Page:Henry Osborn Taylor, A Treatise on the Law of Private Corporations (5th ed, 1905).djvu/590

§ 565.] THE LAW OF PRIVATE CORPORATIONS. [CHAP. IX. a payment in accordance with the terms on which the preferred shares were issued. 1 § 564. That dividends on preferred shares are " guaranteed," authorizes the interpretation that they are curnula- dividends tive ; and the arrears must be paid before any divi- cumu ative. c j em j can rightfully be paid on the common stock. 2 § 565. Rightfully, dividends can only be paid out of profits; 1 Boardman v. Lake Shore, etc., Ry. Co., 84 N. Y. 157; Westchester, etc., R. R. Co. v. Jackson, 77 Pa. St. 321; Bates v. Androscoggin, etc., R. R. Co., 49 Me. 491; Nickals v New York, L. E. & W. R. Co., 15 Fed. Rep. 575; see St. John v. Erie R. R. Co., 22 Wall. 136; compare Williston v. Michigan South., etc., R. R. Co., 13 Allen, 400; Belfast & M. L. R. R. Co. v. Belfast, 77 Me. 445; Field v. Lamson, etc., Co., 162 Mass. 388; McLean v. Plate Glass Co., 159 Pa. St. 112. The holders of common stock are not necessary parties to an action by preferred shareholders to compel the payment of dividends claimed to be due the latter. Thompson v. Erie R. R. Co., 45 N. Y. 468. It has been held, however, that an agreement between two corporations whereby one guarantees to the other a certain specified annual dividend on its capital stock, is npt a guaranty to the shareholders individually, but only to the corporation; that the respective boards of directors have power to modify such an agreement; and that a court of equity will not interfere if that power is fairly ex- ercised. Flagg v. Manhattan R'y Co., 10 Fed. Rep. 413; S. C, 20 Blatchf. 142 and 21 Am. Law Reg. N. S. 775; Beveridge v. N. Y. E. R. Co., 112 N. Y. 1; People v. Metro- politan Ry. Co., 26 Hun, 82. See Sheffield Nickel Plated Co. v. Unwin, 36 L. T. N. S. 246; S. C, L. R. 2 Q. B. Div. 214. 570 2 Boardman t>. Lake Shore, etc., R'y Co., 84 N. Y. 157; Westchester, etc., R. R. Co. v. Jackson, 77 Pa. St. 321; Bates v. Androscoggin, etc., R. R. Co., 49 Me. 491; Prouty v. Michigan Southern, etc., R. R. Co., 1 Hun, 665. Compare Williston v. Same, 13 Allen, 400; New York, L. E. and W. R. R. Co. v. Nickals, 119 U. S. 296. The right of preferred shareholders is substantially a right to interest at the stipulated rate chargeable ex- clusively on profits, and payable, with arrears, before anything be divided among ordinary sharehold- ers. Henry v. Great Northern R'y Co., 3 Jur. N. S. 1133. But it may be provided expressly that the divi- dends on preferred shares are not to be cumulative. See Bailey v. Rail- road Co., 17 Wall. 96. Or this may be inferred from the language of the by-law providing for the divi- dends on the preferred shares. Bel- fast and M. L. R. R. Co. v. Belfast, 77 Me. 445; Hazeltine v. Railroad Co., 79 Me. 411. For the respective rights of preferred and common shareholders on dissolution, see § 786. Where by by-law the divi- dends on preferred stock are not cumulative, but can be paid only from net earnings of each year, the preferred shareholders have a stronger standing to compel directors to declare a dividend when earned. Hazeltine v. Railroad Co., 79 Me. 411.