Court Opinion

ID: 8190264
Source: CourtListenerOpinion
Date Created: 2022-09-09 23:13:10.122159+00
Date Added: 2024-06-11T16:40:35.147786
License: Public Domain

TimliN, J.
(dissenting). Frederick Pabst of Milwaukee died January 1, 1904, leaving a will which was admitted to probate in the county court of Milwaukee county February 3, 1904. He also made a deed bearing date July 17, 1903. By these two instruments he disposed of his property, consisting largely of shares of stock in the Pabst Brewing Company, a Wisconsin corporation, in trust upon several distinct trusts. Mr. Pabst left surviving him Maria Pabst, his widow, his sons Gustave G. Pabst and Frederick Pabst, Jr., his daughters Maria Goodrich and Emma Soehnlein, and his granddaughter Emma Maria Pabst, commonly called Elsbeth Pabst. All of these are still living except the testator’s widow, who died October 3, 1906. The will was construed in Pabst v. Goodrich, 133 Wis. 43, 113 N. W. 398, where the trust provisions of the will may be found in detail. The trusts for tire benefit of Gustave G. Pabst, Maria Goodrich, and Frederick Pabst, Jr., have been executed upon the death of testator’s widow. Two trusts remain, one for Emma Maria Pabst, not involved in this appeal, and one arising under the deed and will called the Soehnlein trust. By the terms of this latter trust Mrs. Soehnlein is entitled to the divi*354dends or income of certain shares of stock in the Pabst Brewing Company and contingently entitled to the shares themselves, and the appellants, children of Mrs. Soehnlein, subject to the right of the latter to the dividends and income, are contingently entitled to the shares. In other -words, they are contingently entitled to the corpus of the trust property. The present interest of Mrs. Soelmlem is only that of a term tenant owning the income or dividends. The circuit court nevertheless, upon request of the trustee for further instructions, ordered all the proceeds of the sale of that part of the stock dividend apportioned to the Soehnlein trust and hereinafter referred to paid over to Mrs. Soehnlein. Her children appeal and thus raise the question whether or not such proceeds belong in whole or in part to the term tenant or whether these proceeds belong in whole or in part to those who own the corpus of the trust property, to wit, the shares. The premises upon which this question must be determined are as follows: The Wisconsin Trust Company, trustee, together with the executors under the will, applied to the circuit court for in.structions in regard to their power and duty to consent to and aid in carrying out the following scheme: The Pabst Brewing Company, a Wisconsin corporation, had a capital of ■$10,000,000, fully paid, represented by 10,000 shares of the face value of $1,000 each. It had a surplus of $3,086,562.02, of which $708,894.12 had been by it invested in the purchase of 736 shares of its own stock. Four hundred and fifty of these shares, called the Falk stock, had been purchased for $454,000 three days before the first application for instructions was filed in the circuit court. That court thereupon instructed the trustees and executors to consent by vote to amend the articles of incorporation of this company so as to make the par value of all shares $100 each and increase the number of shares accordingly, and to increase the capital stock of the company from $10,000,000 to $12,000,000 by the issue of $2,000,000 preferred stock. This latter stock was preferred *355as to assets as well as to dividends and carried seven per cent, cumulative dividends and was redeemable at $115 per share and accrued dividends. Out of the 736 shares above mentioned purchased in as aforesaid (which were now 7,360 shares), 5,000 shares were to be given as a bonus to the purchasers of the preferred stock at the rate of one of these shares to each four shares of the preferred stock. Arrangements were made by which the preferred stock and this 5,000 shares of common stock would, as soon as issued to the existing stockholders, including the trustee, be sold, the preferred stock at par with the bonus of 5,000 shares of common stock prorated as aforesaid to the purchasers of preferred stock. This was done, and after the money was realized on the shares of the preferred stock which were apportioned to the trustee in the Soehnlein trust according to the usual mode of distributing among existing stockholders, the question brought before this court on this appeal arose, and it was sought to have it ascertained and settled whether these proceeds should go in whole- or in part to the owner of the income, viz. the term tenant, or to the owners of the shares which formed the corpus of the Soehnlein trust. By this financiering the corporation would receive for its preferred stock $2,000,000, on which it must pay dividends at the rate of seven per cent, annually, and for the