Crocker v. Waltham Watch Co.

• Decision Date: 01 February 1944
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: PERCY G. CROCKER v. WALTHAM WATCH COMPANY & others.

315 Mass. 397

53 N.E.2d 230

PERCY G. CROCKER v. WALTHAM WATCH COMPANY & others.

Supreme Judicial Court of Massachusetts, Suffolk.

February 1, 1944

October 7, 8, 1942.

Present: FIELD, C.

J., LUMMUS, QUA & DOLAN, JJ.

Corporation Dividend, Capital. Equity Jurisdiction, Corporate dividend. Words, "Shall forthwith," "Capital," "Annual net earnings."

Review by DOLAN J., of decisions relative to when and in what circumstances directors of corporations may be required to declare and pay dividends.

A provision of the agreement of association of a corporation construed as making payment of a dividend to stockholders mandatory in certain circumstances must be enforced by a court of equity if as so construed it is not contrary to some positive rule of law.

A provision of the agreement of association of a corporation that as to a certain class of common stock the directors annually "shall ascertain the annual net earnings for the preceding year remaining after the payment of all interest charges" and accrued and unpaid dividends on prior preference stock, dividends on which were cumulative "and shall forthwith declare and pay" a dividend in a specified amount on such common stock "provided the company's capital will not be impaired" thereby, and that, if it would "be so impaired, then the directors shall forthwith declare and pay a dividend . . . of so much of . . . [such amount] as may be paid without impairing the company's capital," left no discretion in the directors but required a declaration and payment of the dividend on such common stock in the circumstances described, although the provisions of the agreement of association as to the prior preference stock gave the directors discretion with respect to the declaration of dividends thereon.

In a provision of the agreement of association of a corporation directing that a dividend of a specified part of the "annual net earnings" should be paid on a certain class of stock "provided the company's capital will not be impaired by such payment," the word "capital" meant contributed capital and not working capital, and the words "annual net earnings" meant only the earnings remaining after making good all existing impairment of such capital.

A provision of the agreement of association of a corporation requiring the payment of a dividend on a certain class of common stock in certain circumstances "provided the company's capital will not be impaired by such payment," and, if such dividend were paid, the payment or accumulation of a certain dividend on a class of preferred stock, implicitly as a matter of law forbade payment of the dividend on the preferred stock in circumstances when it would result in an impairment of capital.

BILL IN EQUITY, filed in the Superior Court on January 23, 1942. The suit was heard by Goldberg, J.

D. Stoneman, for the plaintiff.

C. B. Rugg, (L.

L. Fuller with him,) for the defendants.

DOLAN, J. This is a bill in equity against the Waltham Watch Company and its directors, brought by a minority stockholder of the defendant company in behalf of himself, the company and all other stockholders. The bill seeks a decree establishing the obligation of the company and its directors under its agreement of association to declare and pay dividends to the class A common stockholders and to declare and pay or accumulate dividends on the six per cent preferred stock annually whenever the operations of the defendant company result in annual net earnings, and establishing the obligation of the directors to declare and pay dividends on the common stock, class A, and to declare and pay or accumulate dividends upon the six per cent preferred stock for the years 1939, 1940 and 1941. The pertinent parts of the agreement of association are annexed to and made a part of the bill. The case was heard upon statements of agreed facts which the parties agreed are all the facts. The judge entered a decree dismissing the bill, from which the plaintiff appealed.

