Where profits exist, either earned currently or accumulated, the matter of a declaration of dividends is thus seen to be always a question of financial policy. In view of the other problems confronting the corporation—its policy of growth and expansion to meet competition and enter other markets, its specific and pressing requirements for funds—the question of the wisdom of a declaration and payment of dividends frequently demands careful consideration. If under the circumstances, in the exercise of their discretion, the directors do not declare dividends, their action is final and, in the absence of fraud or an abuse of discretion, will not usually be interfered with by the courts.

Courts do sometimes intervene, however, as in Matter of Rogers, 161 N. Y. 108 (1899): “The directors must act in good faith. If they fail to do so and it clearly appears that they have accumulated earnings not required in the prosecution of the business which they withhold from the stockholders for illegitimate purposes, a court of equity may interfere and compel a distribution of such earnings.” Again, in Hunter v. Roberts, Throp & Co., 83 Mich. 63 (1890), the court said: “Courts of equity will not interfere in the management of the directors unless it is clearly made to appear that they are guilty of fraud or misappropriation of the corporate funds or refuse to declare a dividend when the corporation has a surplus of net profits which it can, without detriment to its business, divide among its stockholders, and when a refusal to do so would amount to such an abuse of discretion as would constitute a fraud or breach of that good faith which they are bound to exercise towards the stockholders.”

In the case of preferred dividends, the courts are somewhat readier to act because of the ease of a fraudulent retention of profits. Where stock is non-cumulative and non-participating and particularly if non-voting, it would be possible for a board of directors to refuse dividend declarations for a number of years and then pay to common stockholders most of the profits so saved. Such a policy is so manifestly unfair and fraudulent as to warrant immediate intervention of the court. When stock is cumulative as to unpaid dividends, such a policy could not be practiced, as the corporation cannot declare dividends unless profits are made, nor, except as above stated, need it declare dividends even when profits are made. But upon the declaration of a dividend, the rights of cumulative preferred shareholders require the payment of all accumulation of unpaid dividends before the other classes of stockholders can share.

Declaration of Dividends

The matter of a declaration of dividends is usually a formal one. The minute book record must always show the authorization. It may appear as a formal resolution or merely as a statement of the declaration. Such resolution or statement will usually carry the amount of the dividend, which may be either a named per cent on the par value of the stock (or the amount paid up on the stock where stock is not full-paid), or it may be a named amount on each share; the date on which it is effective; the date and manner of payment; and to whom payable, i.e., to the stockholders as of a given date. Dividends may be declared to become effective on some future date but never on a past date. Antedating a dividend so as to make it apply to past stockholders who may no longer have any interest in the corporation would manifestly be unfair, opening the way to manipulation and fraud.

A stockholder is entitled to notice of every dividend declaration. This may come to him by published notice in the newspapers or through the mails. A dividend check mailed to his last-known address has been held to constitute sufficient notice.

Liability of Directors

Together with the power and control over dividends by the directors is a responsibility and liability for those wrongly declared. The law is very specific and emphatic in its refusal to allow dividends except from profits. The State of New York in its Stock Corporation Law has this to say with regard to the liability of directors for making unauthorized dividends: “The directors of a stock corporation shall not make dividends, except from the surplus profits arising from the business of such corporation, nor divide, withdraw, or in any way pay to the stockholders or any of them, any part of the capital of such corporation, or reduce its capital stock, except as authorized by law. In the case of any violation of the provisions of this section, the directors under whose administration the same may have happened, except those who may have caused their dissent therefrom to be entered at large upon the minutes of such directors at the time, or were not present when the same happened, shall jointly and severally be liable to such corporation and to the creditors thereof to the full amount of any loss sustained by such corporation or its creditors respectively by reason of such withdrawal, division, or reduction.”[65]

In some states the liability of directors is made to include, in addition to restitution of the amounts wrongfully paid, liability for all debts contracted during their term of office and even to a body judgment for misdemeanor. The stockholders receiving such a dividend are held to have known of its illegality and are liable for restitution. While payment of dividends out of capital is the most frequent source of illegality, a declaration of dividends contrary to the provisions of the charter or by-laws relative thereto, or a declaration which disregards the rights of other stockholders, is equally illegal. Thus, a dividend paid before reserving profits, where the by-laws require antecedent reservation or one paid to common shareholders ahead of an accumulated dividend to cumulative preferred stockholders, is classed as illegal.

Revocation of Dividends