Court Opinion

ID: 4011110
Source: CourtListenerOpinion
Date Created: 2016-07-06 11:13:51.623192+00
Date Added: 2024-06-11T09:36:22.838472
License: Public Domain

[EDITORS' NOTE:  THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 655 
Action by plaintiffs as preferred stockholders of the defendant corporation against defendant for declaratory relief to determine the proper application of distribution of assets made by defendant company to its preferred stockholders on November 24, 1931, and subsequent dates, and the respective rights of the preferred and common stockholders in the assets of the corporation.  From the whole of the judgment of the circuit court for Milwaukee county entered March 6, 1940, plaintiffs appeal.  Defendant appeals from a certain part of said judgment hereinafter indicated.
The case was tried to the court upon stipulated facts supplemented by some oral and documentary evidence.  The facts as found by the trial court are all within the facts as stipulated.  The stipulation also contains the contentions made by the respective parties.  The following is a summary of the stipulated facts:
Defendant corporation was organized April 27, 1872, for the principal purpose of tanning and dealing in leather, in which business it was actively engaged until September, 1930.  Its authorized capital stock was increased from time to time, and on April 1, 1920, the corporation had an authorized capital of $12,000,000, consisting of 100,000 *Page 656 
shares of common stock of the par value of $100 per share and 20,000 shares of seven per cent cumulative preferred stock of the par value of $100 per share.  Of its authorized capital there was then outstanding 69,577 shares of common stock and 12,365 shares of preferred stock.  At this time the corporation had a surplus and undivided profits of over $9,000,000.
On April 8, 1920, the corporation declared a stock dividend out of its surplus and undivided profits and distributed to the holders of its common stock 30,423 shares of common stock and 7,635 shares of preferred stock.  The company's operations during the period from 1920 to 1930 resulted in losses aggregating approximately $12,500,000.  The last regular dividend was paid on preferred stock May 31, 1923. At no time thereafter was there any surplus resulting from earnings.  At the end of 1927 the company had a deficit of $858,051.18.  On February 24, 1925, the common stock was reduced from 100,000 shares to 80,000 shares.  On February 28, 1928, its articles of organization were amended changing its common stock then outstanding of the par value of $100 each to the same number of shares of common stock of $10 par.  On March 14, 1928, the articles were again amended changing the common stock to no par value stock having a declared value of $10 per share.  This amendment in part provided:  "So much of the assets of this corporation available for common stock as is equal to $10 per share of said common stock at any time outstanding shall be treated as capital, and the balance of such assets shall be treated as surplus."  No part of this capital surplus was created through earnings.  It was reduced from time to time and on December 31, 1938, it amounted to only $793,769.01.
On account of the heavy losses sustained through the period from 1920 to 1930, and the banks' demands that the company's loans be paid, the directors found it necessary to *Page 657 
suspend operations and to take steps to liquidate the company. Tanning operations were discontinued September 1, 1930. No tanning operations have been conducted since that time. Notice of intention to liquidate was given to all stockholders, preferred and common, on February 13, 1931, which notice was accompanied by a further notice of the company's annual meeting to be held on February 24, 1931.  At this meeting 78,341 shares of the common stock then outstanding and 18,388 shares of the preferred stock then outstanding were represented either in person or by proxy.  A full report of the company's financial condition was made by the president to the stockholders.  The company at that time, in addition to its indebtedness to banks, had bonds and debentures outstanding.  The debentures matured November 1, 1930. The president reported that the banks had insisted that their loans be paid in advance of the debentures, and that because of business conditions and the company's financial condition, the directors had discontinued manufacturing operations on September 1, 1930, and that it was necessary to liquidate the business to meet the company's indebtedness and to provide for outstanding bonds.  The president further reported to the stockholders that the company had been advised by its attorney that the accumulated dividends on preferred stock and the premium thereon could be paid to the holders of preferred stock only to the extent that there were profits from which such dividends and premium could be paid.  The stockholders, on motion duly made and seconded, accepted the president's report, and same was placed on file.  When the company ceased manufacturing on or about September 1, 1930, its principal assets consisted of several large tanneries in Milwaukee county, a large inventory of finished leather, tanning supplies and equipment, a 63,000-acre tract of timber land in Georgia, a building in the city of New York, a plant in Leicester, England, and some corporate securities. *Page 658 
At the time the company quit manufacturing it had on hand a large inventory of finished leather.  Same was sold through its own salesmen and nearly all of it was sold by the end of 1931.  By December 31, 1936, defendant had sold practically all of its tanning machinery and its equipment. The company listed all of its real estate for sale, and from time to time various pieces of property were sold.  In order to meet carrying charges on its property, defendant leased substantial portions, said leases containing clauses permitting cancellation in the event of sale.
