These four cases involving the dividend rights of stockholders of the Pacific Coast Company were brought to enjoin the company from paying dividends of $4 per share on the second preferred stock and $1 per share on the common stock declared out of the 1947 net earnings. The first preferred stockholders claim that, before payment of any dividends on the second preferred stock or the common stock, they are entitled to be paid dividends which could have been, but were not, paid out of profits or surplus for the years 1935 to 1947 inclusive. The second preferred stockholders claim a similar priority before dividend payments to the common stockholders.
The common stockholders denied such claims and counterclaimed for a determination of the rights of the various classes of stock and for a permanent injunction against the declaration or payment of any dividend except in accordance therewith. A preliminary restraint issued against the payment of the aforesaid 1947 dividends. In December, 1948, the company declared like dividends out of the 1948 net profits, payment whereof was by stipulation restrained.
The Pacific Coast Company was incorporated in 1897 under the laws of this State, to acquire the assets of the Oregon Improvement Company, a corporation of the State of Oregon, pursuant to a plan of reorganization of said company, which had defaulted in the payment of its outstanding bonds. The company was authorized to issue capital stock in the sum of $12,525,000, divided into three classes: 15,250 shares of non-cumulative first preferred stock, 40,000 shares of non-cumulative
second preferred stock and 70,000 shares of common stock -- all of $100 par value. The first preferred stock was to have first preference as to dividends to the amount of 5% per annum and to be entitled to no other or further dividend or preference. The second preferred stock was to have second preference as to dividends to the amount of 4% per annum and thereafter the common stock to the amount of 4% per annum; and if in any year dividends in excess of these were to be paid, the second preferred and the common stocks were to share ratably in such excess. From its organization until the year 1921, the company annually earned substantial profits and paid dividends. However, in the ensuing twelve years, the company suffered losses in eight years and reduced profits in four years. During the period, the only dividends paid upon the first preferred stock were 2 1/2% in 1924, 5% in 1925, 1926 and 1927 and 1 1/2% in 1928; upon the second preferred stock, 1% in 1925, 4% in 1926 and 1% in 1927; and none upon the common stock.
In consequence of this period of reverses, the company in 1932 had its property and the property of its subsidiaries appraised, with a resulting valuation of $7,373,899.99. The company had outstanding stock of an aggregate par value of $12,525,000 and bonds amounting to $4,000,000. There was therefore a substantial impairment of capital. Accordingly, the company took steps to reduce its capital and capital stock. By action of the board of directors approved by more than two-thirds of the stockholders, the capital of the corporation was reduced and the Certificate of Incorporation amended on June 27, 1933. By such amendment each share of first and second preferred stock of $100 par value was converted into a share of no par value first or second preferred stock of a stated value of $10 per share; and each share of common stock was reduced in par value from $100 to $10. In lieu of the original dividend provisions expressed in percentage, the amended Certificate of Incorporation provided for like dividends in terms of dollars. Whereas the original Certificate of Incorporation made no express provision for distribution of assets, the amendment expressly provided that except as to
dividends all shares should share ratably, without preference or priority. In this respect the amendment did not alter the stockholders' rights, but made more explicit a provision of the original certificate. The rights of the stockholders inter sese remained undisturbed.
Article Fourth of the amended Certificate of Incorporation reads as follows:
"IV. The amount of the total authorized capital stock of the Corporation is one hundred twenty-five thousand two hundred fifty (125,250) shares. The number of such shares that are to have a par value is seventy thousand (70,000) shares and the par value thereof is Ten Dollars ($10) each. The number of such shares that are to be without par value is fifty-five thousand two hundred fifty (55,250). The shares of the Corporation are divided into fifteen thousand two hundred fifty (15,250) shares, without par value of the First Preferred Stock, forty thousand (40,000) shares without par value, of the Second Preferred Stock, and seventy thousand (70,000) shares, of the par value of Ten Dollars ($10) each, of Common Stock.
"The amount of capital stock with which the Corporation will commence business is One Thousand Dollars ($1,000).
"The fifteen thousand two hundred fifty (15,250) shares of First Preferred Stock, of the par value of One Hundred Dollars ($100) per share previously authorized and issued, are hereby changed into fifteen thousand two hundred fifty (15,250) shares of First Preferred Stock, without par value, and the forty thousand (40,000) shares of the Second Preferred Stock of the par value of One Hundred Dollars ($100) per share, previously authorized and issued, are hereby changed into forty thousand (40,000) shares of Second Preferred Stock, without par value.
"The par value of the Common Stock, of the par value of One Hundred Dollars ($100) per share, is hereby changed and reduced to Ten Dollars ($10) per share.
"The First Preferred Stock shall have a first preference as to dividends to the amount of $5 per share per annum, which shall not be cumulative; that is to say, the First Preferred Stock in any year shall be paid $5 per share in dividends before any dividend is paid upon the Second Preferred Stock or the Common Stock. The First Preferred Stock shall be entitled to no other or further dividend or preference.
"The Second Preferred Stock shall have a second preference as to dividends to the amount of $4 per share per annum, which shall not be cumulative; that is to say, the Second Preferred Stock in any year shall be paid $4 per share in dividends before any dividend is paid upon the Common stock, but shall be entitled to no other or further preference.
"After the payment of $5 per share upon the First Preferred Stock and $4 per share upon the Second Preferred Stock in any year, the
Common Stock shall next be entitled to $4 per share in dividends; and if in any year dividends in excess of $5 per share upon the First Preferred Stock, $4 per share upon the Second Preferred Stock and $4 per share upon the Common Stock be paid, both the two classes of stock last named -- to wit, the Second Preferred Stock and the Common Stock -- shall share ratably in such excess, each share of stock ...