Murphy v. Richardson Dry Goods Co.

This case reaches us on cross-appeals advanced on the docket and comes to the writer by reassignment. The issues and facts thus presented will be briefly stated.

Plaintiff is the owner of five hundred shares of preferred stock of defendant, Richardson Dry Goods Company, which went into voluntary liquidation about January 1, 1928. This is a proceeding instituted by plaintiff, in his own behalf and in behalf of other stockholders similarly situated who might join therein, to enjoin defendant from distributing any part of its assets to the common stockholders until it has first paid the preferred stockholders a dividend of six dollars per share for each of the years ending December 31, 1926, and December 31, 1927, amounting in all to $60,000, and to compel defendant, after the common stockholders have received the par value of their stock, to allow the preferred stockholders to share with them in the surplus.

The trial court enjoined defendant from distributing the assets of the common stockholders until it has first paid the two dividends of $6 a share to the preferred stockholders with interest from December 21, 1928, but denied the preferred stockholders the right to share with the common stockholders in the surplus.

From the undisputed facts disclosed by the record we find that defendant was incorporated December 29, 1910, with a capital stock of $800,000, divided into 8,000 shares of the par value of $100 each, 3,000 shares being common stock and the remaining 5,000 shares being preferred stock. Defendant was engaged in the wholesale dry goods business in the city of St. Joseph, Missouri. Since going into liquidation all of its merchandise has been sold and most of its book accounts have been collected. In March and April, 1928, the preferred stockholders were paid $500,000 representing the face value of their stock, and the common stockholders have as yet received nothing. All of the debts of the company have been paid and the balance on hand consists of about $170,000 in cash, about $5,000 in good book accounts, and real estate consisting of two business buildings in St. Joseph. These buildings are carried on the books of the company at $271,000, which represents the cost, less a small amount of depreciation. The carrying charges on the real property amount to $8,000 to $10,000 a year, exclusive of interest on the investment. Up to the time of the trial, efforts to sell or rent the buildings were unavailing, except as to a small space which was rented for $25 a month. All of the dividends have been paid regularly upon the preferred stock up to and including year 1925. No dividends were earned in the years 1926 and 1927, and during those two years the company lost in the neighborhood of $39,000 each year. No dividends have been paid on the common stock since 1920. No net profits were made after 1925. The articles of incorporation provide:

". . . 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 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, . . ."

On December 30, 1910, the following by-law was adopted:

"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."

On March 28, 1924, the articles were amended so as to strike out the words "but that said preferred stock shall have no voting power." With the exception of this amendment the provisions of the articles of incorporation have remained unchanged.

Each appellant presents a single assignment of error. Defendant-appellant says:

"The court erred in decreeing that the preferred stockholders are entitled to a dividend of six per cent for the years 1926 and 1927."

Plaintiff-appellant says:

"The court erred in its refusal to enjoin the defendant from distributing in liquidation the remainder of the assets of said company to its common stockholders after the payment to its preferred stockholders of the dividends upon the preferred stock for the years 1926 and 1927, such relief being necessary to protect the rights of the plaintiff as a preferred stockholder to share with all other stockholders in the assets of the defendant company after the payment of one hundred dollars per share to all stockholders, common and preferred."

With reference to preferred stock dividends, defendant's articles of association provide that "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 theCumulative and common stock of said corporation." In Fletcher'sNon-Cumulative. Cyclopedia of the Law of Private Corporations, Vol. VI, sec. 3754, p. 6249, it is said:

"Dividends on preferred stock may be either cumulative or non-cumulative. Sometimes the dividends are in express terms made to depend upon the profits of each particular year, so that the holders of the stock will not be entitled to any dividends in a particular year if there are not enough profits in that year to pay the same, or will be entitled only in so far as there are profits. In such a case, the dividends are not cumulative, and are not to be made up out of the profits, although sufficient, of subsequent years."

The same doctrine is thus stated in Clark and Marshall on Private Corporations, Vol. 2, section 529d, p. 1643:

"Sometimes the dividends upon preferred stock are in express terms made to depend upon the profits of each particular year, so that the holders of the stock will not be entitled to any dividends in a particular year if there are not enough profits in that year to pay the same, or will be entitled only in so far as there are profits. In such a case, the dividends are not cumulative, and are not to be made up out of the profits, although sufficient, of subsequent years." See also, 5 Thompson on Corporations (2 Ed.) sec. 5349; 14 C.J. 421, sec. 578; Dent v. London Tramways Co., 16 Ch. Div. 344; Staples v. Eastman Photographic Materials Co., 2 Ch. 303 (1896).

