certain per cent. each year, or by which the company also guarantees the dividend, creates an absolute obligation on the part of the corporation to pay interest on the shares, or only an obligation to pay a preferred dividend in case there are profits which can be divided. There would seem to be no room for doubt on the question; and yet the courts have doubted upon it, and have, the author thinks, gone wrong in deciding it. If the shares are entitled, we will say, to a preferred dividend of seven per cent., then the corporation must pay that dividend if there are profits which can be properly so applied, and to create this obligation the additional guaranty is not necessary. The rule of interpretation which makes the guaranty a mere guaranty of dividends in case there are profits out of which dividends can be declared, gives no effect whatever to that clause of the contract, and violates the rule that an instrument must be so interpreted, if possible, to give effect to all its parts. The additional guaranty can only mean that the company undertakes that the dividend shall be payable in any event, in other words, it converts the certificate into an interest-bearing debenture. Where, in addition to the guaranty of interest at the rate named, the stock is payable in full on a dissolution of the corporation next after the payment of debts, there is no room for any hesitation in holding that the guaranty of interest is absolute and wholly independent of the question whether there are profits in any year whatever on which a dividend could be properly declared ;1 for here the share certificate is in the nature of an interestbearing debenture.

§ 2275. Doctrine that Such a Guaranty is a Guaranty only in Case there are Profits. We must, however, take the decisions as we find them. There are holdings to the effect that a general guaranty of dividends by a railroad company on its preferred stock is not a guaranty of payment in any event, but only in the event that the dividends are earned.2 It has also been held that the holders of preferred stock or preference shares of a corporation, are entitled to dividends when there are profits out of which dividends may be declared, and not other

1 Williams v. Parker, 136 Mass. 204.

2 Miller v. Ratterman, 47 Ohio St. 141; s. c. 23 Ohio L. J. 416.

1

wise, although the resolution of the directors under which the stock is issued provides that "a semi-annual dividend of five per cent., payable in each year, shall be guaranteed by the company," and although the certificates of stock contain the recital "five per cent. semi-annual dividend guaranteed." This conclusion is enforced by Mr. Justice Cooley in a train of specious reasoning, proceeding upon the view that the conclusion which would make such stock a debt and which would make the semiannual guaranteed dividend merely interest, would place the preferred in antagonism to the general shareholder, and would thereby produce inharmony in the management of the corporation; since preferred shareholders would be interested in keeping it alive as long as they could sap its capital by the collection of the semi-annual dividends, while in case of its becoming a failing concern, the general shareholders would be interested in winding it up and distributing its capital among all the shareholders. "A contract," concluded the learned judge, "the necessary construction of which would be that on which the plaintiff relies, and which would lead or tend to the consequences pointed out, which would require dividends when honesty and good faith to the public would forbid, and public opinion condemn them; which would antagonize the positions of different classes of men engaged in the same joint undertaking and preclude harmony of action and union of effort, precisely under those circumstances when harmony and union would be most essential; under which the corporation making it must almost inevitably be destroyed unless it should enjoy continuous prosperity; and which, under some circumstances, would make one class of persons having a voice in the control and management of the corporation interested in so controlling its means as to keep them as long as possible in an unproductive condition, until by a slow process they can absorb them to the prejudice of their associates, must neces

sarily be opposed to public policy and void. And a contract which will bear any other reasonable construction could not, consistently with the rules of law, and with regard to what must be deemed the intent of the parties, that their contract should be just, reasonable and beneficial, have this construction put upon it.""

1 Lockhart v. Van Alstyne, 31 Mich. 76, s. c. 19 Am. Rep. 156.

2 Ibid., p. 84.

§ 2276. Such a Guaranty may Make the Right to Dividends Cumulative. Such a guaranty may, however, have the possible effect of making the right to the dividends cumulative, — that is, of making the profits of one year make up the deficiencies of the preceding years. At least one holding in an intermediate appellate court is found where the certificates stated that the stock was "entitled to dividends at the rate of 10 per cent. per annum, payable semi-annually, in New York, on the first days of June and December, in each year, out of the net earnings of said company; and the payment of dividends as aforesaid is hereby guaranteed." Here it was held that the holders of the stock were entitled to the guaranteed amount of dividends out of the net earnings whenever made, and were not restricted to the earnings of any year for the payment of dividends falling due that year.1