Pursuant to an offer of the defendant made August 21, 1931, 13,098 shares of outstanding preferred stock were surrendered in exchange for certain corporate securities held by the defendant, thus leaving only 6,902 shares of preferred stock outstanding.  From time to time, as the company disposed of various assets, liquidating payments were made on account of preferred stock.  At the time of the trial of this action in October, 1939, sixteen liquidating payments had been made to the preferred stockholders aggregating $565,964, constituting eighty-two per cent of the face amount of the outstanding preferred stock.  The first liquidating dividend was paid on November 2, 1931. Between September 30, 1930, and December 31, 1938, defendant's assets were reduced from $9,758,750.15 to $1,836,012.13, during which period defendant had paid approximately $5,000,000 to the creditors and on account of principal of its preferred stock.
The court found that the management of the defendant has at all times proceeded with the liquidation in good faith, and as rapidly as possible without undue sacrifice or waste, and with intent and purpose to complete the same as expeditiously as reasonably possible, and that at no time has the intent to proceed to a completion and final liquidation been abandoned.  The court further found that the holders of preferred stock participated in various, corporate actions in *Page 659 
connection with the liquidation, and that since 1936 the direct management of the corporation has been in their hands.
At the time the company ceased doing business and commenced liquidating, and at all times since, the defendant's charter has provided:
"Article IV. (e) In the event of any voluntary liquidation or dissolution or winding up of the corporation and the distribution of any corporate assets other than profits, before any amount shall be paid to the holders of common stock, the holders of preferred stock shall be entitled to be paid in full the par value of their shares, and in addition thereto, in case that there shall then be and to the extent that there shall then be any profits of the corporation applicableto dividends on preferred stock, an amount equal to five per centum (5%) upon the par value of said stock, plus the amount of such dividends then accrued and unpaid, but they shall not be entitled to any further or other participation in the distribution of assets and/or profits."
Paragraph (a) of article IV of the defendant's articles provided in part:
"The holders of preferred stock shall be entitled from and after the issue thereof to receive when and as declared from the surplus or from the net profits of the corporation dividends at the rate of seven per cent per annum and no more. . . ."
Upon the foregoing facts, the court made the following conclusions of law:
"(1) The acceptance of the president's report by the stockholders at the annual meeting held February 24, 1931, constituted an approval of the president's plan of liquidation of the defendant.  (2) The subsequent conduct of the stockholders, both preferred and common, constituted acquiescence in and ratification of the defendant's acts taken toward complete liquidation.  (3) The defendant has been in liquidation since *Page 660 
September 1, 1930.  Such liquidation is necessarily a slow process.  All steps taken have been directed to the attainment of an ultimate complete liquidation of all the assets of the corporation.  (4) All payments made by the defendant to holders of preferred stock since November 1, 1931, are properly to be applied toward the return of capital (par value of the preferred) as liquidating dividends; and all future payments should be so applied until the full par value of such shares has been paid.  (5) The capital surplus of the defendant constitutes corporate assets not derived from earnings in the operation of the business.  The corporate articles do not contemplate the use of `capital surplus' for dividend purposes prior to the completion of the liquidation.  The mere existence at the date of trial of a `capital surplus' account does not establish that when liquidation has been completed there will be any excess of assets over capital.  The judgment of the directors in not declaring dividends out of such surplus while the corporation is in process of liquidation should not under the facts of this case be interfered with.  (6) If and when the holders of preferred stock of defendant shall receive the full par value of such shares, any further distribution upon liquidation shall be applied toward the return of capital to the holders of common stock of the defendant until such holders shall have received the declared value of such shares, to wit:  $10 per share.  To the extent that there may be netassets (at actual cash value) in excess of the total liabilitiesthe defendant, including its capital stock, such net assetsshall be applied toward accumulated and unpaid dividendson the preferred stock and toward the payment of an amountequal to five per cent of the par value of such preferred stock. All assets remaining shall be the exclusive property of the holders of common stock and all payments on account thereof shall be made exclusively to the holders of common stock. (7) No dividends accrue on preferred stock during the period of liquidation and, accordingly, dividends ceased to accrue September 1, 1930."