money so obtained at this high rate it must pay out the bonus shares of the value of $500,000 and the premium of $15 per share on redemption of 20,000 shares of preferred stock, amounting to $300,000, thus making the transaction, in its effect upon the stock as it existed prior to the increase, equivalent to borrowing $2,000,000 at seven per cent, per an-num and paying for such loan in addition a bonus of $800,000. The total assets of the corporation at this time amounted to $17,749.,487.37, of which amount about $12,000,000 was in buildings, real estate, and tangible personal property other than merchandise, and the remainder mostly in merchandise on hand, bills and accounts receivable, *356and its own shares purchased by the corporation. There was only the sum of $143,196.10 in cash on hand and at the bank. There were liabilities, exclusive of liability to capital stock and surplus, of $4,955,949.51, and in this last was included outstanding bonds secured by mortgage on the corporation’s real estate amounting to $2,560,000. The only evidence tending to show the value of the shares as they stood prior to the issue of preferred stock consists of the amount paid by the corporation for its shares when purchased in from-the stockholders as follows:
December 29, 1906, 35 share's. $35,000 00
December 29, 1906, 25 shares. 25,000 00
February 12, 1907, 70 shares. 72,651 63
February 28, 1910, 2 shares. 2,000 00
March 31, 1910, 150 shares. 120,242 49
June 3, 1910, 450 shares.'. 454,000 00
This indicates a value of about par and a dividend rate of five per cent, or less. There is no direct evidence to show what annual dividends were paid on these shares. The net result of the transaction, so far as the original shareholders of the Brewing Company were concerned, was to diminish the value of the former stock in the corporation by reducing it to the rank of common stock, by placing a lien of $2,000,000 and $300,000 premium, making $2,300,000, paramount to the common stock in ownership of corporate assets, and by diminishing the ability of the corporation to pay dividends because of the high rate of the preferred cumulative dividends which attached to this preferred stock. This preferred stock dividend was manifestly much higher than the dividend rate formerly paid by the corporation on its stock. So far as the' corporation is concerned,' its liability to surplus was reduced $2,500,000 and its liability to capital increased $2,000,000 by the transaction, and its assets in no wise increased. So far as the former shareholders are concerned, one who formerly owned $1,000,000 face value of the stock, or one. tenth of the corporate assets, now only owns one twelfth of the corporate *357assets, subject to the burden of this preferred stock, and in like proportion for smaller amounts.- It appears clearly to me that by this transaction the amount and value of the interest of each of the former shareholders.is diminished or taken away to a greater extent than it would have been by the mere declaration and payment of a cash dividend out of the surplus, and that the value so taken away is given to the holders of this preferred stock. Sec. 1765, Stats. (1898), is the authority for a corporation issuing a stock dividend. That provides :
“Any corporation (1) which has invested or 'may invest its net earnings or income or any part- thereof in permanent additions to its property or (2) whose property shall have increased in value, may lawfully declare a dividend payable to stockholders upon its capital either in money or in stock to the extent of the net earnings or income so invested or of the said increase in the value of its property.”
Under this statute as I understand it, a stock dividend is the capitalization of earnings or income which the corporation has already invested in permanent additions to its property or an issue of stock to represent an increase in the value of its property. This last is of course capital. Whether the first is or is not need not be determined here, because, even upon the assumption that it is not, the judgment appealed from is erroneous, as hereinafter attempted to be explained. Sec. 1759a, Stats. (1898), as amended by ch. 576, Laws of 1907, also provides:
“Any corporation may provide for ■ preferred stock in its original articles of organization, or-by amendment thereto adopted by the unanimous vote of the-stockholders, and may, in such original articles or by such amendment thereto adopted by the unanimous vote of the stockholders, provide for the payment of dividends on such preferred stock out of the profits at a specified rate before dividends are paid upon the common stock; for the accumulation o-f such dividends; for a preference of such preferred stock, not, however, exceeding the par value thereof, over the common stock in the dis*358tribution 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.”