We do not think the limitation fixed upon payment of preferred stock dividends in the clause last above quoted from the articles of incorporation is removed by the context whichArticles. immediately follows (italics ours), "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," etc. The preceding language restricted the preferred stock to such dividends as could be paid "out of the net yearly income earned in any current year." There was no net income earned in either 1926 or 1927. Hence, the preferred stock was entitled to no dividends for those years, and the mere direction that upon distribution of the assets of said corporation the preferred stock should "be first paid in full" would not enlarge such payment so as to include dividends to which the stock was expressly not entitled. It follows that under the express terms of the articles of incorporation the dividends on preferred stock are non-cumulative, and, since the record shows that there were no earnings in 1926 and 1927, preferred stock owners are entitled to no dividends for that period. Plaintiff-appellant asserts the contrary and cites 1 Cook on Corporations (7 Ed.) p. 796; Hazel Atlas Glass Co. v. Van Dyk et al., 8 F.2d 716; and Langben v. Goodman, 275 S.W. 841. However, these authorities are not in point because they all proceed on the theory of stock issued without any mention of whether the dividends were cumulative and without any provision that the dividends should be paid out of the earnings of the current year, while the articles of incorporation in the instant case expressly provide that the preferred stock dividend shall be paid "out of the net yearly income earned in any one current year."

But, plaintiff-appellant says, dividends on preferred stock were made cumulative by the by-law adopted December 30, 1910, and hereinabove set forth. Defendant derives its power to issue preferred stock from Sections 3339 and 3358, Revised Statutes 1909, which were in effect when it was incorporated.By-Law. These sections have been carried forward without amendments affecting the question here under consideration and now appear as Sections 10144 and 10163, Revised Statutes 1919. They prescribe the conditions upon which a Missouri corporation such as defendant can issue preferred stock. Section 3339, Revised Statutes 1909, contained and Section 10144, Revised Statutes 1919, still contains, the following provision relative thereto (italics ours):

"Provided, that if upon organizing a corporation under thisarticle it is desired that any portion of the stock shall bepreferred, the articles shall further set out the amount of such preferred stock, the number of shares thereof, the names of the subscribers therefor, the number of shares of such stock subscribed by each subscriber therefor, and the preferences,priorities, classification and character thereof as provided inSection 3358 of the Revised Statutes of Missouri, 1909."

Section 3358, Revised Statutes 1909, thus referred to was carried forward without amendment as Section 10163, Revised Statutes 1919, and is as follows (italics ours):

"Whenever any corporation shall desire to call a meeting of its stockholders for the purpose of increasing the amount of its capital stock, and the directors thereof shall deem it advisable for the best interests of said company to submit, at the time and place of said meeting, to the stockholders, whether any part of said stock so proposed to be increased shall be preferred, and the amount, number of shares, the price per share, in case an increase shall be determined, and also the priorities, preferences and character thereof, and the different classes of preferred stock, if any, and in case additional notice to such effect shall have been given for the time as required by this article, for the purpose of increasing said capital stock, then,if on canvassing the votes of the said stockholders, as requiredby this article, it shall appear that all the stock of saidcompany shall have been cast for the increase of its stock, andthat all the stockholders have voted that any part of the saidincreased stock shall be preferred, the said stockholders shallalso, at said time and place, by like vote, determine thecharacter, amount, the number of shares, and the price per shareof said increase, and what rate of dividend, not exceeding eightper cent per annum, shall be paid on said preferred stock out ofthe net earnings, and whether such dividends shall be cumulativeor not, and what priority, if any, any class of such preferredstock shall have over the common stock or other preferred stockout of the assets of the corporation in case of its dissolutionor liquidation."

