Champlin, C. J.
Roberts, Throp & Co. is a manufacturing corporation organized under the laws of the State of Michigan, and engaged in the manufacture
of
threshing-machines and other agricultural implements. Complainant's intestate was a stockholder in the corporation, and she has filed the bill of complaint in this case to compel the directors of the corporation to declare and pay a dividend. The bill of complaint was dismissed by the court below, who filed a written opinion in the cause, which has been returned with the record. After a careful perusal of the testimony, I am led to the conclusion reached by the circuit judge, and mainly for the reasons given by him in his opinion, as follows:
“The defendant is a corporation duly organized under the laws of this State, and has been engaged in the business of manufacturing principally thi-eshing-machines for many years at Three Rivers, in this county. The articles of association provide for §250,-000 capital stock, but §80,000 only has ever been issued. This amount was issued before 1881, and was fully paid up. The complainant, as such administratrix, holds §6,000 of this stock, for which her former husband, Lothrop, paid, in 1881, §9,000. Since
then no dividend has been made by said corporation defendant, and the complainant files this bill to compel the defendant to declare a dividend on its capital stock of $80,000, alleging that it has surplus profits which should be set apart and used for that purpose. No request has ever been made to the defendant’s board of directors to declare a dividend, but since a majority of such directors have been witnesses upon this trial, and have testified that they would not have declared a dividend if a request had been made, I think it should be held for the purposes of this trial that no request was necessary.
“It is undoubtedly true that the ultimate object for which every corporation of the character of the one under consideration is formed, is the payment of dividends to its individual members. While this is true, it is also true that the declaring of such dividends must ordinarily be left to the sound discretion of boards of directors. Whether a corporation can safely make a dividend involves the exercise of knowledge and judgment, and the power of deciding this question should not be taken from the directors, and assumed by the courts, unless it clearly appears that the directors have mistaken their legal duties. Any other rule would lead to the frequent intervention of the courts, to the substitution of the court for the board of directors, and, in very many instances, would prove disastrous to the best interest of the corporation and its stockholders, and the business of trading and manufacturing would be seriously hampered and retarded. To authorize the court to intervene, and decree a dividend, it ought, in the first place, to appear clearly that' there are surplus profits to divide, and that such profits can be separated from the necessary working capital, for the purpose of a dividend, without serious detriment to the interest of the stockholders and the prosperity of the business of the corporation. It ought to appear that there is no good reason for withholding a division of the surplus earnings among the stockholders, and that they are withheld from the will or caprice of the directors. If there is reasonable cause for withholding the dividend, then it ought not to be decreed.
“ The evidence shows that the books of the company are kept in excellent system, and with great accuracy, and a full and fair showing has been made of the business and condition of the company. Although there have been losses, it cannot be said but that they were unvoidable, and incident to the necessary risks of the defendant’s business. The evidence further discloses that the directors are men of large experience in business affairs; that they are familiar with all the details of the business of the company; and that, according to their best judgment, for the best interests of the stockholders, a dividend cannot now, and could not have been,
made, and in this respect their opinions are at unity. The evidence entirely fails to disclose that the directors, in not declaring dividends, have been actuated by malice or improper motives. They are largely interested in the corporation, and in their testimony say that, as individuals, they would have been glad to have declared a dividend, and had themselves the benefit of it, if the condition of the finances of the company would have permitted such action; but they declare emphatically that such dividend cannot be made without great detriment to the best interests of the company and its stockholders. And, since these directors are men of high standing as business men, and of unquestioned integrity, I am bound to believe that, according to their best and united judgment, a dividend ought not to be made.
“ I am aware that it is pretty well settled by authority that ‘there can be such a condition of things as will justify a court of equity in compelling directors to declare a dividend contrary to their judgment;’ but when a board of directors made up of experienced business men, largely interested in the welfare of the corporation, familiar with all its affairs, and influenced by no improper motive, declares that a dividend cannot be made without serious detriment to all concerned, then the court ought to proceed with great caution in decreeing a dividend, and the facts proven upon the trial ought clearly to justify such action. It is necessary, therefore, to look somewhat into the condition of the company in order to determine whether the court' ought to order a dividend against the best judgment of the directors.