The trustee for infant beneficiaries who consented and the court which authorized such consent to the scheme heretofore outlined and to the amendment of the articles of the Pabst Brewing Company under the last quoted statute in the instant case were quite complaisant. That transaction is not before us for review, because the appeal here is only from the order distributing the proceeds of the sale of this preferred stock wholly to the term tenant. But the transaction is relevant to the question before us, because it shows that the new preferred stock represents not alone surplus or income, but takes materially from the value of the corpus of the trust estate. With reference to sec. 1765, supra,, it seems to me obvious that if our statute be so construed as to permit the issue of a stock dividend of common stock by a corporation against its surplus, consisting of cash or earnings not capitalized, all corporations paying large dividends and whose stock is for that reason worth more than its par value may at will impair the value of the former shares in the hands of a minority of its shareholders by annual stock dividends based on profits. This must be true unless it is assumed that a corporation which is capable of earning, say, twenty-five per cent, on $10,000 capital will continue to earn twenty-five per cent, on all additions to that capital. I think the latter as a rule, or generally, is demonstrably incorrect. It seems also clear that where the dividends belong to another the guardian or trustee of an infant shareholder should not consent to the issue of preferred stock to be paid for at par out of surplus, particularly preferred stock carrying a high dividend rate and a bonus on redemption, if that preferred stock is to be all turned over to the term tenant or life tenant, or if that preferred stock is to be sold and the whole avails of such sale turned over to the term tenant.
*359I am unable to understand tbe majority opinion. The conflicting views of courts there discussed relate to questions not in the instant case, as it seems to me. It may be that I have acquired some of the confusion so generally attributed in that opinion to the supreme court of the United States and other distinguished courts and jurists. • I do not understand that there are any cases which grant to the term tenant the whole avails of the sale of a stock dividend or the whole stock dividend under circumstances such as -exist in this case. It is true there is a conflict of authority upon other and different questions relating to stock dividends as between the owner of the income, whom we may call the life tenant, and the owner of the shares, whom we may call the remainderman. Excepting the cases which assume that the intention of the testator or other creator of the trust was to recognize the power of the corporation and the usual mode of corporate business and consequently to give to the person entitled to the income only that which the corporation should disburse as income and to the owner of the shares all that which the corporation should capitalize or treat as capital, the basic concept in all the cases is to preserve the corpus or principal of the trust estate with its unearned increment or increase in value for the owner of' the shares and to preserve to the life tenant or other person, entitled to the income all that is really earned income. This is the principle underlying the decision in In re Allis’s Estate, 123 Wis. 223, 101 N. W. 365, and indeed underlying all the cases relied upon in the majority opinion as well as those herein cited. But courts in the application of this principle have not always agreed with reference to what is capital or principal and what is income. I think, however, that all courts agree (1) that there exists a rule by which, upon increase of capital of a corporation by means of a stock dividend or otherwise, the new shares must be offered to existing' shareholders pro rata. 1 Cook, Corp. (6th ed.) § 286. (2) Where a trustee is such shareholder he has the right under *360this rule to take his pro rata of the new shares. (3) This right he holds for the owner of the shares, and if there is any profit, value, or advantage in the exercise of this right such profit, value, or advantage belongs to the owner of the shares, not to the owner of the income. This is the rule even in New York courts, whose decisions the majority opinion finds free from confusion and professes to follow (Robertson v. De Brulatour, 188 N. Y. 301, 80 N. E. 398, affirming S. C. 111 App. Div. 882, 98 N. Y. Supp. 15), and in Kentucky (Hite's Devisee v. Hite’s Ex’r, 93 Ky. 257, 20 S. W. 778). Erom this rule the conclusion seems inevitable that a stock dividend based on profits must also he offered to the owner of the shares, and he may pay cash for it, the cash going to the life tenant or owner of the income and the new shares to the former shareholder. It also follows that if the new shares are to he paid for at par either in cash or by a proportionate diminution of the surplus of the corporation and they are worth more than par, the excess value belongs to the owner of the former shares or the remainderman, and not to the owner of the income. The cases are full of suggestions that the substantial nature, not the form, of the transaction should control. This is in line with the cases decided by this court. In re Allis’s Estate, supra; Pabst v. Goodrich, 133 Wis. 43, 113 N. W. 398. If the income or earnings represented in the surplus account of the corporation were disbursed in the form of a cash dividend to the term tenant or the owner of the income, could that person use this cash to buy from the corporation the new shares at par ? Manifestly not as against the holder of the old or former shares, unless the shares were first offered to the former shareholder and refused by him. The person entitled to the income, therefore, must pay for these shares not at par hut at what they are worth not less than par, in order to preserve the former proportion between principal and income. Upon the increase of capital stock of a corporation by the issue of new shares to be paid for in money, *361it is very common knowledge that the right to subscribe to these new shares belongs to the owners of the former stock pro rata. Vast transactions are carried on in the stock exchanges of the country in the sale of such rights by the former shareholders. It is said in 2 Cook, Corp. (6th ed.) § 559:
“The right to subscribe for new shares at par upon an increase of the capital stock, which is an incident of the ownership of the stock, does not belong as a privilege to the life tenant, but such an increment must be treated as capital, and be added to the trust fund for the benefit of the remainder-man. This is equally the rule whether the trustee subscribes for the new stock for the benefit of the trust or sells the right to subscribe for a valuable consideration. In either event the increase goes to the corpus “ citing many cases.
