201 McClaran v Crescent Planing Mill Co. February 27, 1906, 117 Mo. App.

40 (Court of Appeals) TOPIC: When Right to Dividends Vests; Right of Transferee PONTENTE: Judge Moses N. Sale

(Unusual but important note: McClaran is the counsel of the plaintiff. McClaran is NOT the stockholder. The stockholder died, McClaran is just the administrator of the stockholder) FACTS 1. Crescent Planing Mill Co., a manufacturing corp in St. Louis, Missouri, through its board of directors, declared a cash dividend. Their reason for declaring such was because they had ample surplus of funds. 2. The cash dividend was to be divided into 4 equal installments (1903: Feb. 15; Apr. 1; Jul. 1; Oct. 1) 3. No other board resolution followed, and the funds for the dividends werent set aside. (take note of this, this will be one of the defenses of the corp. later on) 4. The corp. paid the 1st of 4 installments (the Feb. 1 installment). 5. When April came (time to pay the 2nd installment), the board held a meeting and resolved that they had overestimated their surplus funds, thus, theyre revoking and rescinding the 3 remaining installments indefinitely. (Dont dwell too much and make it a point of conflict whats the difference of revoking and rescinding. Basta binawi ng corp yung sinabi nila) 6. The stockholder requested from the corp. it pay its 2nd installment of $235.50; which was obviously refused. 7. The stockholder filed an action for recovery of the alleged amount. 8. Corp. puts up the ff. defense: - Funds werent actually set aside for payment of the dividends - Their resolution (in #5) superseded their dividend declaration (in #1). 9. Lower Court: in favor of the stockholder. 10. Corp. appealed to the CA of Missouri. 11. Stockholder died. McClaran, his counsel was appointed as administrator. 12. The corp. through its counsel contends: - The phrase set aside is included in the definition of dividends, thus the BoD needs to set aside funds for the dividends. - He cites a case, (Ford v East Hampton) and says that the BoD in that case validly rescinded its declaration of dividends. So why shouldnt they also be allowed to do the same? ISSUE: 1. Whether or not the mere declaration of distribution of dividends by the corp. creates a debt in favor of the stockholders despite the corp. not setting aside of funds for it? 2. Whether or not the corp. can rescind its declaration that it will distribute dividends and thus not pay the installments not yet paid? HELD: 1. Yes. 2. No.

AUTHOR: Keith Meridores Take note: right of the stockholder to the dividends vests as soon as it is declared by the BoD. The corp. now becomes indebted to the stockholder for what it declared as dividends. Jist: BoD authorized release of cash dividend which was to be paid in 4 equal installments. After payment of the first installment, sabay bawi. BoD puts up several defenses as to why the 3 remaining installments will no longer be paid. (read on)

RATIO: Issue 1 1. it appears that the principle obtains that the mere declaration of the dividend, without more, by competent authority under proper circumstances, creates a debt against the corporation in favor of the stockholder the same as any other general creditor of the concern [this means, upon declaration of dividends by the BoD and if they werent able to set aside funds, the stockholders who are entitled to receive it has a status of a general creditor; BUT nevertheless! They still have the right to the dividends] ; 2. whereas, the setting apart of a fund after or concurrent with the declaration, out of which the debt thus created is to be paid, passes one step further toward securing the payment of the identical fund to the shareholder inasmuch as the law treats the setting apart of such fund as a payment to the corporation as trustee for the use of the stockholder, on which fund the stockholder has a lien, and to which fund he has rights superior to the general creditor. [pero, in the event na i-set aside yung funds, what happens is that the corp is now a holder in trust for THAT funds for those stockholders who are entitled to it. Baga, they have a better right now compared to a general creditor] 3. Explanation: In sum, when the BoD declares stock dividends, it is already liable. It doesnt matter if they put aside specific funds for that purpose. The only effect of setting aside funds upon declaration of dividends is that, it puts the stockholders entitled in a better position compared to general creditors. Issue 2 1. a cash dividend, properly and fairly declared, cannot be revoked by the subsequent action of the corporation, for if, by the declaration of the dividend, the corporation thereby becomes the debtor of the stockholder, it goes without saying that the debtor cannot revoke, recall or rescind the debt or otherwise absolve itself from its payment by any action on its part against or without the consent of the creditor. 2. The resolution of April 11th, attempting to so do, was of no force. 3. The case cited by the counsel for the corp. (tignan mo yung #12, yung Ford v East Hampton) is inapplicable. 4. In that case it appears that the board of directors made and declared a dividend, but before notifying any of the stockholders except the directors themselves who were present, and without having set apart a fund for its payment, rescinded and recalled their action declaring the same. (Hindi pa alam ng stockholders na nagdeclare, so pwede pa bawiin ng BoD) 5. It is preposterous to say that such debt can be cancelled by the action of the debtor (the corp.) without the consent of the creditor (stockholders). CASE LAW/ DOCTRINE: 1. When the directors of a corporation formally declare a dividend out of the profits existing at the time it is declared, the relation of debtor and creditor is established between the corporation and the stockholders; a debt is created against the corporation and in favor of each stockholder for the amount of the dividend due him on his stock. 2. It is not necessary for the directors to go further and set apart a fund for the payment of the dividend; in that case, a trust fund would be set apart for the use of the stockholders, giving them rights thereto superior to the general creditors. 3. When a dividend has been properly and formally declared, it cannot be rescinded by any subsequent action of the corporation, because a debtor cannot revoke or rescind his debt.