The judgment entered is in accord with the foregoing conclusions of law.  The plaintiffs appeal from the whole of the judgment.  The defendant appeals from that part of the *Page 661 
judgment which provides as follows:  "To the extent that there may be net assets (at actual cash value) in excess of the total liabilities of the defendant, including its capital stock, such net assets shall be applied toward accumulated and unpaid dividends on the preferred stock and toward the payment of an amount equal to five per cent of the par value of such preferred stock."
The plaintiffs-appellants contend that the finding that "The management of the defendant has at all times proceeded with the liquidation in good faith and as rapidly as possible without undue sacrifice or waste and with the intent and purpose to complete the same as expeditiously as reasonably possible and at no time has the intent to proceed to a complete and final liquidation been abandoned," is against the great weight and clear preponderance of the evidence and the inferences which must necessarily be drawn therefrom. Also that the finding that "All parties in interest have at all times considered and treated the defendant as being in complete liquidation and all action which has been taken has been consistent therewith," is against the great weight and clear preponderance of the evidence and the inferences which must necessarily be drawn therefrom.  The plaintiffs-appellants further contend that the court erred in its conclusions of law in paragraphs 1, 2, 3, 4, and 5, set out in the foregoing statement.
The defendant-appellant contends that the court erred in holding that after the preferred and common stockholders *Page 662 
had received the par or declared value of their shares, then to the extent that there might be net assets (at actual cash value) in excess of the total liabilities of the defendant, including its capital stock, such net assets should be applied toward accumulated and unpaid dividends on the preferred stock and toward the payment of an amount equal to five per cent of the par value of such preferred stock.  In all other respects the defendant-appellant contends that the judgment should be affirmed.  In this connection defendant's contention is that accumulated dividends and premiums on preferred stock are payable only out of net profits and that contributed surplus does not constitute net profits.
As to the plaintiffs' contentions, with reference to the two findings quoted above, we conclude that the findings in the respect indicated are fully sustained by the stipulated facts and the uncontradicted evidence.  It is the function of the trial court to draw such inferences from the established facts as is deemed proper, and this court is not at liberty to disturb same unless they are against the great weight and clear preponderance of the evidence.  It will serve no useful purpose to discuss the stipulated facts.  They fully sustain the findings and the findings impel the conclusions of law except in the particular instant hereinafter indicated.
There is no merit in plaintiffs' contention that defendant corporation is not in liquidation so as to affect or divest the rights of the preferred stockholders to cumulative dividends which accrued since May 31, 1923, that is, the date on which the last regular dividend was paid to preferred stockholders, since which time the company has had no surplus resulting from earnings.  The surplus which resulted through the amendment of defendant's articles changing its common stock from 80,000 shares of the par value of $100 each to the same number of shares of the par value of $10 each and the later amendment changing the common stock to no par value *Page 663 
having a declared value of $10 per share did not create a surplus from earnings, though it did result in eliminating the large deficit as of December 31, 1927, and in creating a large surplus.  This surplus was designated on the company's balance sheets at all times as "capital surplus."
