I do not concur in the reasoning of the majority opinion, nor in the conclusion deduced therefrom.
That my attitude may be clearly understood I deem it necessary to state the facts as I glean them from the record, and my conclusions concerning the applicable law under those facts.
The facts, as alleged in the pleadings and disclosed by the evidence, are as follows:
The defendant was an incorporated mercantile company engaged in the sale of dry goods in the city of St. Joseph. Missouri. Its capital stock was divided into eight thousand shares, of the par value of one hundred dollars each, of which three thousand shares were common and five thousand shares preferred stock. It had been in business since December 29, 1910, the date of its incorporation, until January 1, 1928, when it went into liquidation.
The article of incorporation setting forth the rights of the preferred stockholders, is as follows:
"Article 3. That the amount of the capital stock of this company shall be $800,000. divided into 8,000 shares of the par value of $100 each; that of said entire capital stock, 3,000 shares shall be common stock and the remaining 5,000 shares shall be preferred stock, which said preferred stock shall be entitled to a dividend of six per cent per annum out of the net yearly income earned in any one current year before any dividend shall be made and paid on any of the *Page 12 common stock of said corporation, and which said preferred stock shall, upon distribution of the assets of said corporation be first paid in full before any of said assets are applied to any of the common stock, but that said preferred stock shall have no voting power, and that the entire amount of said capital stock has been bona-fide subscribed and the full amount thereof actually paid up in lawful money of the United States and is in the custody of the persons hereinafter named as the first Board of Directors."
After the issuance of the certificate of incorporation at the first meeting of the stockholders, which was on the day succeeding the issuance of the articles, they formulated and adopted a by-law defining the rights of the preferred and common stockholders as follows:
"The preferred stock of this corporation shall be entitled to a dividend from the profits of the capital at the rate of six per cent per annum cumulative and no more, and upon the winding up of the company, the holders of said preferred stock shall be entitled, after the debts of said corporation are paid, to receive from the remaining assets of said corporation the par value of said preferred stock before the holders of the common stock shall receive any sums in liquidation upon their holdings of common stock; but said preferred stock shall have no voting power."
No changes were subsequently made in the articles of incorporation or the by-laws except that the preferred stockholders were given voting power.
The dividends upon the stock of the preferred stockholders were paid each year up to and including the year 1925, but has not been paid for the years 1926 and 1927. On January 1, 1928, the company decided to dispose of its assets, wind up its affairs, and go out of business. Its merchandise has been sold, and its book accounts are nearly all collected. In the early part of 1928 and before the institution of this suit, the preferred stockholders, including the plaintiff, were paid in liquidation $100 per share for their stock. The debts of the company have been paid and it has on hand $170,000 in cash, about $5,000 in book accounts, and real estate consisting of two buildings, one a seven-story and basement building, and an additional four-story building. This real estate is carried on the books of the defendant at $271,000, which represents the cost of the property less a small depreciation. Efforts to sell this real estate have, so far, been unsuccessful. The carrying charge of these buildings in the way of taxes, insurance, etc., is from $8,000 to $10,000 a year. The president of the defendant company testified the buildings were worth approximately the amount at which they were carried on the books. The company at the time of the institution of this suit was proceeding with the liquidation and had assets on hand more than sufficient to pay the common stockholders at $100 *Page 13 per share, and the preferred stockholders the accrued and delinquent dividends which the lower court found should be paid to them.
The plaintiff's assignment of error, as a basis for its appeal, is the refusal of the trial court to enjoin the defendant from distributing in liquidation the remainder or surplus assets of the company to its common stockholders after the payment to its preferred stockholders of dividends on their stock for the years 1926 and 1927.
The defendant's assignment of error is that the trial court erred in decreeing that the preferred stockholders were entitled to a dividend of six per cent for the years 1926 and 1927.
I. Generally speaking, the rights of stockholders of a corporation, whether they be preferred or common, are, in the absence of a statute, an article of incorporation or a by-law, subject to the same rules of construction.
If this be true, then the holders of stock, whether designated as preferred or common, are entitled to share in the surplus of a corporation, after each of the holders of the same has received the full par value of his stock, unless, as stated, the contract (by which we mean the articles of incorporation and the by-laws) setting forth the terms and conditions upon which the stock was issued or is held, limits the rights of the preferred stockholders. This rule, after a review of the law in different jurisdictions, is succinctly stated in Corpus Juris as follows:
"Speaking generally, in the absence of any controlling provision in the statute or contract, preferred stockholders stand upon substantially the same footing as ordinary stockholders and have the same rights and are subject to the same liabilities, except that they are entitled to a certain preference." [14 C.J. sec. 573.]