“In 1881 the company was largely reorganized. Before that time it had been doing a very successful business. During that year, Throp, or the Throp family, sold out their interests in the real estate, tools, and fixtures, and some other property, to Roberts, receiving in cash §60,000, and receiving’ also one-half of all the available assets of the company, consisting of paper owing to the company, and amounting in gross to $100,000, or over. As far as the evidence discloses, the $80,000 of stock was before this sale owned by Roberts and Throp. Roberts became the purchaser of the Throp interest. He thereupon sold to other persons a considerable portion of the stock on the same basis that he had bought of Throp; that is, 1J- for each share. This, upon the $80,000 paid-up stock, aggregated $40,000. Since then it has been carried upon the books, and appears in some of the annual statements as a surplus fund of $40,000. In fact, it was, regarded as a premium on the stock for the good-will of the business. So far as stock was sold, this premium was received by Roberts individually, and did not go to the benefit of the funds of the company. Considering the actual value of the company’s property,-it is questionable
•whether the stock of the company has any real value above par. The $40,000 for good-will was largely speculative, based upon the supposed ability of the company to make money in the future.
“When the company began business after this partial reorganization, its property consisted of its real estate, the tools, machinery, and fixtures, and probably some material and unfinished work. It had no money. Its available assets had been divided and appropriated between Roberts and Throp, and among its first acts was to borrow 81,000 to meet current expenses. On the basis paid by the new stockholders, the value of the stock should have been $120,000. They undoubtedly expected that, if it was not then worth that amount, it would be made good by the earnings of the company. Among these new stockholders was the complainant’s decedent, who had a position and salary as an employe of the •company, and was familiar with its financial condition and affairs. •Since the company, after the sale and division between Roberts and Throp, had no money or available means, it must have been contemplated by the stockholders and directors that the first manufactured products of the company would be obtained by means of borrowed money, and that for a considerable time to come the earnings and profits of the company must be applied to its floating debts, and the expenses of manufacturing and selling its products, •and development of its business. It must have been contemplated that the company would engage exclusively in the business for which it was organized, and especially so in the somewhat new existence that it entered upon after the reorganization.
“ Courts cannot but take notice of the fact that the competition in all kinds of manufactured goods is so severe (and the evidence shows that it is especially so in the line of threshing-machines) that the profit upon each article is small, and in no other way can money be made than by manufacturing, putting upon the market, and selling a large number of the manufactured articles. Considering the value of the plant, and the amount of money paid by the new holders for their stock, it could not have been contemplated that the company would restrict its business, and build but a small number of machines. Such action would inevitably have defeated the evident intention and expectations of the stockholders. And it must have been quite as evident that a large business could not be carried on without a large amount of working capital. As the stockholders were not called upon to furnish this, it could not be supplied in any other way than from the earnings of the company. From these earnings the business of the company has been ■carried on from year to year for a period of some eight years, and the directors testify that at no time during this period could they safely take from these earnings any money, and set it apart for the purpose of declaring a dividend.
'
“ The period of time at which the complainant asks the court to-interpose and decree a dividend is at or about the time of filing her bill, December I, 1887. An examination of the financial report and balance sheet of December 12, 1887, discloses the fact that at that time there was no money on hand from which a dividend could be paid. The bills receivable, or paper and accounts owing to the company, are the only resources from which money could be realized to make a dividend. It must have been obtained in that way, or by borrowing the money for that purpose on the credit of the company. The reports show that at that time the floating indebtedness of the company was large, but the bills receivable were largely in excess of such indebtedness; and counsel for complainant has argued, with much force, that a sufficient amount can be safely spared from this excess, and the money realized upon it, to make a dividend.
“A careful consideration, however, of the nature of this paper, and the condition of the company’s business, satisfies me that this cannot be done in the exercise of that prudence and care which is essential to the safety of the company’s business, and the substantial interests of the stockholders. The evidence shows that this paper, taken in payment of the company’s machines, is long-time paper, running from one to four years. Its actual value is from 60 to 70 per cent, of its face, but could not be sold for more than 50 per cent. A much larger amount could be realized upon it if left in the control of the company’s agents than in any other manner, and if placed in hostile hands it would endanger the company’s business in making future sales. The machines for the sales, of the coming season must necessarily be built in early winter, and the expenses for material and labor correspondingly large. In the usual course of collection, no more money can be realized from bills receivable than is actually necessary to pay the expenses of material, manufacturing the goods, insurance, taxes, and expenses of making sales and collections, and not enough to extinguish readily the floating indebtedness of the company. The so-called ‘surplus profits’ are tied up in this paper, and it is.evident that a. sufficient sum cannot be got out of it to make any considerable-dividend without great sacrifice, and not then except at the necessity of driving the company to add largely to its indebtedness to-obtain money to carry on its business and pay its current expenses.
