Opinion by
Mr. Justice Green,
We think the decree of the learned court below in this case was entirely correct. We do not see that there is anything either in the resolution of the stockholders at the meeting held October 18th, 1883, authorizing the issue of preferred stock, or in the certificates issued to the holders of preferred stock, which takes away from the directors, or impairs, the discretion which they must exercise in the declaration of dividends. According to the language of the certificates, “ The holders of preferred stock of said company are entitled to dividends out of the net earnings of each year, when declared by the board of directors, to the extent of twelve per centum of the par value of said stock before the payment of dividends to the holders of common stock, but the dividends on the preferred stock are not cumulative.” By this language the preferred stockholders are entitled to have their dividends “ when declared by the board of directors,” and such declaration by the directors is antecedent to the right to have them. The resolution of the stockholders is the mere general expression of the authority given to the directors to issue preferred stock, prescribing the [117]*117preference in the way of dividends to be given to the holders of preferred stock, but not assuming to regulate the circumstances which shall determine the action of the directors, or to control their discretion in the exercise of their right. The 16th section of the corporation act of 1874, which confers the power to issue preferred stock, provides distinctly that “ the holders of which preferred stock shall be entitled to receive such dividends thereon as the board of directors of the corporation may prescribe, payable only out of the net earnings of the corporation.”
As a matter of course the directors must determine not only the amount of all dividends to be declared, but the circumstances in which they will or may declare them. They are cer- < tainly not entitled to refuse them either arbitrarily, or when, in view of all the considerations which should properly affect the question, they ought to grant them. Their action, or refusal to act, is undoubtedly subject to review by the courts, but within the regulated limits of their authority as suggested they have the exclusive control of the whole matter, and their action is binding upon the stockholders.
In a given case, therefore, it is only necessary to inquire what were the reasons which controlled their action. In the present case, which was heard upon the bill and answer only, they allege that, “In or prior to the year 1892, the said company decided to enlarge, extend and increase its works and business, and during the said year, in so doing, made large expenditures and incurred large indebtedness. No dividends have been declared for the said year 1892 upon the preferred or common stock, solely for the reason that in the judgment of the board of directors of said company it was, and is, expedient and necessary to apply all the earnings of the company upon the company’s indebtedness incurred in said enlargement, extension and increase of its works and business, and that said earnings have been so applied.”
In the fourth paragraph of the bill it was alleged that the liabilities of the company aside from its capital stock amount to $1,853,000, while without its investment account its assets, consisting of material, stock on hand, and outstanding accounts, amount to the sum of $789,000. This statement is admitted in the answer to be correct. Of course such assets are not cash [118]*118and are not available for use in paying debts, except in the process of liquidation. The question then is whether, with debts and liabilities amounting to 11,353,000, it was an abuse of discretion on the part of the directors to abstain from paying any dividends for the year 1892. We think not. This very question has been determined by the Supreme Court of the United States in two cases, both of which appear to be entirely applicable to the facts of this case : St. John v. Erie Railway Company, 22 Wallace, 136, and New York, Lake Erie & Western Railroad v. Nickals, 119 U. S. Rep. 296. In the first of these cases the property and franchises of the company had been sold under proceedings in foreclosure, and a reorganization was had by which the unsecured creditors of the company were to take preferred stock for their claims, and the stockholders of the old company should be common stockholders of the new. The preferred stockholders were to be paid dividends of seven per cent out of the net earnings of the road, before the common stockholders were to get any. The company perfected its organization, and carried on its operations for several years, and paid the seven per cent dividends to the holders of the preferred stock. After the making of the agreement of reorganization, the company leased new roads, some of which were unprofitable; they also borrowed large sums of money which was spent in repair and equipment of the road. It then happened that after paying interest on the old debts, rent for the new roads, and interest on the new loans, the company could pay nothing more, and the dividends on the preferred stock were no longer paid. A preferred stockholder filed a bill to compel the payment of his seven per cent dividends, and claimed he had a right to have them paid out of net earnings upon the condition of the road as it was when the agreement was made, and in advance of any payments of interest on newly borrowed money, or of rentals of other roads under the new leases. The Supreme Court denied this right and held that the right to have preferred dividends out of the net earnings meant earnings which resulted after all charges or outlay were deducted. Mr. Justice Swavne, in delivering the opinion, said, “ There is nothing in the agreement or the statute, and we are aware of no legal principle, which would authorize the stockholders in question to analyze the business, select out a part of [119]*119it, and to say that the net earnings specified must be a predicate of that part, and of none other. The company had the right to conduct its operations in good faith, as it might see fit; and it was from them, and all of them, that the materials for the computations of earnings were to be derived. . . . The corporation never agreed to be limited in the exercise of its faculties, and the complainant must abide the result. If errors were committed, aqd a loss ensued, a court of equity cannot relieve him. It is one of the chances of the enterprise in which he embarked.”
