Page:Henry Osborn Taylor, A Treatise on the Law of Private Corporations (5th ed, 1905).djvu/592

§ oG5.] THE LAW OF PRIVATE CORPORATIONS. [CHAP. IX. a holder of " preferred and guaranteed " stock is entitled to be paid his guaranteed percentage only out of the profits of the corporation legally applicable to the payment of dividends. 1 He is not a creditor, it being really a dividend and not a debt that is guaranteed. 2 Thus, in a recent case in the Federal States, 108 U. S. 277. "As a general proposition, net earnings are the ex- cess of the gross earnings over ex- penditures defrayed in producing them, aside from and exclusive of the expenditure of capital laid out in con- structing and equipping the works themselves." Union Pacific R. R. Co. o. United States, 99 U. S. 402, 420; opinion of the court per Bradley, J. See, also, Sioux City and P. R. R. Co. v. United States, 110 U. S. 205. See also regarding what constitutes " net earnings." Union Pac. R. R. Co. v. United States, 99 U. S. 402; United States o. Central Pac. R. R. Co., ib. 449; Same v. Kansas Pac. R'yCo., ib. 455. A solvent corporation may pay dividends out of its receipts, over and above expenses, in the ordinary course of business, though its assets consist of property which in the na- ture of things will thereby be ex- hausted, like a mine or a patent. Lee v. Neuchatel Asphalte Co., 41 Ch. D. 1. 1 St. John v. Erie Railway Co., supra. Taft «. Hartford, etc., R. R. Co., 8 R. I. 310; Chaffee v. Rutland R. R. Co., 55 Vt. 110. See Miller v. Ratterman, 47 O. St. 141. Compare Gordon v. Richmond, F. and P. R. R. Co., 78 Va. 501, 517. A contract by the corporation to pay annual dividends to preferred shareholders, without reference as to whether there are earnings (i. e., an implied agreement to pay dividends, al- though there are no profits), is op- posed to public policy and void. Lockhart v. Van Alstyne, 31 Mich. 76. See Elevator Co. v. Memphis, 572 etc., R. R. Co., 85 Tenn. 703. But the terms on which " preferred share- holders" receive their interest may be such that courts will regard them as creditors; e. g. when they have no right to vote, and four per cent, annually is guaranteed them, with repayment of the principal at a time specified, and a mortgage is exe- cuted to secure them. Burt v. Rat- tle, 31 Ohio St. 116; see Totten v. Tison, 54 Ga. 139. Compare West Chester, etc., R. R. Co. v. Jackson, 77 Pa. St. 321; Williston v. Michi- gan Southern, etc., R. R. Co., 13 Allen, 400. In a late Massachusetts case, a statute authorizing a corpo- ration to issue "preferred stock" provided: (1) " the said company to give its guaranty that each share of said stock shall receive semi-annual dividends of four dollars on each share; provided, that no share of such preferred stock shall be issued until the said company shall receive one hundred dollars therefor." (2) "No dividends more than four dol- lars per share semi-annually to be paid on said stock under any cir- cumstances, but any holder may ex- change for common stock share for share." (3) " In case of dissolution . . . . the holders of preferred stock shall be entitled to payment of the same in full next after payment of the debts of the company, and be- fore any payments to the holders of stock not preferred." Held, that the guaranty of dividends was not con- ditional on the earning of profits. Williams v. Parker, 136 Mass. 204. 2 Taft ». Hartford, etc., R. R. Co.,