“ The complainant, in her bill, sets forth the embarrassments of the estate of which she is administratrix, and the financial condition of her family. This state of her affairs is well calculated to appeal to the sympathies of the court, and to lead it to endeavor to find a way within the bounds of the law and the evidence to afford adequate relief. It is evident that a small dividend, such a one as the company might perhaps, without great sacrifice, raise the
money to pay, would be of but little assistance to tbe complainant. Her counsel ask tbe court to make an order for a dividend of 100 per cent, upon tbe §80,000 of issued stock. A sum much less than tbis would not relieve tbe complainant from ber financial needs. On tbe other hand, the raising of §80,000 on the bills receivable for tbe purpose of making a dividend would, it is evident, so embarrass tbe company, and deprive it of means to carry on its business, ■as to involve it in disaster, and probably in irretrievable ruin, and tbe stock held by the complainant would be involved in tbe disaster. Tbe directors, acting in good faith, are positively of the opinion that a dividend cannot be ordered without grave injury to tbe interests of the company and its stockholders. They are the legally appointed agents and trustees of the stockholders, and their judgment should not lightly be disregarded. I am also satisfied that the evidence fully sustains the judgment of the directors.
“The bill must be dismissed, but without costs against the complainant.”
The corporation was organized in 1875, with an authorized capital of $250,000, only $80,000 of which was paid in. It did business until March, 1881, when a •change was made in its stockholders, one of the Koberts purchasing the Throp interest, which was represented by 1,600 shares at $25 each, for which he paid $60,000. At this time the notes and money were divided, leaving the ■corporation without available capital or means to carry on the business. In this crisis the corporation resorted to borrowing, and from that time until December 12 following it had borrowed money and obtained credit to the amount of $37,903.71, of which $26,7§6.14 was represented by bills payable, and the balance in open account. The sales of its manufactured articles have been made in several states from Michigan to Texas and the Dakotas, and are made through agents or traveling salesmen, and mostly upon a credit of from three to four years. Notes of the purchasers have been taken upon sales, which, from the length of time and the distance of the parties, have not been bankable paper, and the corporation has been obliged to be a steady borrower and purchaser upon •credit year by year. In 1882, its bills and accounts pay
able amounted at the close of business, December 12, to-$72,954:54; in 1883, to $59,787.65; in 1884, to $89,989.91; in 1885, to $69,880.46; in 1886,' to $84,088.15; in 1887, to $81,006.91. These items show that it required a large-amount of ready money to carry on the business, and it was laid out in merchandise purchased, additional tools, and machinery, and the expenses necessary to the manufacture and sale of the manufactured product, as shown in the respective accounts .upon the books of the coloration. During the same time, the corporation steadily increased its bills receivable, which, added to debts due-to the corporation upon open account, showed a steady increase of assets over liabilities year by year; yet the real value of such assets was much below their nominal value, owing to the nature of the credits, as before stated. Different witnesses familiar with this paper placed their estimate of its real value ranging all the way from 30 to-50 per cent, less than its face. There is no testimony in the case showing, or tending in the remotest degree to-show, that the business has not been well and economically managed. The salaries paid the officers are moderate and reasonable in amount, and, in my opinion, well earned. The proof is without contradiction that at no-time since the complainant’s intestate became a stockholder have the assets of the -corporation been in a condition where a dividend to the stockholders could be made without serious detriment to the business of the corporation, by crippling its resources, and compelling' it to discontinue business. Indeed, this fact is quite evident from the amount of capital required to carry on its business, the nature of its assets, and the amount of its liabilities.
The statute under which the corporation was organized provided that—
,cIf the directors of any such corporation shall declare
and pay a dividend when the corporation is insolvent, or any dividend the payment of which would render it insolvent, knowing such corporation to he insolvent, or that the payment of such dividend would render it so, the directors assenting thereto shall be jointly and severally liable, in an action founded on this statute, for all debts due from such corporation at the time of paying or declaring such dividend.”
In view of such liability, a court' of equity should pause and ponder well before compelling a board of directors to declare and pay a dividend in a case where each individual director testifies that the corporation cannot pay a dividend without serious injury to the business of the corporation, and the president and general manager testifies that such a step would have injured their business so that they would have had to wind it up. The statute also provides that the stock, property, affairs, and business of every such corporation shall be managed by its directors.
It is a well-recognized principle of law that the directors of a corporation, and they alone, have the power to declare a dividend of the earnings of the corporation, and to determine its amount. 5 Amer.
&
Eng. Enc. Law, 725. 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. Such is not the case here. The directors themselves own the largest share of the stock, and testify that they are anx
ions to receive a dividend whenever it can be made without injury to the business. They have not diverted nor misapplied the funds of the corporation. They have exercised the best of faith towards the stockholders. The books of the corporation show judicious management, and that a-surplus of net earnings had accrued from year to year to and including the year 1887, which may be considered “net profits,” which term has been defined to be what shall remain as the clear gains in any business venture after deducting the capital invested in the business, the expenses incurred in its conduct, and the losses sustained in its prosecution.
