§ 2204. Cash Dividend Voted to Pay Invalid Stock Dividend. -- Where the directors of a corporation vote a cash dividend for the purpose of paying for new stock to be issued to its stockholders, the whole transaction constituting a stock dividend, if the issue of the stock is void because of non-compliance with the provisions of a statute, the cash dividend will fall also, and cannot be claimed by a person entitled to the income of certain shares of stock.1 § 2205. Shares Reduced in Consequence of Losses and Then Re-issued After Recovery. Where a banking corporation lawfully reduced the par value of its shares, in consequence of certain supposed losses, and, upon recovery of the sum supposed to have been lost, issued additional stock to its shareholders to represent the restored value, it was held that the new stock thus issued belonged to the corpus of the estate of a deceased shareholder, and did not go to the life-tenant.2 This conclusion would plainly have followed either under the Massachusetts or the Pennsylvania rule. § 2206. What Dividends Pass to the Specific Legatee of Shares. Under the foregoing principles, a specific legatee of corporate shares is entitled to all dividends which are declared after the death of the testator. To this rule one English case adds the qualification that a dividend earned before the death of the testator and which ought to have been declared before, goes to the corpus of his estate, and does not follow the shares to the specific legatee. Another English case holds that dividends payable after the death of the testator go to the specific legatee, although the resolution declaring them may have been passed in the testator's life-time. Although this case is said by Sir Nathaniel Lindley to have turned on the special wording of the company's deed of settlement, yet it reaches the result which would be reached in most American courts in respect of ordinary dividends. The rule, elsewhere stated,' that the severance of title in respect of the dividend takes place at the date when it is 1 Rand v. Hubbell, 115 Mass. 461; s. c. 15 Am Rep. 121. 2 Parker v. Mason, 8 R. I. 427. 3 Jacques v. Chambers, 2 Coll. 435; Wright v. Warren, 4 De Gex & S. 367; Browne v. Collins, L. R. 12 Eq. 586; Ibbotson v. Elam, L. R. 1 Eq. 188. 4 Browne v. Collins, supra. 5 Clive v. Clive, Kay, 600. 6 Lind. Comp. Law, 5th ed., 545, note i. 'Ante, § 2172. declared without reference to the date when it is made payable, would take it to the general estate if it were declared prior to the death of the testator, and to the specific legatee if declared after his death. Most of the English cases conform to this theory,, and unite in holding that dividends declared before the death of the testator belong, prima facie, to his general estate, and do not pass to a specific legatee, although he may die before the date at which they are payable.1 § 2207. View that the Question is to be Determined by the Form of Corporate Action.- Another view is that the question is to be determined by the form of the action of the corporation, the courts sometimes say intent and substance, but they really mean form. The meaning of it is this: that whatever the corporation chooses to call capital and to treat as capital, becomes for that reason capital as between the lifetenant and remainder-man, and goes to the latter, although derived from its profits; and on the other hand, whatever it may choose to distribute as ordinary dividends while it is a going concern, is to be regarded as profits, and is to go to the life tenant, although it may in fact be a dividend of its capital, and although its payment may in fact impair to that extent its permanent capital. This, substantially, is the view taken by the Supreme Judicial Court of Massachusetts. That court have reasoned that, although money in the hands of the directors may be income to the corporation, yet it is not income to a stockholder until a dividend is declared. When, therefore, the company invests such money in buildings and machinery, or in railroad tracks, depots, rolling stock, or any other permanent improvements, for enlarging or carrying on their legitimate business, it never becomes income to the shareholder. The investment becomes an accretion to the capital, and it is equally so whether they increase the number of shares, or the par value of shares, or leave the shares unaltered. Or if the number of shares is increased for purposes merely speculative, it is an increase of capital stock, and not of income, and it would be practically unwise for courts to go behind the action of the company and 1 De Gendre v. Kent, L. R. 4 Eq. 283; Lock v. Venables, 27 Beav. 598; Wright v. Tuckett, 1 Johns. & H. 266; attempt to ascertain how they came by the funds out of which they declare either cash or stock dividends. The same court has reiterated this view in a later case, by saying in substance that whether the distribution, by a corporation, of its earnings among its stockholders, is an apportionment of stock, or a dividend of profits, depends upon the substance and intent of the action of the corporation, as shown by its votes. It is also repeated that it would be impracticable for the courts, in determining the comparative rights of different persons in a particular share of stock, to go behind the votes of the corporation and its directors, and investigate the accounts and affairs of the corporation, in order to ascertain how the corporation acquired the funds out of which the dividend was declared." 2 § 2208. Result of this View: Cash Dividends, However Large, Income; Stock Dividends, However Made, Capital.