Rand v. Hubbell

Whether the distribution, by a corporation, of its earnings among its stockholders is an apportionment of stock, or a division of profits, depends upon the substance and intent of the action of the corporation, as shown by its votes. A corporation voted to increase the number of shares of its capital stock, so as to allow each stockholder to increase the number of shares held by him by one half, and commanded the directors to do whatever was required by law for that purpose. A vote of the directors, passed on the same day, declared that a dividend in cash should he payable to each stockholder at the time within which he was allowed by the vote of the corporation to take his new shares, and should be applied by him in payment for those shares; and directed the treasurer to issue such shares to old stockholders only. Each stockholder received a check for the amount of his dividend, and immediately exchanged the check for a certificate of the shares apportioned to the stock held by him. The checks were then destroyed, and were not presented at the bank. Held, that the stock issued in compliance with the above votes constituted a stock dividend; and that in the case of shares of old stock held by a trustee, the new shares must be considered an addition to the capital of the trust fund. When the directors of a corporation vote a cash dividend for the purpose of paying for new stock to be issued to its stockholders, the whole transaction constituting in fact a stock dividend, if the issue of the stock is void because of non-compliance with the provisions of the St. of 1870, c. 179, the cash dividend will fall also, and cannot be claimed by a person entitled to the income of certain shares of said stock.

Bill in equity by the administrators with the will annexed of Sarah Louise Hubbell, to obtain the instructions of the court as to whether certain shares of stock should be inventoried as part of the estate of said Sarah Louise, and whether said shares were income or capital. The case was reported by Ames, J., for the determination of the full court, in substance as follows : Sarah Louise Hubbell died September 10, 1873. By her will, which was duly proved October 7,1873, she disposed of her entire estate, real and personal. Peter Hubbell, by his last will, which was proved February 14, 1871, gave to his wife, the said Sarah Louise, during her life, the use, income and improvement of all the rest and residue of the estate, real, personal and mixed, of which he should die seised or possessed or entitled to, remaining after payment of his debts and sundry legacies, with full power to sell and reinvest proceeds at her discretion; and on her decease, such rest and residue to his heirs at law of lineal descent; and appointed her executrix of his will. She was also required to pay an annuity of $3000 to the son of the testator, and legacies of $1000 each to nine nephews and nieces. He died January 9,1871, and was at the time of his death the owner of 1355 shares of the capital stock of the Bay State Brick Company, a corporation organized under the general laws of Massachusetts, the capital stock of which was, down to April 14,1873, $500,000, divided into 5000 shares of $100 each. The certificates for said 1355 shares stood in the name of Peter Hubbell, until the transaction of May 23, hereinafter mentioned. On April 14, said corporation at a legal meeting of its stock' holders passed the following vote : “ That it is expedient to increase the capital stock of the company to the amount of two hundred and fifty thousand dollars, so that the capital stock shall be seven hundred and fifty thousand dollars, instead of five hundred thousand dollars as now constituted, divided into shares of one hundred dollars each; and that each stockholder of record of this date be entitled to one share in the new stock so created for every two shares held in the old stock; that said capital be increased accordingly, and that the new stock be paid for and taken on or before the 15th day of May, A. D. 1873; and that the directors be authorized and directed to take the requisite steps to this end, and do whatever is required by law for this purpose; and that new certificates be issued according to law.” On April 14, the directors of said corporation passed the following votes : “ That an extra and special dividend of fifty dollars a share be paid on or before May 15, 1873, to holders of the old stock as it stood April 14, 1873, the dividend to be applied by the stockholders in payment for the new stock created.” “ That in issuing stock under the recent vote of the stockholders the treasurer be authorized to recognize assignments of fractional parts of new shares among the stockholders; but he is not to issue new stock to other than the old stockholders without further action of the directors.” On the same day, the treasurer of said corporation issued to each stockholder therein the following notice: “By a vote of the stockholders the company has increased its capital stock to the extent of $250,000 more. Holders of shares of record April 14, 1873, are entitled