Following this rule, the court in Smith v. Southern Foundry Co., 166 Ky. 208, 179 S.W. 205, said:
"Except as to preference in the payment of dividends and distribution of the assets as provided by the certificate and charter, and when authorized by statute, the holders of common and preferred stock have the same rights and are subject to the same liabilities."
The United States courts and the courts of last resort of Maryland, New York, Pennsylvania, Virginia and England, have adopted this rule. Vide cases cited in 6 American Law Reports, page 829, where the rule is thus summarized:
"In the absence of a limitation imposed by contract or by statute, the preferred stock in a corporation is entitled to share equally with the common stock in any distribution of profits after the common stock has received . . . an amount equal in rate to that stipulated for the preferred stock."
Calling stock preferred stock, however, "does not, per se, define the rights of such stock, but to determine in what respect the holder of such stock is to be preferred to the holder of ordinary stock, *Page 14 resort must be had to the statute or contract under which it is issued. [Elkins v. Camden Atl. Ry. Co., 36 N.J. Eq. 233.]
Referring to defendant's articles of incorporation and by-laws we find that the articles, while the company is a going concern, provide for a six per cent dividend to be paid out of the net yearly income in any one year, to the preferred stockholders before "any dividend shall be paid on the common stock;" and upon a distribution of the assets the preferred stockholders shall "be paid in full before any of the assets are applied to the payment of the common stock." The language employed in the articles does not limit the amount to be paid to the preferred stockholders, either as a dividend during the active operation of the company or as a distribution upon its liquidation. The provisions of the article, above quoted, are a concession to but not a limitation upon the plaintiff's share of earnings during the operation of the company or his share of the capital stock upon its liquidation.
After having received such advantages or preferences there is no further agreement or contract so far as the articles are concerned, as to the disposition of profits during the operation of the company or of its assets in the event of liquidation. Nor is there anything in the by-laws which, changes the situation. The by-law having reference to the rights of preferred stockholders to dividends is as follows:
"The preferred stock . . . shall be entitled to a dividend from the profits of the capital at the rate of six per cent per annum cumulative and no more, and upon the winding up of the company the holders of said preferred stock shall be entitled after the debts of said corporation are paid to receive from the remaining assets of said corporation the par value of said preferred stock before the holders of the common stock shall receive any sums. . . ."
If the contention be made that the surplus of this company after granting to preferred stockholders their authorized preferences and after paying to the common stockholders the par value of their stock, represents the profits in the business, and that the by-law, above quoted, limits the preferred stockholders' interest in the profits to the annual six per cent, then as a logical sequence it must follow that during the continuance of the company in business the right of the preferred stockholders is limited to a six per cent annual dividend. However, it must be noted from the language employed that this limitation is applicable only to dividends to which stockholders are entitled by virtue of a proper declaration thereof from the net profits while the company is in active operation or a going concern. When, however, it goes into liquidation the net profits accumulated and represented by the surplus, then existing, become capital assets and lose their identity as profits. It is therefore, under the facts at bar, solely a question of the distribution of capital assets among stockholders, and by-laws having application to the declarations of dividends *Page 15 by the directors, while the company is a going concern, have no application.
II. It is contended by the defendant that inasmuch as the articles of incorporation do not expressly state that the dividends shall be cumulative there is nothing to indicate what the intention of the parties was in that regard.
The provisions of the articles of incorporation and the by-laws applicable to the rights of stockholders while the defendant was a going concern are as follows:
Articles of Incorporation. By-laws.
"Said preferred stock shall be "The preferred stock of this entitled to a dividend of six per corporation shall be entitled to cent per annum out of the net a dividend from the profits of yearly income earned in any one the capital at the rate of six current year before any dividend per cent per annum cumulative and shall be made and paid on any of no more." the common stock of said corporation."
The rule of construction urged by the defendant has no application, except in cases where there is nothing to indicate what the intention of the parties was in the premises. No such condition exists here, and an application of the rule is certainly unauthorized where, as in this case, the stockholders met and adopted the by-laws within twenty-four hours after the articles were filed and before the preferred stock was issued. If there had been no affirmative declaration in the by-laws as to the cumulative character of the dividends the provision in the articles that they were to be paid "out of the net yearly income earned in any one year," would, under well considered cases and a recognized treatise on the subject, have necessarily rendered such dividends cumulative. [Boardman v. Lake Shore, etc. Ry. Co.84 N.Y. 157; Allen v. Montana Ref. Co., 71 Mont. 105, 227 P. 582; 6 Fletcher on Corp. p. 6028; 14 C.J. 350 and 351.]
