More usual, however, is the payment of dividends by means of short-term obligations known as scrip or dividend scrip. Scrip takes many forms. It is usually so drawn as to constitute the corporation’s promise to pay. It may be unconditional, and so negotiable, or it may be hedged about with limiting conditions. Date of payment may be absolute or contingent. Scrip may be convertible into the bonds or stock of the company at the option of either party. Unredeemed scrip may even bear dividends. Usually, however, the issue of scrip is for the purpose of deferring date of payment of the dividend until cash can be accumulated from sale of property or from the profits of the new period.

Stock Dividends

The one remaining method of settling the dividend claim is by the issue of stock. As pointed out above, the effect of this is to convert some portion of the “margin” or surplus into capital stock. This change in the form of proprietorship is accomplished by a reduction of proprietorship through the declaration of a dividend and an equal increase of proprietorship through payment of the dividend in stock of the company. The effect of a stock dividend, therefore, is to fix a portion of the “margin” so that it becomes a part of the permanent capital of the corporation and, as such, is no longer subject to the direct control of the board of directors. Excepting in states which expressly forbid the stock dividend—and even here the same result is accomplished by other means—its legality is thoroughly established.

Thus, in Howell v. Chicago, etc., Ry. Co., 51 Barb. (N. Y.) 378 (1868), the court said: “It becomes immaterial whether such increase (in capital) is made by awarding the stock to stockholders as dividends in lieu of money, retaining the money for the purpose of the company, or by paying the stockholders the dividends in cash from the earnings of the company and selling the stock in the market to raise money for the use of the company.” In Williams v. Western Union Telegraph Co., 93 N. Y. 162 (1883), the court ruled: “If it [the corporation] can issue stock in payment of property to be obtained by it as part of its capital for its legitimate uses, why may it not issue stock in payment for property in effect purchased of them [i.e., the shareholders] and added to its permanent capital and which they relinquish the right to have divided? So long as every dollar of stock issued by a corporation is represented by a dollar of property, no harm can result to individuals or the public from distributing stock to stockholders.... All that can be required in any case is that there shall be an actual capital in property representing the amount of share capital issued.”

Any unissued or treasury stock in the possession of the company may be used for this purpose and, in the case of unissued stock, becomes full-paid if the property against which it is issued is of equal value to it. If the necessary legal requirements are met, even authority for an issue of new stock may be given and the stock used for the purpose of paying the dividend.

Stock Dividends in Estate Accounting. An interesting point is raised in estate accounting as to whether a stock dividend should be treated as principal or income as between the life-interest party and the remainderman. In such a case, the income from the stock which yields the dividend belongs to the life-interest party, while the stock itself is the principal and belongs to the remainderman. Of course, any dividend declared before the decedent’s death, though not payable until after it, is a part of the principal of the estate. The original fund of principal being established, all dividends, whether in cash or stock, which disburse current earnings belong to the life-tenant as income. Where a dividend partakes of the nature of a liquidating dividend—i.e., represents a return of some portion of the net worth as at the decedent’s death—the portion so returned should, in equity, be looked upon as principal.

Any stock dividend has the effect of lessening the value of the stock previously outstanding by the circumstance that it, while issued at par, after issue takes on its pro rata share in any accumulated margin. Thus, by the very fact of payment of a dividend in stock, the principal of the estate diminishes in value. Courts have usually held this proper, however, but in cases of manifest injustice, as where profits have been reserved in large amounts and thus have come to be treated as a part of the permanent capital, the “cutting of the melon” in the form of a stock dividend would work so markedly to the injury of the value of the principal that exception would be made here.

Dividends Proportional to Holdings

Dividends must be exactly proportional to the holdings of stock. If there is but one class of stock outstanding, each share must bear the same dividend as every other share. Any other basis of distribution is sufficient cause for asking the intervention of the court. If several classes of stock have been issued, the same requirements hold within each class; but as between the classes themselves the dividend rates may vary, this variation frequently being the differentiating mark. Among the members of any class, therefore, distribution must be made with absolute impartiality, the number of shares held by each determining the amount of dividend for each owner. Also, time and manner of payment, except by special consent, must be the same for every member within each class.

To Whom Payable