to one share of the new stock for every two of the old, with a right to transfer fractional shares as between each other. An extra dividend has been ordered of fifty per cent, on the old stock, payable May 15,1873, which is to be taken in payment of the new stock. Please call, take the stock and dividend, and pay for the same. Please bring your old certificate.” The treasurer of the corporation made out checks upon the Blackstone National Bank for the respective amounts of the dividends so ordered by the directors, and intrusted them to the clerk of the corporation, from whom each stockholder received the check for the amount of his dividend, and gave therefor a receipt upon the dividend book of the corporation in the form hereinafter set forth; and on receiving the check, he was told by the clerk to take it to the president of the corporation; and he accordingly took the check to the president in the adjoining room, and exchanged it for a certificate of the shares apportioned to the stock held by him, and gave a receipt for the shares. This was the course of proceeding adopted by the officers of the corporation, and this course was pursued by every stockholder, except perhaps in one or two cases, when the clerk was absent, the president transacted the business ; and all the new stock was issued in this manner. After this use was made of the checks tney were ail destroyed. None of them were ever presented at the bank. In the case of fractional shares, parties concerned settled among themselves by payments in cash. The moneys of the corporation were from day to day deposited in the Blackstone National Bank, to the credit of Job A. Turner, treasurer, and drawn out ar.d used in the transaction of the business of the corporation. The checks were received by the respective stockholders on different days from May 14, to July 7, 1873, Ox which days there were on deposit in said Blackstone National Bank certain amounts to the credit of the treasurer; but these amounts were not specially provided or expected by the corporation to be drawn upon for the payment of said checks, nor were they sufficient therefor; but they were used by the corporation in the ordinary course of its business in the same manner as if no such checks had been given. Moneys were deposited by the corporation in said bank, and drawn out and expended from day to day in its business without regard to said checks. It was taken for granted that each stockholder would take his proportion of the new stock, and would use his dividend check to pay for it. All of the dividend checks were used in that manner; and the corporation was not prepared, and its officers did not expect, to pay them in any other manner. The bank account was not disturbed by any of these transactions, except so far as fractional shares were concerned, which were bought and sold. The corporation had no other bank account. Warren Sanger was employed by Sarah Louise Hubbell, from the time of her appointment as executrix of the will of Peter Hubbell, to act for her as executrix, and in the management of her personal affairs. She left for Europe on November 9, 1872, and returned to the United States in August, 1873. Just before leaving, she gave to Sanger a power of attorney. Sanger received, on or about April 14, 1873, the notice to said executrix of that date, issued by the treasurer to the stockholders as before stated. He was present at the meeting of stockholders of April 14th, and knew of their vote. He did not see the vote of the directors, but gathered its purport only from the notice. On May 23, 1873, he received from the clerk of the corporation a check signed by the treasurer for $67,700 on the Blackstone National Bank, and signed a receipt therefor in the name of Sarah Louise Hubbell, executrix, by him as her attorney, in the form following : “We, the subscribers, acknowledge to have received of the treasurer of the Bay State Brick Company a dividend of the sums severally set against our names, being extra and special dividend of $50 per share, payable May 15,1873. May 23. S. Louise Hubbell, Ex. Warren Sanger, Attorney.” On receiving this check, Sanger was told by the clerk to take it to the president of the corporation in the other room, and receive the certificate of the stock from him. He accordingly carried the check immediately to the president, and delivered it to him, and received certificates of 677 shares, for which he gave receipts. These certificates imported that the estate of Peter Hub-bell was entitled to the shares. Sanger was asked by the counsel for the heir of Peter Hubbell, “ Did you understand that you could use the check for any other purpose than to pay for the stock ? ” This question was objected to; but the presiding judge ruled that it might be put; he thereupon answered that he understood that he could use the check only for that purpose; and to this ruling the counsel for the legatees of Mrs. Hubbell took exception. Mrs. Hubbell arrived at New York, on her return from Europe, in August, 1873, very ill, not able to reach her home, and she died at a hotel in New York. Sanger saw her