Opinion
Civil Action No. 407.
May 9, 1945.
John J. Morris, Jr., of Wilmington, Del. (of Hering, Morris, James Hitchens, of Wilmington, Del.), and J. Channing Ellery, of Philadelphia, Pa., for the receivers.
Action by Frank E. Waldner against Equitable Loan Society, involving issue as to distribution of assets of defendant corporation which was in process of liquidation.
Order in accordance with opinion.
Equitable Loan Society, a Delaware corporation, is in process of liquidation. All creditors and the greater part of the administrative expenses have been paid. $78,565.53 remains in the receivers' account awaiting distribution to stockholders. The corporation has 33,734 shares of $1 preferred and 128,587 shares of $1 common outstanding. The pertinent provisions of the charter (par. 4) provide:
"Said Preferred stock shall entitle the holders thereof to receive out of the net earnings and the company shall pay before any dividends shall be paid on the common stock, a fixed yearly dividend of eight per cent (8%), payable as the Board of Directors may from time to time determine. * *
"The holders of the preferred stock shall, in case of liquidation or dissolution of this company, be entitled to be paid in full, both the principal of their shares and any accrued dividends before any amounts shall be paid to the holders of the general or common stock."
No dividends have been paid on the preferred for any year subsequent to 1918. If preferred is to be paid par plus dividends from 1918 to the date of the commencement of this action, April 3, 1944, the fund will be exhausted and nothing will remain for the common stock. Notice of the date for the hearing on the application of the receivers for instructions were sent to both preferred and common stockholders. Notice by newspaper publication was also had. The receivers contended that the remaining assets should be applied first to the payment of the par of preferred and second to the payment of dividends in arrears since 1918. No common stockholder appeared and objected.
The sole question is whether the preferred stock is entitled to cumulative dividends. Par. 4 of the charter construed under the rules of Delaware law would make such stock carry the attribute of a cumulative dividend. See Garrett v. Edge Moor Iron Co., 22 Del. Ch. 142, 194 A. 15, affirmed sub nom. Pennsylvania Co. for Insurance on Lives, etc., v. Cox, 23 Del. Ch. 193, 199 A. 671, and cases therein cited. Further than that, the evidence at the hearing was abundant to show the acts of the officers, directors and stockholders over a long period of time disclose the construction they placed on the meaning of the contract, found in paragraph 4 of the charter, between the preferred and common stockholders inter sese. At the first meeting of the incorporators on January 22, 1910 a resolution was passed approving the form of the preferred stock certificates. These certificates since then and up to the present have always borne the legend that the dividends on such shares were to be "cumulative." Thereafter, the whole course of conduct demonstrates that when a dividend was declared for payment on the preferred stock it covered the period from the date of last payment to the preferred. For example, the dividend declared on December 30, 1922 and to be paid January 15, 1923, was, as the minutes disclose, "to be for the dividend as accrued for the six months beginning December 31, 1912 and June 30, 1913." This system of dividend payment was followed throughout the history of the corporation from 1910 to the date of institution of suit.
The language appearing on the preferred stock certificate reads:
"This stock shall bear dividends at the 8 per cent. per annum cumulatively and shall be preferred both as to dividends in any distribution of profits and as to principal and any accumulations of dividends in any distribution or division of the corporate property upon dissolution or liquidation. This stock shall further be entitled to participate in the distribution of 50 per cent. of the net profits of the company to the holders of all the preferred stock issued."
Twenty-seven years accrued dividends, amounting to $2.16 a share, are now due the preferred after they receive their par. $33,734 will be allocable to the payment of the par. The balance will be insufficient to pay completely the back dividend charge. Nothing remains for distribution to the common stockholders.
Let the receivers make final distribution in accordance with the foregoing.