A dividend once legally declared and of which notice has been given cannot be revoked. As stated above, such a dividend becomes a claim against the corporation and ranks with the claims of outside creditors. Even further than this, it has been held that if actual funds have been set aside, as by deposit in a bank, for the payment of these dividends, these funds cannot be touched by other creditors in case of insolvency, but must be applied to the payment of dividends.
With regard to the revocation of dividends, such action is held to be possible only until the fact of declaration has become known outside the board of directors. The revocation of a dividend is merely looked upon as a reconsideration of business policy. In case of illegally declared dividends, they may be revoked by the directors any time previous to payment and the directors may be enjoined from making payment of them.
Payment of Dividends
Inasmuch as a declared dividend becomes a debt of the corporation, it may be settled by whatever means another debt might be. Thus, if a stockholder owes anything to the corporation, the debt for dividends may be used as an offset and only the net payment be made or received, as the case may be. In this way dividends may be made to apply to unpaid subscriptions on capital stock.
After the declaration of dividends provision must be made to pay them. Before the declaration, a report from the treasurer will have probably shown the financial condition of the company to be such as to warrant the payment. Unless specifically ordered otherwise, payment in cash is understood. Payment of the dividend is a duty of the treasurer. If present at the board meeting when the dividend is declared, that is sufficient notification to him to make arrangement for paying it. If not, notice may come to him verbally, by an inspection of the minute book, or by formal notice from the secretary.
Dividends may be paid by check through the mail or by notifying the stockholders to appear at a designated place to claim their dividends. Under this latter procedure, receipt for the dividend is usually made by signature of a form of receipt in the dividend book. Where payment is made by check, the signing of a formal receipt may or may not be required. In a large corporation the stock of which is widely held, a distinct series of checks formally marked “Dividend Check” is made use of. If these checks bear an identification phrase on their face, as Dividend No. ..., indorsement by the holder upon receipt of payment by the bank and the bank’s cancellation stamp undoubtedly constitute sufficient receipt for payment. However, if desirable, a formal receipt may be issued with the check and its return requested. In a small corporation, the regular check series may be used and marked as dividend checks.
Dividends Paid as Salaries
A peculiar method of payment of dividends is by means of excess salaries—which is largely a matter of bookkeeping. In a close corporation where all the stockholders are officers of the corporation, salaries, in addition to those regularly paid, may be voted in lieu of dividends. The courts have held that, so long as all the parties interested—incorporators, stockholders, directors, and officers—assent to the scheme for the distribution of profits by the payment of salaries, the plan is not objectionable. Salaries so paid would usually be in proportion to holdings of stock and as such become dividends, merely booked as salary.
Methods of Paying Dividends
An interesting point is raised in the question as to whether it is legal or wise to borrow funds to pay dividends. This question in its turn raises the point as to the various ways in which dividends may be paid. In addition to the payment of dividends in cash, other property owned, such as the stock and bonds of other concerns, even the more or less fixed assets if these can be apportioned, may be used for this purpose. The issue of the company’s obligations in the form of its own bonds, or in a special form of promise to pay known as dividend scrip; and, furthermore, the absorption of the dividend by the business through the issue of its own shares—both these methods have been employed to liquidate the dividend obligation.