Sterling v. H. F. Watson Co.

Opinion by Mr. Justice Elkin, This case was so carefully considered and so properly decided by the learned court below that but little if anything of value can be added by an extended discussion of the points involved in the controversy here. The appellant corporation desires to retire its preferred shares of stock as it has the right to do upon the conditions contained in the certificates of the preferred shareholders. Appellant is a Pennsylvania corporation and has the power to issue both preferred and common stock. The certificates representing preferred stock contain the following provisions: “The stock represented by this certificate is a portion of the preferred stock authorized by the stockholders, in pursuance of the Acts of Assembly of April 18, 1874, P. L. 61; April 3, 1872, P. L. 37, and April 28, 1873, P. L. 79, is entitled to cumulative semi-annual dividends of four per. cent, each [110] on the par value of the stock, payable from the net earnings of the company; and is subject to the right of the EL F. Watson Company, at its option, to retire and extinguish the same, upon the payment to the owner thereof all arrears of dividends, and the par value thereof, at any time after April 6, 1907.” The certificate is a contract between the parties and means exactly what it says. The preferred stock is cumulative and the semi-annual dividends are given a preference out of the net earnings. These dividends being made payable out of the net earnings at stated periods must necessarily be understood as payments in cash at the dividend periods. Any other construction would be in disregard of the every-day experience of business men and would do violence to the common understanding of parties dealing in matters of this character. The dividend rate and the times of payment clearly indicate that the parties intended the preferred dividends to be paid in cash out of the net earnings and not in any other manner. Appellant has the right to retire the preferred stock, but before exercising that right it must be prepared to pay the par value of the preferred shares, together with all unpaid dividends at the rate of four per centum semi-annually to the time of actual payment or tender. This is what the court below held and there can be no doubt as to the correctness of the conclusion. The fact that a stock dividend of twenty-five per centum of the issue then outstanding was declared and the stock thus issued divided between the common and preferred shareholders according to their respective holdings has no bearing on the question involved in this controversy. Whether this be regarded as a gratuity to all stockholders, or as representing the value of current assets, makes no difference so far as the right of the preferred shareholders to demand as a preference payment of their dividends at the rate of four per centum semi-annually out of the net earnings. This was a preference to which these shareholders were enti [111] tied under their contract and before the preferred stock is retired these dividends must be paid as provided in the certificates. It was so stipulated in the contract with the preferred shareholders and they have the right to insist upon performance according to the terms of that contract. These dividends are preferences and not limitations. When the preferred dividends are paid, and dividends out of the net earnings from year to year of an equal amount have been declared and paid on the common stock, then all of the stock, common and preferred, has the right to participate in the distribution of surplus earnings upon an equal basis. This is the doctrine of Fidelity Trust Company v. Lehigh Talley R. R. Co., 215 Pa. 610, and Sternbergh v. Brock, 225 Pa. 279. The principle is sound and is sustained by the great weight of authority. We agree with the learned court below that in principle these cases rule the one at bar. In the present case appellant corporation distributed among all of its stockholders an additional issue of stock, and in the division of this stock no distinction was made between common and preferred shareholders, but this was a matter for the stockholders to determine in the issue of the new stock and it in no way affected the preference in the payment of semi-annual dividends to which the preferred stock was entitled. That the new stock was not issued as a preference to preferred shareholders is shown by the fact that it was distributed to holders of common and preferred stock alike according to their respective holdings. We cannot agree with the learned counsel for appellant that the par value of the new stock issued to preferred shareholders should be regarded as a payment on account of the semi-annual dividends to which they were entitled. There is nothing in the contract of the parties to warrant the payment of semi-annual dividends by the issue of new stock. These dividends must be paid out of net earnings and not by the issue of new; stock. [112] We concur in the views expressed by the learned court below and find no error in the disposition made of the case. Decree affirmed at the cost of appellant.