In the other case above mentioned, New York, Lake Erie & Western R. R. v. Nickals, a somewhat similar state of facts was presented. The property and franchises of the company had been sold, and a reorganization effected, under which new preferred stock was to be issued in exchange for old preferred stock, on which non-cumulative dividends were to be paid at the rate of six per cent out of the profits of each year, in preference to the payment of any dividends on the common stock. New common stock was to be issued in exchange for old common stock. There were other details of the agreement for reorganization which are not material. The company was reorganized and carried on its operations.
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Opinion by
Mr. Justice Green,
We think the decree of the learned court below in this case was entirely correct. We do not see that there is anything either in the resolution of the stockholders at the meeting held October 18th, 1883, authorizing the issue of preferred stock, or in the certificates issued to the holders of preferred stock, which takes away from the directors, or impairs, the discretion which they must exercise in the declaration of dividends. According to the language of the certificates, “ The holders of preferred stock of said company are entitled to dividends out of the net earnings of each year, when declared by the board of directors, to the extent of twelve per centum of the par value of said stock before the payment of dividends to the holders of common stock, but the dividends on the preferred stock are not cumulative.” By this language the preferred stockholders are entitled to have their dividends “ when declared by the board of directors,” and such declaration by the directors is antecedent to the right to have them. The resolution of the stockholders is the mere general expression of the authority given to the directors to issue preferred stock, prescribing the [117]*117preference in the way of dividends to be given to the holders of preferred stock, but not assuming to regulate the circumstances which shall determine the action of the directors, or to control their discretion in the exercise of their right. The 16th section of the corporation act of 1874, which confers the power to issue preferred stock, provides distinctly that “ the holders of which preferred stock shall be entitled to receive such dividends thereon as the board of directors of the corporation may prescribe, payable only out of the net earnings of the corporation.”
As a matter of course the directors must determine not only the amount of all dividends to be declared, but the circumstances in which they will or may declare them. They are cer- < tainly not entitled to refuse them either arbitrarily, or when, in view of all the considerations which should properly affect the question, they ought to grant them. Their action, or refusal to act, is undoubtedly subject to review by the courts, but within the regulated limits of their authority as suggested they have the exclusive control of the whole matter, and their action is binding upon the stockholders.
In a given case, therefore, it is only necessary to inquire what were the reasons which controlled their action. In the present case, which was heard upon the bill and answer only, they allege that, “In or prior to the year 1892, the said company decided to enlarge, extend and increase its works and business, and during the said year, in so doing, made large expenditures and incurred large indebtedness. No dividends have been declared for the said year 1892 upon the preferred or common stock, solely for the reason that in the judgment of the board of directors of said company it was, and is, expedient and necessary to apply all the earnings of the company upon the company’s indebtedness incurred in said enlargement, extension and increase of its works and business, and that said earnings have been so applied.”
