For modification -- Chief Justice Weintraub, and Justices Burling, Jacobs, Francis, Proctor, Hall and Schettino. Opposed -- None. The opinion of the court was delivered by Jacobs, J.
On March 27, 1957 the plaintiff corporation instituted its class action seeking a determination of the relative rights of its preferred and common stockholders under its amended certificate of incorporation. On September 15, 1958 the Chancery Division entered a declaratory judgment from which preferred stockholders appealed to the Appellate Division. See Leeds and Lippincott Co. v. Nevius, 51 N.J. Super. 343 (Ch. Div. 1958). The plaintiff corporation cross-appealed from the Chancery Division's allowance of counsel fees and we thereafter certified the entire matter on our own motion. See R.R. 1:10-1(a).
The plaintiff's amended certificate of incorporation first provides that the preferred stockholders shall receive, when and as declared, a yearly dividend at the rate of $2.50, provided that no dividend shall be paid on the preferred stock until the net earnings for the year in which the dividend is to be paid exceed $700,000, and then only to the extent of the excess. It then sets forth the following provisions
upon which the Chancery Division grounded its declaration that the plaintiff may, in any year, declare and pay dividends on the common stock from net earnings in that year exceeding $700,000, provided there has first been paid from such net earnings a dividend of $2.50 per share on the preferred stock:
"The dividends on the preferred stock shall be noncumulative; provided, however, that no dividends shall be paid for any year on common stock in excess of the net profits for that year remaining after payment of Two Dollars and Fifty cents ($2.50) per share for such year on the preferred stock, until dividends earned, but unpaid for any prior year or years on the preferred stock, shall have been paid, but in no other respects shall dividends on preferred stock be cumulative.
No dividends shall be paid on common stock in any year, or for any year, until the full dividend of Two Dollars and Fifty Cents ($2.50) per share for such year has been paid on the preferred stock, and for prior years as set forth in the preceding paragraph. When all dividends as aforesaid have been declared and shall have become payable on the preferred stock, the Board of Directors may declare dividends on the common stock, out of Net Earnings in excess of Seven Hundred Thousand ($700,000.00) Dollars, payable then or thereafter, with limitations as aforesaid."
The appellants contend that under the principles expressed in Sanders v. Cuba Railroad Co., 21 N.J. 78 (1956), the plaintiff may not pay a dividend on common stock from current net earnings until after the preferred stock is paid not only its current dividend of $2.50 but also its accumulated dividend credit for past years during which there were earnings from which dividends could have been declared but were passed by in the exercise of the discretion of the corporation. We adhere fully to Sanders but point out that New Jersey's dividend credit rule, which was there unequivocally reaffirmed, is admittedly subject to contrary directions or provisions which appear clearly in the certificate of incorporation. See 21 N.J. at pages 83, 86; R.S. 14:8-2; Ballantine, Corporations 516, 517 (1946). The quoted paragraphs in the plaintiff's certificate clearly import to us, as they did to the Chancery Division, the existence of authority
in the plaintiff to pay from current net earnings exceeding $700,000, a dividend of $2.50 to preferred stockholders and then a dividend to common stockholders from the excess current net earnings. Thus the first sentence explicitly sets forth that dividends on the preferred stock shall be non-cumulative, that no dividends shall be paid for any year on common stock in excess of the net profits for that year remaining after payment of the preferred stock's $2.50 dividend until dividends earned but unpaid for any prior years on the preferred stock shall have been paid, and that in no other respects shall dividends on preferred stock be cumulative. The purpose and effect of this language, insofar as it is pertinent here, appear to us to be entirely evident; after preferred receives its current dividend of $2.50 from current net profits, no dividend to common may exceed the available remaining current net profits unless and until the accumulated dividend credit of preferred for past years has first been paid; or to word it affirmatively, common may, after preferred has been paid its current dividend of $2.50, receive a dividend from the available remaining current net profits but may not receive a dividend from surplus until preferred's dividend credit has been satisfied.
The appellants urge that the second quoted paragraph throws serious doubt on the foregoing construction, but we do not so read it. The first sentence in the second paragraph sets forth that no dividends shall be paid on common stock in any year, or for any year, until the full dividend of $2.50 for such year has been paid on the preferred stock and for prior years as set forth in the preceding paragraph. While it might well have been worded differently, its pertinent purpose appears plainly enough; it is intended to provide an affirmative restriction against the payment of a dividend to common until the $2.50 on preferred has been paid and "as set forth in the preceding paragraph" until the dividend credit has been paid where the payment to common is to come from surplus as distinguished from current net earnings. The second sentence in the second paragraph sets
forth that when all dividends as aforesaid have been declared and shall have become payable on the preferred stock, dividends may be declared on the common stock out of net earnings in excess of $700,000, payable then or thereafter with limitations as aforesaid. Here again the pertinent purpose appears plainly enough; it is intended to provide an affirmative authorization for the declaration of a dividend to common after all dividends on the preferred stock "as aforesaid" have become payable, namely, after the current dividend of $2.50 has become payable and, where ...