Bowers v. Post

CARPENTER, J.

(after stating the facts as above). [1] Several points have been argued earnestly and ably by counsel, but the interesting proposition in this case, and the controlling proposition, is the construction of the resolutions of the stockholders and board of directors. There is some ambiguity in the terms used; whether resulting from carelessness or design is immaterial. In endeavoring to reach a conclusion as to what the parties intended by the language used, it is necessary, so far as is possible, to get into the atmosphere surrounding them when the resolutions were passed; to become acquainted with their general plan, and, if you please, with their “habits of language.” In other words, having discovered their general situation and purpose, and knowing their peculiarities and eccentricities, you must then determine what they meant by what they did.

As to the general scheme: Eyon & Healy had issued capital stock of 5,000 shares, and in 1904 had accumulated a large surplus and a large amount of undivided profits. The notice sent out to the stockholders, the action of the stockholders, and the action of the board of directors which approved the action of the stockholders, all indicate that it was the purpose of those interested to make a division of some vof the accumulated eaflnings. To this end it was voted to increase the capital stock of the corporation 2,500 shares. As to one-half of the increase, clearly it was intended to declare a stock dividend. As to the other one-half, it was determined that for the good of the enterprise certain trusted employés should become stockholders. They were to pay for their stock as it-was convenient, with interest on the deferred payments. The proceeds accumulating from the sale of “employés’ stock” was to be distributed among the stockholders of the company.

The difficulty arises in the wording of the resolutions. The stockholders and directors determined:

“That all proceeds of such stock so sold shall belong to and be distributed to the holders of the present or original’ capital stock, and our board of directors shall so arrange that when any part of such stock shall be sold and collected for, the proceeds shall be at once distributed to the holders of the said original stock in proportion to their respective holdings at the time of such distribution.”

[2] The plaintiff contends that Post, having disposed of jáis stock, by that very circumstance divested himself of all interest in the “employés’ trust fund,” and that the words “in proportion to their respective holdings at tíie time of such distribution” are conclusive on this point. The same language was used with reference to the 1,250 shares of stock dividend. It is conceded that the stock dividend proper would not pass by a sale of the original stock, after the resolution of the directors on January 30, 1904. That language, used in connection with the “employes’ stock,” ought not to be given a different meaning unless a different intent is manifestly clear.

The resolution was drawn in the light of existing conditions and must be viewed from a practical standpoint. At the time it was passed, Tyon & Healy'had a capital stock of $500,000, a surplus of $750,000, and undivided profits of $500,000; the value of eacfi share of stock in the company, therefore, was $350. The owners of the 5,000 shares were the owners in common of the assets of the company, and had the company then been liquidated each one would have been entitled to his ratable proportion of the capital, surplus, and undivided profits.

Immediately after the passing of the stockholders’ and directors’ resolutions, t6e capital stock account of the corporation was credited upon its books with $250,000, and the undivided profits account was charged with the same amount of money. Thus the new stock issue of 2,500 shares was immediately paid for, and out of the interest of the tiien stockholders. Instead of having an interest in $250,000 of undivided profits, the stockholders became entitled to receive their proportionate share of the increased capital stock.

The corporation, through its stockholders and directors, immediately segregated $250,000 of its undivided profits and credited the amount to its capital stock account. That asset, when segregated, belonged to the stockholders, and took the form of new shares of stock fully paid, belonging to the shareholders in proportion to their respective holdings. The corporation, as such, ceased to have any interest in the increase; it had received full payment. If, as contended by plaintiff, the “employes’ stock” had been held by the company to be sold at $200 a share, the purchase price would have belonged to the company , and would have passed to its treasury. If the parties interested had contemplated such action, the book entries in evidence never would have been made. The books of the company showed no debit entries against the purchasing employés, nor in any of its financial statements made during the years succeeding 1904 did it credit itself with the indebtedness of the employés on account of stock purchases. Moreover, it is stated unequivocally that the purpose of the shareholders and • directors was to make each share of stock of the company worth $200. If the stock to be sold to the employés belonged to the company, then each share would have been worth, book value, $233, and the employés, immediately after their purchase, would have had a profit of one-third on their transaction. On the other hand, if the “employés’ stock” passed as an incident to the ownership of the original shares, then all the original shares would have been worth $250 each, and the employés’ shares would have been worth $200 each.

It is clear that the corporation neither had nor asserted a right to the new stock. If the corporation surrendered its rights, who succeeded to them? Who had the right of succession? The increase of stock was intended to be paid out of the undivided profits. That was done. The normal instincts of mankind cannot be overlooked by the courts in administering the law. We have in this case the joint owners of a large amount of property deciding to divide up some of it. Is'it likely they made the division with the purpose in - view that others than themselves should get the benefit of it? A melon ordinarily is cut for the benefit of the owners of the melon patch.

It is argued for. plaintiff that the resolution of tlie directors making the “employés’' stock” fully paid, and providing that in certain events the stock sold to employés should be taken over by the corporation at what was paid for it, and sold to the original stockholders according to their holdings, the proceeds to go into the treasury of the company, is inconsistent with the idea of an absolute segregation of that stock.. Quite the contrary is true. The original holders of stock, having received a cash return for the “employés’ stock,” naturally would not receive the surrendered stock, or its value, becausé it was not intended there should be a double profit on the transaction. It was proper therefore to provide that the subsequent purchase of the “employés’ stock” should come from the company, and that the proceeds of the resale should go to the company; it being apparent that the purpose of selling the “employés’ stock” was to increase the interest of the employés in the company and to stimulate them in the common interest.

Moreover, paragraph 8 of the directors’ resolutions provided certain metho.ds for issuing the “employés’ stock” and the appointment of a trustee to receive the proceeds thereof, and made it “the duty of such trustee to collect and receive all dividends declared upon any stock so sold to employés, and to distribute the same pro rata to the holders of said original stock.” Here again the right of the holders of the original stock was emphasized. The language used amounted to a declaration of the directors of an immediate dividend of the proceeds of the “employés’ stock.” The right of the shareholders was determined upon the adoption of the stockholders’ and directors’ resolutions; the enjoyment only was postponed at 4 per cent, interest. It was an immediate vested estate, the enjoyment of which was postponed merely for the convenience of the estate and for the purpose of arranging the necessary details of disposing of the stock to the employés.

If it had been intended that the proceeds of the sale of stock to the employés should be paid to whomsoever was the holder of the stock at the'time such proceeds were ready for distribution, it would have been easy to have so provided. It was not so provided, nor was it so intended. It cannot .be supposed that the holders of shares in the Lyon & Healy company were so altruistic as to take their own money to provide dividends for persons not known to them. And it may very well be doubted if the directors of a corporation have the legal right to declare a dividend out of present earnings, and provide for its payment, not to the present shareholders, but to some subsequent transferees.

In the view I take of the transaction, every stockholder surtendered a p'ro rata of his interest in the surplus of the corporation, to be transformed into stock and sold to employés; that such surrendered interest was intended to be and was treated as belonging to each individual stockholder at the time the action was taken. Otherwise the stock would have been issued by the corporation to the employés and the proceeds received by the corporation. The rights of the stockholders were fixed, the realization only being postponed; and each stockholder so surrendering his interest is entitled to payment therefor regardless of whether or not he disposed of his holdings of original shares. It was a stock dividend, and when the defendant Post sold his stock he sold it, in commercial parlante, ex-dividend.

There will be a general finding against the plaintiff, and a finding in favor of the defendant on his plea of set-off for the sum of $3,614.71.