obligation was recognized as due. *Page 277