Burk v. Otawa Gas and Electric Co.

Concept: Dividends Purchase by Corporations of Shares

FACTS:
Action was brought by the preferred, non-cumulative stockholders of the company against two other
corporations and the directors and officers of Ottawa Co., to require defendants to account for assets
which are in their possession and that Ottawa Co. be ordered to declare dividends from the net profits
of the business as should have been declared since January 1906. The defendants maintain that nondeclaration of dividends was due to expenditures it had to make in connection to extensions of the
companys plant.
HELD:
The court ordered remand of the case for ascertainment of facts; it however, set down the rule that
conditions under which holders of preferred stock may demand dividend depends upon the precise
terms upon which it is issued. In this case, the court held that the fair interpretation of the contract
between the corporation and the preferred stockholder is that if in any year, net profits are earned,
dividend is to be declared. To hold that the board has a discretion to declare or not when it has funds
that it can use for that purpose is to hold that one party has the option to pay something to the other
or not, at its own election, since if the dividend is not declared at the end of the year, the benefits of
the accumulated profits are practically lost. Such a construction should be avoided for it would result in
temptation to unfair dealing. The holder of the preferred stock, is not generally a creditor until a
dividend is declared, but as equity regards as done that which ought to be done, if under the facts of
this case dividends ought to have been declared in a certain year or years, they should be regarded as
creditors to such extent from such time or times, in this equitable action.