A summary of the facts follows: The plaintiff is the owner of nine hundred shares of the six per cent preferred stock of the defendant company, and has owned these shares continuously since the reorganization to be mentioned hereinafter. The individual defendants are the directors of the company and were the directors during the years 1939, 1940 and 1941. The company was organized and incorporated in Massachusetts in 1923 to succeed to the watch-making business of a predecessor company of the same name. The old company met serious financial difficulties at the end of the last war, having accumulated a large inventory, much of which was obsolete and overvalued. It had little cash and was forced to resort to bank loans and public offerings of five-year coupon notes to keep going, meanwhile continuing to operate at a loss. The old company exhausted its borrowing power and could obtain no further extensions on its bank loans, and despite all efforts continued to lose money until the bank creditors approached Kidder, Peabody & Co. to undertake a financial reorganization. The assets of the old company were sold to the new defendant company in 1923; the new company assumed the debts of the old company and procured cash to liquidate the $7,200,000 of bank loans and publicly held coupon notes by the sale for $5,300,000 of the bonds, debentures, and a portion of the six per cent preferred stock of the new company, by the issue of $1,700,000 of prior preference stock for subscription at par by the old preferred stockholders, and by the issue of common stock, class A, for $250,000. (For full details of the reorganization, see Abbot v. Waltham Watch Co. 260 Mass. 81 .)

Since the date of the reorganization, the financial position of the new company has steadily improved. Earnings have been sufficient to enable the company to retire its debentures without refinancing, and to purchase and retire substantial amounts of its mortgage bonds and stocks, so that on December 31, 1941, there were outstanding the following securities: $1,130,000 of mortgage bonds due June, 1943; prior preference stock of a par value of $381,230; six per cent preferred stock of a par value of $3,384,285; twenty-five thousand shares of no par value common stock, class A; and forty-one thousand eight hundred sixty-eight and three fourths shares of common stock, class B, no par value.

The pertinent provisions of the agreement of association and articles of organization of the company follow: "SECOND:

Holders of prior preference stock shall be entitled to receive, when declared by the Directors, cumulative dividends at the rate of 7% per annum and no more . . . . No dividends shall be paid on any other class of stock until all accrued dividends and the current quarterly dividend on the prior preference stock shall have been paid, or a sufficient sum from which to make payment when due shall have been set aside for that purpose. THIRD: Holders of preferred stock shall be entitled to receive, when declared by the Directors, dividends at the rate of 6% per annum and no more, payable before any dividends are paid on the common stock in any year, except as hereinafter provided in the case of common stock, Class A. Such dividends shall be non-cumulative except as hereinafter provided. FOURTH: Holders of common stock, Class A, will be entitled to receive each year in dividends an amount equal in the aggregate to one-fifth of the net earnings of the Company for the preceding year, to be determined as follows: At the end of each calendar year the Directors shall ascertain the annual net earnings for the preceding year remaining after the payment of all interest charges, accrued and unpaid dividends on the prior preference stock and after providing during the first five years for the annual sinking fund, to retire the debentures dated February 15, 1923, and shall forthwith declare and pay to the holders of the common stock, Class A, a dividend equal in amount to one-fifth of such net annual earnings, provided the Company's capital will not be impaired by such payment. If the Company's capital will be so impaired, then the Directors shall forthwith declare and pay a dividend to the holders of the common stock, Class A, of so much of the one-fifth of such net annual earnings as may be paid without impairing the Company's capital. The rights of the holders of common stock, Class A, to the dividends above provided for shall be noncumulative. If a dividend as above stated is paid on the common stock, Class A, in any year, there shall either be paid in the same year on the preferred stock a dividend equal in amount to four times the dividend paid on the common stock, Class A, but not exceeding an amount equal [315 Mass. 401] to 6% per annum on the preferred stock outstanding, or if such dividend is not paid during the same year, it shall be accumulated, and no dividends shall be paid on the common stock, Class B in any year unless such accumulated dividend on the preferred stock is paid as well as the dividends on the preferred stock for such year. . . . NINTH: All the stock, both preferred and common, shall have equal voting powers, each share entitling the holder to one vote."

During the years 1939, 1940 and 1941, the company had an earned surplus and after the payment of taxes and all charges, had earnings in excess of the amount necessary to pay all accrued dividends on the prior preference stock. The figures for 1939 and 1940 are shown in the balance sheets and earnings statements for those years attached to the record. No figures were available for 1941 when the statement of agreed facts was prepared. All cumulative dividends on the prior preference stock for the years 1939, 1940 and 1941 have been paid. It is conceded that after such payments net earnings...