This rule is slightly complicated when the increase of capital is paid for out of the surplus or by a proportionate diminution of the surplus. But it is not abrogated. If the surplus so to be applied existed wholly in cash and was of such an amount that the smaller fraction of the corporate assets, which after the increase belonged to the former stockholder, was equivalent in amount and value to the larger fraction thereof which was his before the increase, and no statute lile© ours intervened, there might be no substantial wrong except the loss of control done to the prior shareholder by giving the new shares to the owner of the income or term tenant; as, for example, if a corporate capital was $1,000,000, consisting of 10,000 shares of $100 each and worth $100 each, and was increased $200,000 and such increase evidenced by a stock dividend payable out of the surplus, the former stockholder who was not the owner of dividends or profits who owned 1,000 shares -or one tenth of the corporate property would own property to the amount of $100,000. After the increase he would own, instead of one tenth of $1,000,000, one twelfth of $1,200,000, or $100,000, the same as before. But if the additional 2,000 shares are not identical with the former shares as to privileges, .advantages, and value, the original proportion of value be*362tween capital and income cannot continue. If, like the instant case, the 2,000 shares added were preferred stock with* a fixed cumulative dividend larger than that which would be-ordinarily paid on all the stock, thus tending to reduce the-future dividend earning power of the common stock, and were-a prior lien on the assets and payable with a premium, all these advantages given to the additional or increased stock diminished the value of the former stock in the same proportion-as the new stock is enhanced in value by the possession of these advantages. They come out of the corpus of the trust estate. As it is said in Eisner’s Appeal, 175 Pa. St. 143, 34 Atl. 577, “The gain of the new stockholder is the precise measure of loss of intrinsic value of the capital of the old stockholder.”' See, also, Gibbons v. Mahon, 136 U. S. 549, 10 Sup. Ct. 1057; Gilkey v. Paine, 80 Me. 319, 14 Atl. 205; Spooner v. Phillips, 62 Conn. 62, 24 Atl. 524; DeKoven v. Alsop, 205 Ill. 309; Carter v. Crehore, 12 Hawaii, 309; Moss’s Appeal, 83 Pa. St. 264; Connolly’s Estate, 198 Pa. St. 137, 47 Atl. 1125; In re Allis’s Estate, 123 Wis. 223, 101 N. W. 365; Pabst v. Goodrich, 133 Wis. 43, 113 N. W. 398.
This advantage to the holder of the new stock and consequent diminution of the value of the former stock may result either because the former stock, by reason of its dividend-paying power, is worth much more than par, while the new stock of' the stock dividend is issued at par and prorates with the more costly stock. This is the ordinary case, often adjudicated., Or it may be because the new stock is given by the amendment to the articles advantages in priority of lien, in amount or rate-of dividend, in premium on redemption, or otherwise, which-makes it of greater value than the old stock with which it in all other respects prorates. This is the instant case. One cannot create value by issuing stock, and the value given to the new stock by priority of lien or preference as to dividends- or rate of dividends or premium must come out of the former-stock, because there is only one amount of property out of *363which both must be fulfilled or satisfied. I conclude, therefore, that the court -below erred in awarding the whole proceeds of the sale of this preferred stock dividend to the term tenant. Whether any part of the proceeds of the sale of this-preferred stock dividend should go to the term tenant, and if' so what proportion, it is unnecessary to consider. The evidence offered below is insufficient to make this point clear,, but it seems to me that there was manifest error in requiring the whole to be paid to the term tenant.
I hope it will not be understood that I approve the majority-opinion except as here mentioned. I think I find much confusion and error therein, but such criticism would be unprofitable.
Mr. Justice Siebeckeb and Mr. Justice Kebwiu concur-in this dissent.