In the fourth paragraph of the bill it was alleged that the liabilities of the company aside from its capital stock amount to $1,853,000, while without its investment account its assets, consisting of material, stock on hand, and outstanding accounts, amount to the sum of $789,000. This statement is admitted in the answer to be correct. Of course such assets are not cash [118]*118and are not available for use in paying debts, except in the process of liquidation. The question then is whether, with debts and liabilities amounting to 11,353,000, it was an abuse of discretion on the part of the directors to abstain from paying any dividends for the year 1892. We think not. This very question has been determined by the Supreme Court of the United States in two cases, both of which appear to be entirely applicable to the facts of this case : St. John v. Erie Railway Company, 22 Wallace, 136, and New York, Lake Erie & Western Railroad v. Nickals, 119 U. S. Rep. 296. In the first of these cases the property and franchises of the company had been sold under proceedings in foreclosure, and a reorganization was had by which the unsecured creditors of the company were to take preferred stock for their claims, and the stockholders of the old company should be common stockholders of the new. The preferred stockholders were to be paid dividends of seven per cent out of the net earnings of the road, before the common stockholders were to get any. The company perfected its organization, and carried on its operations for several years, and paid the seven per cent dividends to the holders of the preferred stock. After the making of the agreement of reorganization, the company leased new roads, some of which were unprofitable; they also borrowed large sums of money which was spent in repair and equipment of the road. It then happened that after paying interest on the old debts, rent for the new roads, and interest on the new loans, the company could pay nothing more, and the dividends on the preferred stock were no longer paid. A preferred stockholder filed a bill to compel the payment of his seven per cent dividends, and claimed he had a right to have them paid out of net earnings upon the condition of the road as it was when the agreement was made, and in advance of any payments of interest on newly borrowed money, or of rentals of other roads under the new leases. The Supreme Court denied this right and held that the right to have preferred dividends out of the net earnings meant earnings which resulted after all charges or outlay were deducted. Mr. Justice Swavne, in delivering the opinion, said, “ There is nothing in the agreement or the statute, and we are aware of no legal principle, which would authorize the stockholders in question to analyze the business, select out a part of [119]*119it, and to say that the net earnings specified must be a predicate of that part, and of none other. The company had the right to conduct its operations in good faith, as it might see fit; and it was from them, and all of them, that the materials for the computations of earnings were to be derived. . . . The corporation never agreed to be limited in the exercise of its faculties, and the complainant must abide the result. If errors were committed, aqd a loss ensued, a court of equity cannot relieve him. It is one of the chances of the enterprise in which he embarked.”
In the other case above mentioned, New York, Lake Erie & Western R. R. v. Nickals, a somewhat similar state of facts was presented. The property and franchises of the company had been sold, and a reorganization effected, under which new preferred stock was to be issued in exchange for old preferred stock, on which non-cumulative dividends were to be paid at the rate of six per cent out of the profits of each year, in preference to the payment of any dividends on the common stock. New common stock was to be issued in exchange for old common stock. There were other details of the agreement for reorganization which are not material. The company was reorganized and carried on its operations. In the year 1880 the report of the directors showed that a profit of 11,790,620.71 had been made on the business of the year, after deducting the payments made for interest on the funded debt, rentals of leased lines and other charges, but the whole amount of the resulting profit, together with a large additional sum, had been expended in the building of a double track, erection of buildings, providing additional equipments, acquiring and constructing docks at Buffalo, and making other improvements to the road and property. In consequence of these expenditures no dividend was declared on either the preferred or common stock, and a preferred stockholder filed a bill to recover his dividends, claiming that the company had no right to expend its earnings in that way to the prejudice of the preferred stockholders. The lower court allowed a recovery, but the Supreme Court reversed the decree, holding that there could be no recovery, on the ground that there was no abuse of discretion on the part of the directors ,in refusing to pay the dividend, or in the management of the affairs of the company by which the expenditures were made. [120]*120Mr. Justice Harlan in the course of the opinion said: “ The directors of such corporations, having opportunities not ordinarily possessed by others of knowing the resources and condition of the property under their control, are in a better position than stockholders to determine whether, in view of the duties which the corporation owes to the public, and of all its liabilities, it will be prudent in any particular year to declare a dividend upon stock. While their authority in respect of these matters may, of course, be controlled or modified by the company’s charter, and while the power of the courts may be invoked for the protection of stockholders against bad faith upon the part of the directors, we should hesitate to assume that either the legislature or the parties intended to deprive the corporation, by its managers, of the power to protect the interests of all, including the public, by using earnings when necessary, or when, in good faith, believed to be necessary, for the preserva<tion or improvement of the property intrusted to its control.”
Reviewing further the contention of the plaintiff, and the power of the directors over the earnings and their expenditure, and the agreement of reconstruction, the court held that the preferred stockholder was bound by the action of the directors, and was not entitled to any dividend because none was declared, and there was nothing to impugn the good faith of their action.
These rulings and principles and reasoning announced, are quite applicable to the present case, and, as we think, dispose, of it. The directors are far better able to judge what is the best policy, and for the best interests of all, in determining how far the earnings ought to be applied to the reduction of indebtedness, rather than to the payment of dividends. As a rule it is always a measure of sound policjr to discharge corporate indebtedness rather than to divide the earnings among the stockholders, allowing the indebtedness to remain. The stockholders are almost certain to obtain larger advantages and returns in the future, especially where as here the property, works and business were so greatly enlarged by the expenditures in question. There is not the least pretence of any bad faith on the part of the directors in making the expenditures and withholding the dividends, and we think the stockholders are bound by their action.
Decree affirmed at the cost of the appellant.