On appeal from a final decree of the former Court of Chancery advised by Vice-Chancellor Bigelow, whose opinion is reported in 142 N.J. Eq. 578.
For reversal -- Chief Justice Vanderbilt, and Justices Case, Heher, Burling and Ackerson. For affirmance -- None. The opinion of the court was delivered by Heher, J.
This is a class bill to restrain the payment of dividends on the common stock of the respondent American Ice Company until "an accumulated dividend preference" on its outstanding non-cumulative preferred stock shall have been paid.
The complainant Agnew is the owner of 400 shares of the preferred stock, all acquired on January 27, 1937; and his co-complainant Woodward owns 300 shares of the same class, of which 50 shares were acquired on February 6, 1929, and 250 shares on May 20, 1940. The respondent Continental Illinois National Bank and Trust Company of Chicago, as executor and trustee of the estate of Thomas M. Howell, deceased, the holder of 114,300 shares of the common stock of the corporation, was on its own motion admitted as a party defendant, and thereafter made answer.
The decree directed the corporation to pay a dividend of $2 on each share of the preferred stock before the payment of any further dividend on the common stock. By an appeal and cross-appeals, the whole of the decree is made subject to review.
The articles of incorporation provided for the payment "out of the surplus or net earnings of each fiscal year, * * * as and when declared by the Board of Directors," of a non-cumulative dividend upon the company's outstanding preferred stock "at the rate of but never exceeding six per cent. per annum, payable yearly, half-yearly or quarterly, before any dividend shall be set apart or paid on the common stock for such year," and the distribution, in the discretion of the directorate, of "the remainder of the surplus or net earnings of each fiscal year * * * as dividends among the holders of the common stock, as and when the Board of Directors shall determine." There was also provision that, on liquidation or dissolution, the holders of the preferred stock shall
receive payment at par "before any amount shall be payable to the holders of the common stock," and thereafter $25 shall be payable upon each share of the outstanding common stock, and the balance of the "assets and funds shall be distributed ratably among all of the shareholders without preference, in such manner that there shall be paid upon each share of common stock one-fourth of the amount paid upon each share of the preferred stock outstanding."
Annual dividends at the established rate of $6 per share were paid on the preferred stock from the year 1917, when the issue was authorized, to and including the year 1934. For ten years thereafter, there were reduced dividends; in some years, none at all. At times, the annual earnings exceeded the dividends paid on the preferred stock; and in other years, the reverse was true. In 1945, payment of the full dividend on the preferred stock was resumed; and on September 24, 1946, a dividend of 50c on each share of the common stock was declared, payable "out of the surplus or net earnings of the Company." It is this dividend that is under attack. The contention of the appellant preferred stockholders is that dividends are not payable on the common stock until the shortage in the preferred dividends for the years 1935 to 1944 shall have been paid.
The learned Vice-Chancellor found (a) that the dividend priority of the preferred stock is confined to the earnings and net additions to surplus in a given year; (b) that the accumulated preferences are reducible by the amount of "overpayments" of dividends on the particular stock in prior years; (c) that profits realized and credited to surplus instead of earnings are allocable to the preferred stock, while losses deducted from surplus are chargeable to the common stock, and where the entries are made in the one year a balance shall be struck; and (d) that where a net operating loss is coupled with a net addition to surplus in a given year, one shall not be offset against the other, nor shall there be such offset in a year in which there were net profits coupled with a net deduction from surplus.
It is the insistence of complainants that there were in fact no prior "overpayments" of dividends on the preferred stock, but that, even though there were, such overpayments cannot be offset against "underpayments" of ...