III. There is no basis for the application of the rule contended for by the defendant on the ground of inconsistency between the articles and the by-laws. The terms of the former, as we have stated, without expressly so declaring, render the dividends cumulative; the latter simply gives affirmative declaration to the construction required to be placed on the former. Certainly no other reasonable interpretation can be given to the articles and by-laws when considered as a whole. There being no inconsistency the rule of construction is general, that an express by-law — in this case concerning the dividends — should be held to interpret and explain the articles in regard thereto and we should therefore give it the meaning intended by the stockholders. Ample authority for this conclusion is not wanting. *Page 16
"A court will not give to it [the charter] a positive construction opposed to any consistent practical construction which it has received from the corporation and its members when such practical construction is not unreasonable or contradictory to principles of justice or morality or to any rule of law or public policy." [14 C.J. 350 and cases.]
In view of the foregoing well defined rule there is respectable authority holding that after the unanimous adoption of a by-law and the issuance of the stock, even though irregular and unauthorized, the company is estopped from setting up the invalidity of the contract so made. For instance, in the case of Strong v. Minn. Auto. Trade Assn., 186 N.W. 800, it is said:
"A by-law, though not expressly authorized, may operate as a contract between the corporation, on one side, and its members, on the other, so as to be binding on both, and a member may be bound by an agreement which adopts an invalid by-law."
Aside from the rulings cited and in the absence of express language in the articles making dividends either cumulative or non-cumulative, under the facts in this case, indicative of the intention of the stockholders, the law will imply that the stock is cumulative.
If preferred stock is issued, without any mention of whether the dividends are cumulative, then the law makes them cumulative. As soon as there are net profits available for dividends, the corporation must pay the preferred dividends and all arrears thereon before a dividend is declared on the common stock. This is the well-settled rule at common law in this country and in England, and is not only equitable but is in accord with the understanding of the business community. [Henry v. Great Northern Ry. Co., De G. J. 606; Boardman v. Lake Shore Mich. Sou. Ry. Co., 84 N.Y. 157; Jermain v. Lake Shore Mich. Sou. Ry. Co.,91 N.Y. 483; Lockhart v. Van Alstyne, 31 Mich. 76, 18 Am. Rep. 156; Hazeltine v. Belfast Moosehead Lake Ry. Co., 79 Me. 411, 10 A. 328, 1 Am. St. 330; Hazel Atlas Glass Co. v. Van Dyk Reeves, 8 F.2d 716; Langben v. Goodman, 275 S.W. 841; 1 Cook on Corp. (7 Ed.) 96, sec. 273.]
IV. If, as has been demonstrated, the articles of incorporation and the by-laws constitute a contract and the latter is not inconsistent with the former, then it follows that the latter — the by-laws, which are declaratory of the intention of the stockholders — constitute a practical construction of the former or the articles of incorporation, to which full effect should be given. Further than this, the dividends on the preferred stock, being cumulative so long as the company continued in existence as a going concern, the holders of the preferred stock were entitled to have paid to them the dividends on said stock for the years 1926 and 1927 before any dividends were paid to the holders of the common stock. *Page 17
V. However, it is the contention of the defendant, that a cumulative dividend can only be paid out of earnings subsequent to the years in which the default occurs, and inasmuch as there were no earnings in 1926 and 1927 and the company then went out of existence, there have never been any earnings out of which the delinquent dividends could be paid even if cumulative. The correctness of the conclusion that dividends are payable only out of subsequent earnings is not only open to question but it will not stand the test of analysis. If a dividend upon preferred stock is cumulative it may be paid out of any earnings of the company regardless of the time when they were earned because they represent the standing obligation of the company as between its common and preferred stockholders. This probably not being determinative of the issues need not be considered as it is not necessary to depend upon a surplus from past earnings from which delinquent dividends shall be paid when the company is in process of liquidation. Such dividends may be paid out of the capital assets whether the same represent past earnings or not; and under the contract existing between the company and its preferred stockholders the dividends, as was held by the trial court, for 1926 and 1927 must be paid before any part of the assets of the company are paid to the common stockholders. The contention of the defendant, in this regard, grows out of an attempt to apply the provision of the articles of incorporation and by-laws applicable only to the company as a going concern, when the provisions applicable are those pertaining to the company when in process of liquidation. These provisions are as follows:
Articles of Incorporation. By-laws.
". . . and which said preferred ". . . and upon the winding stock shall, upon distribution up of the company the holders of the assets of said corporation of said preferred stock shall be first paid in full before be entitled, after the debts of said any of said assets are applied corporation are paid to receive to any of the common stock. from the remaining assets of said . ." corporation the par value of said preferred stock before the holders of the common stock shall receive any sums in liquidation upon their holdings of common stock."