Park v. Locomotive Works,
40 N. J. Eq. 114 (3 Atl. Rep. 162). By referring to the balance-sheet at the close of the business December 12, 1887, it will be seen that the capital invested in the business was:
Real estate...................................... $37,869 42*
Tools and machinery............................ 31,160 50
Merchandise................-................... -41,783 54
$90,813 46
Bills payable..................-.......-......... $56,917 07
Accounts payable............................... 24,089 84
$81,006 91
The items of the account under the head of - “Real Estate,” “Tools,” etc., and “Merchandise,” are not available for the payment of dividends, and may be set aside as so much capital invested in the plant and product. 'The resources out of which profits may be expected to arise at that date will have to be scaled down to actual value as shown by the testimony, and perhaps the lowest estimate placed upon them by the witnesses should" be adopted, if we are to sit in judgment upon the discretion exercised by the directors in the management of the business. The lowest estimate of the value of the bills receiv
able and accounts receivable is 50 per cent, of their face value. The face value, as shown by the balance-sheet of December 12, 1887, is as follows:
Bills receivable............__.................. $173,616 16
Accounts receivable........................... 87,179 90
Total face value.......................... $260,796 06
Fifty per cent, of this is........ $130,398 03
Add cash in bank and safe is................ 2,396 05
$132,794 08
If from this sum we deduct the bills and accounts payable as above stated, there remains $51,787.17 as net profit. Now, since in this calculation all the liabilities have been provided for, and all losses likely to arise from the conversion of the notes and accounts into money have been eliminated, and as the corporation has on hand merchandise of the value of $41,783.54, which consists of unsold manufactured articles, and raw material on hand to be used in manufacturing, it may be asked, why may not the whole or a considerable part of this net profit be appropriated to the payment of dividends to stockholders? The answer is that it would deprive the corporation of the means from which to carry on its business. If this class of assets could be converted into money, and the debts and liabilities of the corporation paid, it would leave a working capital in the hands of the directors of $51,787.17. This sum is insufficient to carry forward the business. The balance-sheets from the books show that about $20,000, on an average, is paid out for merchandise, which, in this instance, is the raw material, wood, and iron, etc., used in manufacture. The expense account, as contained in the balance-sheet of December 12, 1887, shows that the operating and other expenses of 1887 were $56,765.26, making a total of $76,765.26 required to carry on the business a year. This shows that the $51,787.17
could not be drawn out from the business and divided without disaster, and compelling a winding up of the corporation. It is true that the directors would have on hand merchandise of the value of $41,783.54, consisting of manufactured articles and material for manufacture, but this could not be made available as a means to carry on the business, for the expense of manufacture must be met at once, and the necessities of the business require that sales of manufactured goods shall be made upon three and four years' time, and the directors could derive-no available means from this source to meet the necessary and current expenses of the business, and the result would be the utter inability of the corporation to continue business. Indeed, this is apparent from the fact that as the business is now conducted, with the notes-maturing, the corporation is obliged to borrow money and obtain credit in open account to the amount of'
$81,006.91,
as shown by the statement of December
12,
1887, for that year. And this is about an average for several years previous. It is evident that no dividend can be paid without borrowing the money for that purpose, and no court of equity will compel a board' of directors, against their judgment and wishes, to borrow money to-pay dividends.
The item in the trial balance called “Surplus Fund’'' is not an asset, but what is not fictitious is a liability, if anything. It is composed first of a fictitious entry of $40,000, supposed to represent premium on the stock. The balance is made up of the difference between the-inventory of merchandise and the “Expense Account,” which is called “net gain,” and carried into the capital stock account as “ Surplus Fund.” If it represents capital stock, it is a liability equivalent to a stock dividend of that amount to be divided
pro rata.
It does not, however, represent a real asset, and is not carried into
the financial statement of “ Resources ” and “ Liabilities.” The merchandise inventoried became converted into bills and accounts, receivable, and these in turn are used in payment of liabilities. So that, in estimating the standing of the corporation, this “ Surplus Fund ” account must be entirely omitted. This “Suspense Account” as kept is a fictitious account. It was opened for convenience, and was designed to represent losses upon debts due the corporation, estimated at 10 per cent, of all such debts. The testimony shows that this estimate was too small, and that such losses equaled or exceeded 30 per cent.
For reasons stated above and in the opinion of the circuit judge, I am of opinion that the decree should be affirmed, with the costs of this Court.
Grant and Long, JJ., concurred with Champlin, C. J.