Story Case

The Hall Manufacturing Company was a corporation engaged in the manufacture and sale of cotton goods. It had a capital stock of $25,000, divided into shares of $100 each. At the end of the first year of its existence, there was a surplus in the corporate treasury of $5,000. At the annual meeting of the directors, it was decided to retain this surplus for emergencies and not to declare any dividends that year. Several stockholders were greatly displeased by this announcement. They, thereupon, instituted proceedings against the directors seeking to compel them to declare dividends. What should be the decision of the Court under such circumstances?

Ruling Court Case. King Vs. Patterson And Hudson River Railroad Company, Volume 29 New Jersey Law Reports, Page 504

The Patterson and Hudson River Railroad Company made two declarations of dividends, - one in January and one in July. The dividends were made payable at the branch office of the Ohio Life Insurance and Trust Company, in the city of New York. Notice of the dividends, and of the time and place of payment, was published by the corporation in a newspaper printed and published in the city of New York. The money to pay the dividends was deposited by the corporation in the office of the trust company, before the day of payment of each of said dividends, to be paid by the trust company to the various stockholders upon their application. King, the plaintiff in the present action, was the owner of two hundred shares of stock in the Patterson and Hudson River Railroad Company; and, as such, was entitled to a portion of the dividends which had been declared. The money with which his dividends were to be paid was left in the hands of the trust company until the 24th of August, when the company failed and the money was lost. King, thereupon, brought this action against the corporation, seeking to recover the amount of dividends which were due him in respect to his stock in the corporation.

It was contended on behalf of the corporation that the deposit of the money with the trust company was payment; and because of his failure to make application for it, the loss must fall on him.

Decision

When dividends have been declared, each stockholder then has a right directly against the corporation for the amount due him; such amount becomes a debt due from the corporation to the stockholder. The payment of such a debt must be made as the payment of any other debt is made. Accordingly, a deposit of the money by the corporation with an agency, to which arrangement the stockholder did not consent, is not a payment. The money on deposit continued to be the money of the corporation. When the bank failed, the money lost was the loss of the corporation and not the loss of the stockholder. Therefore, as the debt in question has not been paid, King is entitled to payment now from the corporation.

The Chancellor delivered the opinion of the Court.

"The debt is strictly demandable and to be paid at the office of the corporation. Admitting the right of the corporation to make it payable elsewhere, it must be done at the risk of the corporation. The debtor has no right, without the consent of the creditor, express or implied, to intrust a third party with the fund for the purpose of payment. The trust company with whom the funds were deposited for payment was the agent of the corporation, not of the stockholders; of the debtor, not of the creditor. If the agent prove faithless, or the fund is lost in his hands, the loss must fall on the owner. The deposit was made in the name of the corporation, and was subject to its control. • • • The fund remains the property of the corporation until payment is made. If a loss is sustained, it falls upon the owner." Accordingly, judgment was given for King.

Ruling Law. Story Case Answer

A corporation is organized for the purpose of making profit. When the corporation, through its corporate activities, has accumulated money over and above the capital stock, it usually divides this surplus among the stockholders in proportion to the number of shares they hold. This surplus thus divided is called "dividends." It is generally held that it is discretionary with the directors whether a given surplus will be divided as dividends, or when they shall so divide the surplus. This discretion will not be interfered with by the courts, unless it clearly appears that the directors have abused their discretion. In the Story Case, it does not appear that the directors have abused their discretion. It is probably wise from standpoint of business to reserve a surplus to care for emergencies. Consequently, the courts will not interfere in such a case. A declaration of dividends creates the relation of debtor and creditor between the corporation and the stockholders. This relation is not extinguished until the corporation has paid the debt as it pays any other debt.