Hyde v. Holmes , 198 Mass. 287 ( 1908 )

Knowlton, C. J.

The plaintiff, a trustee holding stock in corporations, the income of which is to be paid to beneficiaries for life and the principal to be held for remaindermen, asks the instruction of the court as to whether a certain dividend of the Pullman Company, declared in November, 1906, and dividends of the Farr Alpaca Company, declared on June 80, 1906, are to be treated as capital and held for the remaindermen, or as income to be paid to the life tenants.

No question is now made that the dividend of the Pullman Company was a stock dividend to be treated as capital. See Minot v. Paine, 99 Mass. 101; D’Ooge v. Leeds, 176 Mass. 558.

The dividends of the other corporation were in all essential particulars like those considered by this court in Davis v. Jackson, 152 Mass. 58. They were declared as payable in cash, and every stockholder could take the money and use it as he chose. An increase of the capital stock of the corporation was voted the same day, and every stockholder had a right to subscribe to the new issue an amount proportional to the amount of his ownership of stock. He might, if he chose, apply the dividend to the payment for this new stock. The increase was of such an amount that the cash dividends would just pay for the new stock to be issued, and it was undoubtedly expected that many if not most of the stockholders would exercise their option by subscribing. The value of the stock was such as to make the right to take it very valuable, and they could sell their rights fpr a substantial sum.

In each of the two communications from the treasurer to stockholders informing them of the increase of the capital stock, they were told that valuable rights to subscribe to stock were attached to the shares then held by them. The dividend was declared from the earnings of the corporation, and before the distribution it was in' the nature of income in the treasury of the corporation. Where its earnings are not capitalized, either formally or substantially, by a corporation, there is no reason why courts, in adjusting rights between beneficiaries for life and remaindermen, should desire to treat the earnings as capital. We are of opinion that the present case is fully covered by the decision in Davis v. Jackson, ubi supra, in which the earlier cases of Rand v. Hubbell, 115 Mass. 461, and Daland v. Williams, 101 Mass. 571, are considered and distinguished. The general subject was again considered and the doctrine of Davis v. Jackson applied in Lyman v. Pratt, 183 Mass. 58, a case very similar to the one now before us.

The remaindermen suggest a difficulty from the fact that two dividends of different amounts were declared with an interval of only two months between the days when they were to become payable, and that the capital stock was to be increased twice, once on each of these days, and that the last dividend would be made upon the stock with the additional number of shares included in the first increase. This does not change the nature of the company’s action in declaring the dividends, although, were it not for the fact that the plaintiff subscribed for the new stock of the first issue, and had other money on hand for investment sufficient to pay for it, it would to a degree have affected the rights of the parties in this case.

If the plaintiff had used the first dividend as income for the life tenants, instead of paying for new shares with it, and had sold his rights to subscribe for the new stock, and had then used his second dividend upon the shares held by him, and sold the rights to subscribe for the second issue of new stock at their fair value, the pecuniary result to all the beneficiaries would have been the same. The only difference would have been that he would have had his two cash dividends amounting to $4,200 instead of $5,600, and the remaining $1,400 and doubtless a large sum besides would have been received from the sale of his rights to subscribe for the two issues of new stock. The nature of this $1,400 would be precisely the same as if the company had increased its capital stock without making any cash dividend, and had permitted its stockholders to take the new stock at par when it was worth much more than par, or to decline to take it and sell their rights to subscribe.

The question arises whether the proceeds of the sale of such rights are capital or income. We are of opinion that the value of the rights to subscribe for an increase of stock, to be issued by a corporation under such conditions, must be treated as property capitalized by the corporation. The value of the new stock is made up of the par value which is paid in by the subscriber, and an additional sum equal to the difference between its par value and its market value. This additional sum inheres in the new stock to be issued, and is a part of the capital of the corporation. It cannot be used or availed of otherwise than as a mere right or privilege, except in connection with the ownership of the new stock, which is capital. An increase of capital by the corporation, which represents not only the amount then paid in, but also a value necessarily included in the capital because the stock is worth more than its par value, is in the nature of a stock dividend by the corporation, to the amount of this additional value represented by the rights to subscribe. D’Ooge v. Leeds, 176 Mass. 558.

But these considerations are not of practical application to the present case, because, as appears from the record, the petitioner had on hand, when these dividends were made and the capital stock was increased, cash funds belonging to the principal of the trust amounting to between $17,000 and $18,000, which cash funds he continued to hold up to the time of filing this bill. He elected to subscribe for each new issue of stock. The investment was a proper one to make, and it was right and proper for him to use so much of the principal of the trust fund as was necessary in paying for the new shares of stock. He had no right to use the cash dividends for this purpose. His investment having been properly made, except in the wrongful application of the cash dividends to the payment for the stock, should be paid for out of the cash funds in his hands belonging to the principal of the trust, and the cash dividends should be paid to the life tenants, with a proper adjustment of the income that has since accrued and of interest, as if the dividends had been paid to the life tenants when they were declared.

The dividend upon the Pullman stock is to be treated as capital.

Decree reversed.