— The logical result of this doctrine is that cash dividends, however large, are income and go to the life-tenant; and that stock dividends, however made, are capital and go to the remainderman.3 § 2209. Another Result; Undivided Earnings Likewise Capital. Another result of this view is that undivided earnings of the corporation are likewise regarded as capital; and hence that, as between the life-tenant and remainder-man, the interest in such earnings represented by each certificate of stock is an interest in the capital, and not an interest in the income.* Moreover, as the corporation may, in the absence of a restraining statute, treat its undivided earnings either as capital or income, that is, turn them into its property or business or 1 Minot v. Paine, 99 Mass. 101; s. c. 96 Am. Dec. 705. 2 Rand v. Hubbell, 115 Mass. 461; s. c. 15 Am. Rep. 121, 134. That the question is to be determined by votes of the corporation, see Leland v. Hayden, 102 Mass. 550; Adams v. Adams, 139 Mass. 452. 3 Minot v. Paine, 99 Mass. 101; s. c. 96 Am. Dec. 705; Daland v. Williams, 101 Mass. 503; Leland v. Hayden, 102 Mass. 550; Adams v. Adams, 139 Mass. 452. Compare Heard v. Eldredge, 109 Mass. 260; 8. c. 12 Am. Rep. 681; Sohier v. Burr, 127 Mass. 225; Hooper v. Rossiter, 1 McClel. 527; Barton's Trust, L. R. 5 Eq. 238; Balch v. Hallett, 10 Gray (Mass.), 403. 4 Gifford v. Thompson, 115 Mass. 480; Rand v. Hubbell, 115 Mass. 461; s. c. 15 Am. Rep. 121, 134. distribute them in cash dividends,' it follows that it may, during the entire life of the life-tenant of its shares, turn its earnings into capital and issue stock dividends to represent the increase, which dividends, under the operation of this rule, will be reserved for the remainder-man, leaving the life-tenant to starve and defeating the plain intent of the testator. § 221 0.Continued: Stock Dividends Capital, although Derived from Net Earnings. It results from this view that when the vote of the corporation is to distribute to each stockholder a certain number of additional shares in the corporation, in proportion to the amount of shares already held by him, the shares so distributed are received by the stockholder as capital, and not as income, although the means of making the dividend are derived from the net earnings of the corporation; and hence, if such new shares go to the trustee in such a trust as we are considering, he must hold them for the remainder-man. If, therefore, a joint-stock association increases its capital stock, to represent profits actually invested in extending its business and increasing the value of its plant, and apportions the new shares pro rata among its existing shareholders, the new shares become capital and not income, for the purposes of such a trust as those under consideration.3 § 2211. View of the Supreme Court of the United States. The Supreme Court of the United States has thrown the weight of its great authority in favor of the Massachusetts doctrine, in a recent opinion pronounced by Mr. Justice Gray, without any dissent. The court hold that stock dividends are a part of the corpus of such a trust estate as that under consider 1 Rand v. Hubbell, supra. 2 Gibbons v. Mahon, 136 U. S. 549; 3. c. 10 Sup. Ct. Rep. 1057; Minot v. Paine, 99 Mass. 101; s. c. 96 Am. Dec. 705; Rand v. Hubbell, 115 Mass. 461; 8. c. 15 Am. Rep. 121, 135; Atkins v. Albree, 12 Allen (Mass.), 359; Daland v. Williams, 101 Mass. 571; Leland v. Hayden, 102 Mass. 542; Gifford v. Thompson, 115 Mass. 479; Brinley v. Grou, 50 Conn. 66; s. c. 47 Am. Rep. 104 618; Greene v. Smith (R. I.), 19 3 Spooner v. Phillips, 62 Conn. 62; s. c. 24 Atl. Rep. 524. 1649 ation, without reference to the question whether they accrue from earnings or accumulations made before or after the death of the testator. The following extract from the opinion will show the principles upon which the court proceed: "The distinction between the title of a corporation, and the interest of its members or stockholders, in the property of the corporation, is familiar and well settled. The ownership of that property is in the corporation, and not in the holders of shares of its stock. The interest of each stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by the corporation, during its existence under its charter, and to a like proportion of the property remaining, upon the termination or dissolution of the corporation after payment of its debts.1 Money earned by the corporation remains the property of the corporation, and does not become the property of the stockholders, unless and until it is distributed among them by the corporation. The corporation may treat it and deal with it either as profits of its business, or as an addition to its capital. Acting in good faith and for the best interests of all concerned, the corporation may distribute its earnings at once to the stockholders as income; or it may reserve part of the earnings of a prosperous year to make up for a possible lack of profits in future years; or it may retain portions of its earnings and allow them to accumulate, and then invest them in its own works and plant, so as to secure and increase the permanent value of its property. Which of these courses shall be pursued is to be determined by the directors, with due regard to the condition of the company's property and affairs as a whole; and, unless in case of fraud or bad faith on their part, their discretion in this respect cannot be controlled by the courts, even at the suit of owners of preferred stock, entitled by express agreement with the corporation to dividends at a certain yearly rate, in preference to the payment of any dividend on the common stock, but dependent on the profits of each particular year, as declared by the board of directors. Reserved and accumulated 1 Citing Van Allen v. Assessors, 3 Wall. (U. S.) 573, 584; Delaware Railroad Tax, 18 Wall. (U. S.) 206, 230; Tennessee v. Whitworth, 117 U. S. 129, 136; New Orleans v. Houston, 119 U. S. 265, 277. 2 Citing New York &c. Railroad v. Nickals, 119 U. S. 296, 304, 307. |