Section 3356, Revised Statutes 1909, now Section 10161, Revised Statutes 1919, which prescribes method of increasing or diminishing amount of capital, or extending or changing the corporation's business, also provides that a verified and acknowledged statement of such proceedings shall be recorded in the office of the Recorder of Deeds of the county in which the corporation is located, and that a certified copy of such recorded instrument be filed in the office of the Secretary of State. Section 3359, Revised Statutes 1909, now Section 10164, Revised Statutes 1919, provides that this statement required by Section 3356 "shall also set forth the amount and number of shares, the price per share of such preferred stock and the preferences, priorities, classification and character thereof, and also the rate of dividend to be paid thereon."

From the foregoing it appears that among the matters and things that must be determined and indicated in the articles of incorporation and in proceedings to increase the amount of capital, when any part of the original or increase of stock is to be preferred, is whether dividends on the preferred stock "shall be cumulative or not." Such statutory requirements must be complied with before preferred stock can be issued. In State ex rel. Ely Walker Dry Goods Co. v. Swanger, Secretary of State,195 Mo. 539, 93 S.W. 932, this court in banc awarded peremptory writ of mandamus where a statement of proceedings to increase capital and issue preferred stock omitted proposition adopted relative to priority of the preferred stock on dissolution or liquidation, and the Secretary of State thereafter refused to receive amended statement including the omitted matter and issue certificate thereon. Had these things been deemed proper matters to be covered by by-laws they would not have been required by statute to appear in the articles of incorporation and in the statement of proceedings relating to increase of capital. Speaking in this connection of the articles of incorporation, it is said in Stockard on Missouri Corporation Law, Section 95, p. 58:

"In setting out rate of dividends, priorities and preferences, the articles must be specific.

"Dividends will not be cumulative unless provided in the articles. No stock will participate to the exclusion of any other class of stock in the assets of a corporation on dissolution or liquidation unless specifically provided for in the articles of association. It means nothing to say only that a certain number of shares shall be preferred stock. All arrangement in reference to dividends, preferences, priorities and classifications is a matter of contract and must be stated in the articles of association."

The fact that the articles of incorporation and the statement of proceedings to increase capital stock are required to be placed of record in the office of the Recorder of Deeds of the county in which the corporation is located and also in the office of the Secretary of State indicates that in the legislative mind their contents were deemed to be of public concern as distinguished from the contents of by-laws which are not subject to inspection by the general public. The public policy declared by such statutes is interestingly discussed in Gaskill v. Gladys Bell Oil Co., 146 A. 337 (Court of Chancery of Delaware, May 22, 1929), and Lloyd v. Penna. Electric Vehicle Co.,75 N.J. Eq. 263. The by-law here in question not only attempts to cover matters which our statutes provide shall be covered by the articles of incorporation, but in stating that the preferred stock shall be cumulative it is in direct conflict with the plain meaning of an express provision of the articles of incorporation, and to the extent of this conflict the language of the articles must prevail. [1 Cook on Corporations (7 Ed.) p. 22; 14 C.J. 362, sec. 460; Stockard on Missouri Corporation Law, p. 178, sec. 360; Kahn v. Bank of St. Joseph. 70 Mo. 262.] In this respect the by-law cannot be regarded as an interpretation of the articles of incorporation because their meaning is clear and they need no interpretation. It is a plain attempt to change completely one of the necessary provisions of the articles of incorporation by the adoption of a mere by-law. To that extent the by-law is invalid, and notwithstanding its adoption the dividends on the preferred stock must be held non-cumulative as provided in the articles of incorporation. The only case cited by plaintiff-appellant that bears upon the question whether the by-law here in question is inconsistent with the articles of association is Boardman v. Lakeshore Ry. Co., 84 N.Y. 157, and that case is not in point because no inconsistency relative to the dividend appears between the resolution and the certificate of stock there discussed.

It follows from what we have already said that the stockholders cannot by consent waive or dispense with such statutory requirements. The corporation's power to issue preferred stock being limited by its charter to such as would bear non-cumulative dividends, it could not, even with the consent of all of its stockholders, issue preferred stock bearing cumulative dividends. We conclude that the trial court erred in holding that the preferred stockholders are entitled to a dividend of six per cent for the years 1926 and 1927.