On February 13, 1931, the company through its president gave notice of the intention to liquidate to all its preferred and common stockholders.  With this notice was inclosed a notice of the annual meeting to be held on February 24, 1931. There was a large attendance of both classes of stockholders at this meeting.  It appears from the stipulated facts that at this meeting the company president made a very full report to the stockholders, represented in person or by proxy, of the company's financial condition and the general business condition.  He reported that tanning operations were discontinued on September 1, 1930.  We do not deem it necessary to go into detail as to the contents of the president's report to the stockholders.  It did recommend that the company liquidate, and that the company had been advised by its attorney that the cumulated dividends on preferred stock as well as the premiums on said stock could be paid to the holders only to the extent that there were profits from which such dividends and premiums could be paid.  It appears that a motion was duly made and seconded that the president's report be accepted and placed on file.
Preferred stockholders have participated in many corporate actions in connection with the liquidation, and since 1936 the management of the corporation has been in their hands.  The precise issue here is the rights of preferred stockholders to accumulated dividends, the company being in liquidation. In this connection it is important to note the provisions of paragraphs (a) and (e) of article IV of the defendant's charter quoted in the statement preceding this opinion.  There is clearly a distinction between the situations referred to in said paragraphs.  Paragraph (e) relates to the *Page 664 
rights of preferred stockholders in case of the company's liquidation, dissolution, or winding up.
In 13 Am. Jur. p. 317, § 198, it is stated:
"In the determination of who is entitled to the funds resulting from a reduction of stock, it must be borne in mind that such funds represent capital and not profits.  Accordingly, it has been held that the surplus capital which remains upon a reduction of capital stock because of business losses cannot be used to satisfy the claims of preferred stockholders to arrears of cumulative dividends; but that such surplus must be distributed ratably among the common and preferred stockholders in the ratio in which their respective holdings have been reduced."
In the same volume at page 658, section 663, under the heading "Surplus arising from reduction of capital stock," it is stated:
"A surplus arising from lawful reduction of the capital stock of a corporation, if available at all for distribution, is generally distributable as capital assets; such surplus cannot be regarded as profits arising from its business, subject to appropriation in satisfaction of dividends due and unpaid to preferred stockholders under an agreement that they shall be paid a fixed annual dividend out of the surplus profits arising from the business of the corporation.  There is authority for a different view with respect to earnings which accrue after an impairment of the capital stock and cannot be paid out as dividends prior to its lawful reduction to cover such impairment. When the reduction takes place, such earnings, it is held, become a part of the earned surplus of the corporation and are available for payment of dividends.  Even though the surplus arising from the lawful reduction of capital stock is available for dividend purposes and may lawfully be distributed as such, payment of dividends therefrom is properly refused where it would result in impairment of capital."
Roberts v. Roberts-Wicks Co. 184 N.Y. 257,77 N.E. 13, is directly in point.  At page 265 the court says:
"When the defendant's directors met, in December, 1904, to act upon the question of dividends, their duty was, in *Page 665 
dividing the surplus profits, to apply them, in first order, to the satisfaction of the debt to the preferred stockholders for arrears of dividends on the whole number of their shares, which were outstanding during the three years prior to July, 1904, before the capital stock was reduced. For the purpose of such a dividend, however, only such surplus as represented the profits of the business could, legally, be availed of and this brings us to consider the question of the disposition of the surplus of capital, left upon the reduction of the capital stock, which the appellant claims to be equivalent to surplus profits and, hence, to be applicable upon the company's debt to the preferred stockholders for arrears of dividends.  As it has been stated, the capital of the defendant had become impaired, by June, 1904, to the extent of $90,861.85, and this necessitated the reduction as then effected.  The reduction to $200,000, thus, left the sum of $9,138.15, which was an excess, or surplus,of capital.  Whether it consisted in funds, or in property, we are not informed and it is not material to our consideration. We may assume that the directors could have converted it into cash and have distributed it by way of dividends; but the preferential right of the preferred stockholdersdid not reach to a distribution of that which wascapital, nor create any charge upon capital.  That which constitutes the capital stock of a corporation belongs to all of its stockholders, proportionately to their holdings.  It is divided into shares and each share represents the holder's proportionate interest.  Jermain v. L. S.  M. S. R. Co.91 N.Y. 492.  Upon dissolution, or in liquidation, it entitles him to share ratably in the assets.  If the directors had undertaken to divide this surplus of capital, it was apportionable, only, among all the stockholders ratably. . . .