about three weeks before her death, and repeated to her orally what had been done, and that he had acted under the advice of her counsel in taking the new stock. Her mind was perfectly clear, but she did not express either assent or dissent. No papers were exhibited to her, nor did she know the form in which the certificates were taken. She was told that her counsel said it was a stock dividend. On April 14, 1873, the surplus earnings and accumulations of the corporation were invested as shown by the statement of all its assets and liabilities then existing, contained in the report of the treasurer, amounting to $259,450.62. No property was sold or converted into money to raise funds for the payment of said dividend or said checks, nor was any money ever specially provided or designed by the corporation for the payment thereof; nor did the corporation, in fact, have cash on hand at any time sufficient for the payment thereof, or of any considerable part thereof; nor were any moneys applied or used for the payment of any of said checks or dividends. Yearly reports were made to the stockholders by the treasurer, showing the entire property of the corporation taken at cost or estimated as aforesaid, and all its liabilities made up in like man ner, and showing a balance called “ surplus,” as follows : 1870, April 1, surplus .... $108,211.50 1871, April 1, “ .... 122,123.02 1872, April 1, “ 182,886.91 1873, April 1, “ . . . 259,450.62 The- “ brick-yards, including land, buildings, machinery and the like, at Cambridge and Medford, owned by the corporation, were taken in some of these reports at their cost, $535,317.53 ; but the president of the corporation testified that in his opinion it would take somewhere between $750,000 and $1,000,000 to replace as much property as the corporation owned in Cambridge and Med-ford, and that the land on Columbus Avenue and Stanhope Street in Boston, taken at its cost, $56,949.60, was worth $150,000 or possibly $200,000. Cash dividends were declared by the corporation semi-annually of from four to five dollars per share from 1871 to 1873. On January 7, 1868, the directors passed the following vote : “ Voted, that a stock dividend be declared of 25 per cent, on the capital stock of the company, certificates of the same to be issued by the treasurer on or before April 1,1868.” And the stockholders at their meeting February 5,1868, voted, “ That the capital stock be increased so that the same shall be in amount $500,000, divided into shares of the par value of $100 each; that the new shares be issued to the stockholders of January 1, 1868, in the rates of one new share for every four old shares ; and that the extra dividend declared at the directors’ meeting held January 7, 1868, called stock dividend, be received, and applied in payment for the new shares to be issued, the holders of stock having the rights to sell and transfer their claims for the new stock for fractional parts of shares.” The new stock was issued in pursuance of these votes. As to the market value of the shares, it appeared that there wore never many transactions in it in the market. The stock was confined to a limited number of owners at first, and was for the most part kept by them among themselves. Before April 14, 1873, there had been sales at from par to ten per cent, premium, and after that date there had been a few sales at par, and one at 95 per cent. When the new stock was created, the directors expected to be able to pay half-yearly dividends at the same rate as before. John H. Hubhell, one of the respondents, contends that said shares are capital and belong to the estate of Peter Hubbell, and that he is under the will of Peter Hubbell entitled to the same ; and the other respondents, who were the residuary legatees and devisees under the will of Sarah Louise Hubbell, contend that the dividend of 50 per cent, belonged to said Sarah Louise; that it was the duty of the directors to sell the said 677 shares, as they remained untaken on May 16, and that' the proceeds, to the extent of their par value, would belong to the corporation, and any premium to the capital of the trust fund; that if the issue of the new certificates cannot now be set aside, the new shares should be treated as taken and paid for at par by the said Sarah Louise out of her own property, and that said shares should be sold now under the order of this court, and their proceeds, to the extent of their par value, should go to the estate of said Sarah Louise, and any premium to the heir of Peter Hubbell, her estate making good any loss of premium incurred by lapse of time since May, 1873 ; or that such order be taken as shall substantially secure to the estate of said Sarah Louise the value of the cash dividend, and to the heir of Peter Hubbell the value of the right to take the new shares under the vote of the stockholders. The case is reserved for the consideration of the full court; such disposition thereof to be made, or such order to be entered therein as shall be proper; and the court may make such inference from the facts stated as a jury would be justified in doing.