Plaintiff-appellant's argument advanced in support of his assignment or error, hereinabove quoted, is to the effect that apart from and irrespective of preferences or special privileges expressly attached to preferred stock, on liquidation, he is inherently entitled to participate in thePreference in distribution of the assets on the same basis asDistribution. common stock. Leading authorities cited in support of this theory are Continental Insurance Co. et al. v. United States of America et al., 42 Sup. Ct. 540; Sterling v. II. F. Watson Co., 88 A. 297; Ramey v. Ironton Lumber Co. et al., 166 Ky. 295; Re Espuela Land Cattle Co. (1909), 2 Ch. 187: Re Fraser and Chalmer (1919), 2 Ch. 114, approving 2 Ch. 187 (1909); 14 C.J. 416, sec. 573; and 6 A.L.R. 829. In opposition thereto defendant-appellant cites Stone v. Envelope Co., 111 A. 536; Cook on Corporations (7 Ed.) sec. 269, note 4, p. 775; Niles v. Ludlow Valve Mfg. Co., 202 F. 141; Bassett v. U.S. Cast Iron Pipe Foundry Co., 73 A. 514; Will v. United Lankat Plantations Co. (1912), 2 Ch. 571; Scott v. B. O. Ry. Co., 93 Md. 475; 7 Thompson on Corporations (3 Ed.) sec. 5338, and In re National Telephone Co., 1 Ch. (1914) 755 (disapproving In re Espuela Land Cattle Co. (1909), 2 Ch. 187), in support of what is said to be the modern prevailing theory applicable to this case, to-wit, that a preference or special privilege accorded preferred stock as to its participation in assets negatives its further participation therein.

Whatever may be the correct rule as between these two theories, all authorities agree that if the intention, not violative of any statute, can be gathered from the contract, it is controlling. As above noted, it is provided in the articles of incorporation that (italics ours) "said preferred stock shall upon distribution of the assets of said corporation, be first paid in full before anyof said assets are applied to any of the common stock." In 6 Ruling Case Law, page 842, sec. 232, with reference to construction of contracts, it is said:

"The grammatical and ordinary sense of the words in a contract is to be adhered to, unless that would lead to some manifest absurdity or some repugnance of inconsistency. This has been called the golden rule of construction."

The words, "paid in full," ordinarily mean that nothing more is due the person so paid. To be sure, the effect in this case of applying the term in harmony with the context is that payment of the par value of one hundred dollars a share for the preferred stock constitutes payment "in full," but that is the term employed in the charter, and adherence to its ordinary meaning leads to no manifest absurdity or repugnance or inconsistency. The incorporators chose to postpone participation of the common stock in the assets on liquidation until the preferred stock had been paid its due. This preference was secured to preferred stockholders even though the common stockholders might never receive anything on any of the original capital invested or any part of the dividends they had foregone in building up a reserve for the safety of the business. In consideration of this special privilege accorded preferred stockholders why should not the incorporators specify, as they did, that this payment should be "in full?" Undoubtedly they had power to limit the rights of preferred stockholders as well as secure preferences for them, and we think they clearly did so by this provision. It is conceded by counsel on both sides that the words "par value" appearing in the by-law hereinabove set forth mean the same thing as the words "paid in full," appearing in the articles of incorporation, and the general rule is that by-laws must yield to charter provisions if consistent therewith. The preceding recital in the by-law that preferred stock should be entitled to a dividend from the profits of the capital at the rate of six per cent per annum "and no more" is also indicative of an intention to limit the rights of holders of preferred stock to preferences specified. The construction we have thus placed on the contract is in line with the majority opinion on similar facts in Williams et al. v. Renshaw et al., 220 N.Y.S. 532 (Sup. Ct. App. Div. 1927). In the separate concurring opinion of VAN KIRK, Acting Presiding Judge, the interpretation adopted is thus discussed (l.c. 538):

"In my view it was intended here that, when the preference was paid, the preferred stockholder had no further claim upon capital assets. This is evidenced by the expression that, ``upon distribution of assets, the preferred stock shall be paid in full at par before any amount shall be paid on account of the common stock,' or, as expressed in the stock certificate, where the words ``at par' are omitted, ``the holders of the preferred stock are entitled to be paid in full before any payment is made on account of the common stock.' Where an obligation is paid in full, nothing remains to be paid thereon. In their common and ordinary meanings, the words ``paid in full' mean complete payment."

Plaintiff-appellant's assignment of error is overruled. However, because of error found and above noted on defendant-appellant's assignment, the judgment is reversed and the cause remanded with directions to dismiss plaintiff's bill. All concur, except Walker, J., who dissents in a separate opinion.