"In the present case, it must be borne in mind that the $9,138.15 remained in the corporate accounts, after the reduction of capital stock, as a portion of the former capital and it was, in no sense, like an excess of property, which had been accumulated in the conduct of the business beyond the fixed capital.  It did not represent `surplus profits arising from the business.'" *Page 666 
Sec. 182.13 (1), Stats. 1929, provides:
"Any corporation may, in its original articles, or by amendment thereto adopted by a three-fourths vote of the stock, provide for preferred stock; for the payment of dividends thereon at a specified rate before dividends are paid upon the common stock; for the accumulation of such dividends; for a preference of such preferred stock not exceeding the par value thereof, over the common stock in the distribution of the corporate assets other than profits; for the redemption of such preferred stock, and for denying or restricting the voting power of such preferred stock."
Sec. 182.19 (1), Stats. 1929, provides:
"No dividend shall be paid by any corporation until at least fifty per cent of the authorized capital stock has been fully paid in, and then only out of net profits properly applicablethereto, and which shall not in any way impair or diminish the capital. . . ."
Sec. 182.13 (1), Stats., above defines the preference which may be given preferred stock.  It limits such preference to the par value thereof over the common stock in the distribution of corporate assets other than profits.  Sec. 182.19 (1) limits the payments of dividends to net profits. Paragraph (e) of article IV of the defendant's articles limits the payment of dividends and the premium on preferred stock in liquidation to profits.  The defendant corporation having been organized under the laws of Wisconsin, the general corporation laws of Wisconsin form a part of defendant's corporate charter and, therefore, constitute a part of the contract between the corporation and the stockholders.  Johnson v. Bradley Knitting Co.228 Wis. 566, 280 N.W. 688; Soehnlein v. Soehnlein,146 Wis. 330, 131 N.W. 739; Gaskill v. Gladys Belle Oil Co.16 Del. Ch. 289, 146 A. 337; Commonwealth v. Allen,240 Mass. 244, 133 N.E. 625; Bouree v. Trust Francais Des ActionsDe La Franco-Wyoming Oil Co. 14 Del. Ch. 332, 127 A. 56. *Page 667 
In general, the rights of various classes of stock to share in the assets of the corporation upon liquidation are fixed by the contract of the stockholders with the corporation.Penington v. Commonwealth Hotel Construction Corp.17 Del. Ch. 188, 151 A. 228; Gaskill v. Gladys Belle Oil Co.,supra; Roberts v. Roberts-Wicks Co., supra; Michael v.Cayey-Caguas Tobacco Co. 190 App. Div. 618, 180 N.Y. Supp. 532; Drewry, Hughes Co. v. Throckmorton, 120 Va. 859,92 S.E. 818; Bishop v. Smyrna  C. R. Co. (1895) 2 Ch. (Eng.) 265; Re Chrichton's Oil Co. (1902) 2 Ch. (Eng.) 86.
It follows that the judgment herein must be modified so as to eliminate that part which directs the payment of accumulated dividends and premium on preferred stock after the payment of the declared value of common stock; that is, to eliminate that particular part of the judgment from which defendant appeals.  After the payment of the full par value of the preferred stock, the remaining assets will belong to the common stockholders.
By the Court. — Judgment modified as directed in the opinion, and, as so modified, it is affirmed.  The defendant-appellant to have costs on its appeal.