Gray v. Hemenway

• Decision Date: 27 May 1912
• Parties: GRAY et al. v. HEMENWAY et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

212 Mass. 239

98 N.E. 789

GRAY et al. v. HEMENWAY et al.

Supreme Judicial Court of Massachusetts, Suffolk.

May 27, 1912

COUNSEL

J. L. Thorndike, of Boston, for defendants Hemenway, Bartol, Briggs, Eustis, and Scott.

John G Palfrey, of Boston, guardian ad litem, for defendants Richardson and Hemenway.

OPINION

SHELDON J.

The dividend here in question was declared out of its surplus or accumulated profits by the Delaware, Lackawanna & Western Railroad Company, a corporation organized under the laws of Pennsylvania. That corporation had invested a part of its surplus by subscribing for and taking the stock of the Lackawanna Railroad Company, a New Jersey corporation, the line of which formed a cut-off between two points on the road of the Pennsylvania company and so materially shortened its track. The Pennsylvania company then took a perpetual lease of the railroad and all other property of the New Jersey company, and thereafter declared a dividend to its own stockholders payable in the stock of the New Jersey company. The amount of this dividend was much less than the accumulated earnings or undivided surplus of the Pennsylvania company. The plaintiffs have received this dividend and now hold the same, amounting to 201 shares of the capital stock of the New Jersey company and $25 in money, and ask to be instructed as to the disposition of this amount, whether it should be added to the principal of the trust fund or paid over to those who are entitled to receive the income of that fund.

In our opinion the case is governed in principle by the decision in Leland v. Hayden, 102 Mass. 542, 551. Here, as in that case, the shares distributed represented an investment of accumulated profits, and it can make no difference that the investment was made by original subscription for the shares taken instead of purchasing them in the market. Here as in that case, if the directors of the Pennsylvania company had sold the shares and divided the proceeds among their stockholders, there could have been no doubt that it was a cash dividend and belonged, as between tenants for life and remaindermen, to the former. Here, as in that case, the declaration and payment of the dividend did not affect the value of the shares on which it was made relatively to the whole capital stock of the company. In essential respects the two cases are alike.

It is the characteristic feature of a stock dividend that the property of the corporation itself remains unchanged, but that each one of the new shares of the increased capital stock represents a smaller fractional interest than before in the total amount of the corporate property. On the other hand it is the characteristic feature of a dividend declared and paid wholly from the net profits or undivided earnings that it does diminish the property of the corporation by exactly the amount of the dividend so paid out, while it leaves the fractional interest represented by each share of the capital stock exactly what it was before. Gibbons v. Mahon, 136 U.S. 549, 559, 560, 10 S.Ct. 1057, 34 L.Ed. 525. Tested in this way, the dividend here in question was not a stock dividend properly so called. It left the corporation the poorer by what was given to the stockholders; it left the proportional interest of each stockholder in the diminished quantum of the corporate property exactly what it had been. As in Leland v. Hayden, ubi supra, we do not regard the fact that the dividend was payable in stock as decisive. Just as a dividend purporting to be made in cash will be regarded as a stock dividend, when it manifestly was intended to be such, because the real nature of the transaction must be determined from what was done in carrying it out ( Daland v. Williams, 101 Mass. 571; Rand v. Hubbell, 115 Mass. 461, 15 Am. Rep. 121; Brownell v. Anthony, 189 Mass. 442, 75 N.E. 746; Bouch v. Sproule, 12 App. Cas. 385), so the mere fact that a dividend may first or last take the shape of certificates of stock does not necessarily make it a stock dividend (Leland v. Hayden, ubi supra; Hyde v. Holmes, 198 Mass. 287, 84 N.E. 318).

Moreover by a stock dividend is generally understood a distribution made by a corporation of shares of its own stock. This was not such a case. The shares distributed were those of another and wholly different corporation, created under the laws of another state and having an absolutely distinct corporate existence. Brighton Packing Co. v. Butcher's Slaughtering & Melting Association, 97 N.E. 780. For this reason also what took place here...