VI. It is further contended that if there is a surplus, over and above the capital stock of the company at the time of the liquidation of its affairs, it consists of earnings prior to 1926 and belongs to the common stockholders. This theory has some support, as the cases cited by the defendant will show, but the better rule is otherwise, as *Page 18 is demonstrated in Continental Ins. Co. v. United States, 66 L. Ed. 871, in being founded upon sounder reason and better logic.
The surplus profits accumulated by defendant company prior to 1926 were never distributed and have now completely lost their identity as surplus profits belonging to any stockholder or class of stockholders and have become capital assets and as such the preferred stockholders should be paid under the terms of the articles and by-laws.
VII. It is also contended that the preferred stock is paid in full when the holder receives $100 per share therefor and that this payment constitutes a full acquittance and discharge of all obligations of the company to him. This contention is sought to be based on that provision in the articles of incorporation which provides that "the preferred stock shall, upon a distribution of the assets, be paid in full before any of said assets are applied to the payment of the common stock." While the articles require that the preferred stock shall be first paid in full before any of the assets are applied to the payment of the common stock, they do not require that all of the claims of the preferred stockholder shall be satisfied regardless of whether his claims result in the payment to him of a greater amount than a full payment of the par value of his preferred stock. The payment in full to him, therefore, occurs when he receives $100 per share for his stock and the accrued and unpaid dividends, and this the articles of incorporation assure to him before any of the assets are applied to the common stock.
VII. This company was incorporated under the Statute of 1909, regulating the formation of manufacturing and business companies. The defendant contends, under Sections 3339 and 3358 of said statute as a prerequisite to the right of preferred stockholders to share in a surplus with the common stockholders upon a liquidation of the assets of a company, that the articles should affirmatively grant this right. Section 3339 provides that the articles with respect to preferred stock shall set out the amount of the same, the number of shares, the names of the subscribers, the preference and priorities and the classification and character thereof as is provided in Section 3358.
Section 3358 provides for the character, amount, the number of shares, the price per share, the rate of the dividends whether cumulative or not and what priority if any the preferred stock shall have over the common stock out of the assets in case of liquidation.
While these sections require a statement of the preferences to be given the preferred stockholders, there is no language which limits the right of any stockholder to share in the assets of the company which remains over after the preferences provided for by the statute, *Page 19 have been satisfied. The preferred stockholder has certain inherent rights as such which need not be set out in the articles any more than the rights of the common stockholder need be set out to share in the assets.
While the sections of the statute cited require the articles of incorporation to declare the preferences to be given to the preferred stock they do not deny the right of the owners of such stock to express in a by-law, as was done in this case, their interpretation of the meaning of the articles; nor does it limit their right to contract among themselves in a by-law as to the manner in which the assets of the company are to be distributed when it goes out of business, has paid all of its debts and only its stockholders are interested in the liquidation of its affairs.
We are therefore of the opinion that the sections of the statute referred to do not require the articles of incorporation to state the rights which the preferred stockholders have in common with the common stockholders: and that the omission from the articles of any reference to a share in the surplus by the preferred stockholders when the company is in process of liquidation does not preclude their right to share in such surplus. As we have stated, all the obligations of this company have been discharged; and it is winding up its affairs. The contract, therefore, as to the distribution of the assets of the company is solely one of agreement between the stockholders and no questions of public policy or the rights of creditors are involved.
A review of the cases cited by defendant and in the majority opinion do not sustain their contentions as to the proper determination of this case.
That the law is as stated in 14 Corpus Juris, page 420, cited by defendant need not be questioned: "The corporation cannot bind itself by an absolute guarantee to pay dividends, otherwise than out of profits, to the impairment of the capital stock and possible prejudice of creditors unless it is expressly authorized by statute." No possible prejudice to creditors can occur when there are no creditors, and when the company is no longer a going concern but is dividing its capital among its stockholders.
The case of Shields v. Hobart, 172 Mo. 491, is a suit by a judgment creditor, involving the rights of creditors and alleging that the action of the corporation in declaring dividends was a fraud upon creditors.
The case of Hodde v. Nobbe, 204 Mo. App. 109, was a suit by a receiver on behalf of creditors to recover dividends paid out of capital in fraud upon the creditors.
Coleman v. Booth, 268 Mo. 64, was a suit by a trustee in bankruptcy for creditors to recover dividends paid out of capital while the company was a going concern. *Page 20
The case of Kidd v. Cereal Food Company, 145 Mo. App. 520, was a suit at law in an attempt to recover preferred dividends while the company was a going concern.
It follows, therefore, that the ruling of the majority opinion, in so far as it holds that the preferred stockholders are not entitled to a share in the surplus of the company when it is in process of liquidation, is error; and the case should be reversed and remanded with directions to the court to modify its judgment in conformity with this dissenting opinion.