§ 2277. Whether a Preferential Certificate is of Stock or of Indebtedness. Whether the scheme and the certificate issued in pursuance of it creates stock in the corporation or an indebtedness of the corporation to the scripholder must depend on the terms of the authorizing statute, of the resolution under which the certificates are issued, and of the certificates themselves. It is ruled in Ohio that where a resolution adopted by stockholders of a railroad company, authorizing the issue of preferred stock, recites that it is to be issued under an act which authorizes the issue of preferred stock, and not of certificates of indebtedness, referring to it by its title and date, which resolution is made a part of the certificates thereafter issued, such certificates will be held to be certificates of stock, unless, considering the whole transaction, it is clear that the purpose was to create a debt, and unless a debt was in fact created. Where a manufacturing corporation, professing to act under the Ohio act of 1870, providing for the issue of preferred stock to pay debts, issued certificates of preferred stock, so-called, certifying that the corporation guaranteed to holders the payment of four per cent. semiannual dividends, and the final payment of the entire amount at a specified time, with the right to convert the preferred stock

1 Prouty v. Michigan, &c. R. Co., 4 Thomp. & C. (N. Y.) 233.

2 Miller v. Ratterman, 47 Ohio St. 141; s. c. 23 Ohio L. J. 416.

into common stock; and the company, at the same time, executed and delivered to a trustee its bond and mortgage, to secure the holders of such certificates, it was held that the holders.

of the certificates did not thereby become stockholders or members of the corporation, but its creditors; and that, as such creditors, they had a lien upon the mortgage property, superior to that of general creditors of the corporation, or of its assignees.1

§ 2278. Preferred Stockholders not Entitled to Priority over Creditors. A preferred stockholder, whose contract merely entitles him to dividends out of profits in preference to ordinary stockholders cannot, by virtue of his contract, claim a preference over creditors; for any contract which gives him such a preference leaves him out of the category of shareholders and places him in that of preferred creditors. Stated in another way, when the scheme of preference is such that the status of the so-called preferred shareholder is really that of a shareholder, and not that of a creditor, he is of course entitled to no preference in winding up the company in the distribution of its assets over its creditors. He is still a member, and hence in a sense a debtor and not a creditor. Nor does the mere fact that he is entitled to a preference over other shareholders in respect of dividends where there are profits to divide, leave him out of this category and entitle him to such a preference in winding up. His rights are to have his preferred dividend in case there is a surplus which can properly be divided among shareholders, and there can be no such surplus so long as debts of the corporation remain unpaid as they mature. And creditors who surrender their debentures for preferred stock remit themselves to this position; for by so doing they cease to be creditors and become shareholders.4

§ 2279. Illustration.

- Certificates of preferred stock of the Ohio and Mississippi Railway Company were issued, containing the following

1 Burt v. Rattle, 31 Ohio St. 116. 2 Re London India Rubber Co., L. R. 5 Eq. 519; Griffith v. Paget, 6 Ch. Div. 511.

3 Warren v. King, 108 U. S. 389; aff'g s. c. 2 Fed. Rep. 36.

4 St. John v. Erie R. Co., 22 Wal!. (U. S.) 136; aff'g s. c. 10 Blatchf. (U. S.) 271.

language: "The preferred stock is to be and remain a first claim upon the property of the company after its indebtedness, and the holder thereof shall be entitled to receive from the net earnings of the company seven per cent. per annum, payable semi-annually, and to have such interest paid in full, for each and every year, before any payment of dividends upon the common stock; and whenever the net earnings of the corporation, which shall be applied in the payment of interest on the preferred stock and of dividends on the common stock, shall be more than sufficient to pay both said interest of seven per cent. on the preferred stock in full, and seven per cent. dividend upon the common stock, for the year in which said net earnings are so applied, then the excess of such net earnings after such payments shall be divided upon the preferred and common shares equally, share by share." It was held that the preferred stockholders had no claim on the property superior to that of creditors whose debts were contracted by the company subsequently to the issue of the preferred stock, and that their only valid claim was one to a priority over the holders of common stock.1

- Nor does a mere

§ 2280. Nor over Other Shareholders. right to a preference in receiving dividends out of profits give a right of preference over other shareholders in the distribution of the company's assets on a final winding-up. The preferred shareholder is still a shareholder, and is entitled to whatever preference his contract gives him, and to no more.2

§ 2281. Preferred Stock may be Issued without the Right to Vote. The ownership of stock in an incorporated company, as a general rule, carries with it the right to vote upon the same at any meeting of the holders of the capital stock. But to this rule there may be exceptions; and it is competent for a railroad company, in issuing certificates of preferred stock, to stipulate therein that the holders shall not have or exercise the right to vote the same, as the owners of the same, at any meeting of the holders of the capital stock of the company.3

1 Warren v. King, 108 U. S. 389. 2 Griffith v. Paget, 6 Ch. Div. 511. The separate assent of the preferred shareholders, as a class, is not necessary to an "arrangement" under § 12,

of the English Company's Act, 1867. Re Brighton &c. R. Co., 44 Ch. Div. 28. 3 Miller v. Ratterman, 47 Ohio St. 141; s. c. 23 Oh. L. J. 416.