Seawell, J.
1. One phase of this case came before this Court for a hearing at the Spring Term, and is reported as
Patterson v. Hosiery Mills, ante,
24. At that time there was a three-to-three division of the Court, and, under our practice, the judgment of the court below stood affirmed, without authority as precedent. The plaintiffs now contend that the judgment of the court below, upon the hearing of the order to show cause why the injunction should not be continued to the hearing, is the law of the case,
res adjudicata,
and determines the matter at the final hearing.
The hearing upon the order to show cause was simply upon the question whether the restraining order obtained by the plaintiffs should be continued to the hearing on the merits. That order was interlocutory, not final, and appeal to this Court was upon the ground that it disposed of a substantial right of the defendants with respect to the continuance of the injunction. C. S., 640.
The judge hearing the order to show cause why the injunction should not be continued to the hearing had no jurisdiction to hear and determine the controversy on the merits, and his findings of fact and conclusions of law were but instruments of decision in the matter before him. These findings and conclusions were not authoritative as “the law of the case” for any other purpose, and the judgment or order was not
res adjudicata
on the final hearing in the court below, and was not invested with that character by any action or nonaetion by this Court on appeal. North Carolina Practice and Procedure, McIntosh, page 993, section 876.
2. As a convenient approach to the merits of the subject under consideration, we must first examine the nature and status of the right which the plaintiffs conceive to be invaded by the defendants in the proposed issue of new preferred stock. The plaintiffs contend that the accrued accumulated dividends on their stock constitute a vested property right, not adversely affected by any charter agreement heretofore made or entered into by them; and within the protection of the consti
tutional provisions against tbe impairment of tbe obligation of a contract and tbe taking of property without due process of law.
Dividends on common stock are not segregated from tbe assets of tbe corporation, so as to become tbe property of tbe stockholder, or a debt recoverable by action at law, until declared. In tbe absence of statute or charter provision requiring distribution, they may be passed into tbe surplus, remain undivided profits, or be reinvested in tbe corporate enterprise, at tbe sound discretion of tbe directors. While tbe preferred stockholder is not a creditor of tbe corporation until tbe dividend is declared, bis right to that dividend stands upon a somewhat different footing.
^
While as a matter of law tbe right to receive dividends, even on preferred stock, is made to depend on tbe actual existence of earnings, be has, in appropriate, cases, a remedy in equity to compel tbe payment of bis dividends; and we think, meantime, tbe right to their equitable pro- 'Z tection. Dividends are cumulative under plaintiffs’ stock, and tbe right to receive them out of earnings does not abate because they were not promptly declared. Tbe right of tbe plaintiffs, to receive dividends at tbe expiration of stated periods during which they are earned, and tbe maturing of tbe dates upon which tbe premiums were due, created a definite obligation on tbe part of tbe corporation to pay such dividends, out of appropriate funds, of course, which must be considered a vested property right, although circumstances might intervene to postpone or prevent its enjoyment.
We think tbe plaintiffs have here a vested property right, of whicKj they may not be divested without due process of law, and which may not be destroyed by legislative impairment of tbe contract out of which tbeyj arose.
3. Not suffering such a degradation of quality as would destroy their character as property, rights of this kind are subject to many conditions arising out of tbe relation of the stockholder to other stockholders, to the corporation itself, and to its creditors, which might interfere with the fruition of the contract; but an examination of the charter, with the cited statutes in mind, convinces us that the condition sought to be imposed by the proposed amendment to the charter was not in contemplation of the parties at the time the contractual relation was created by the purchase of plaintiffs’ stock; and we find nothing in the articles of incorporation, as they stood at that time, to indicate that plaintiffs subjected themselves to an express or implied waiver, or consented in advance to an amendment which would practically destroy the right to the accumulated dividends.
Indeed, upon reading and analyzing the statutes relied on by defendants as authority for the corporate amendment — C. S., 1131 and 1156— and reading therewith the pertinent provisions of the charter, we find
nothing in either inconsistent with the view that they are intended to be prospective with respect to dividends to be earned upon the stock. Whether the law itself makes the amendment, or as now, confers the power of amendment to the corporation, it will not be construed to operate retrospectively to the detriment of rights already vested under the old charter.
Greer v. Asheville,
114 N. C., 678, 19 S. E., 635;
Fenner v. Tucker,
213 N. C., 419, 423, 196 S. E., 357. A contrary construction of the statute, giving authority to the retroactive provisions of the charter amendment under consideration, would do violence to the Constitution and would compel us to view the proposed action as the taking of property without due process of law.
We find the statement of the Court in
Keller v. Wilson and Company,
190 Atl., 115 (1936), an appropriate expression on-this subject, under a statute which is at least as liberal toward corporate reorganization as ours:
“Section 26 of the General Corporation Laws is'the section authorizing amendments of corporate charters. It authorizes nothing more than it purports to authorize, the amendment of charters. The cancellation of cumulative dividends already accrued through passage of time is not an amendment of a charter. It is the destruction of a right in the nature of a debt, a matter not within the purview of the section. The cancellation of the right to such dividends is foreign to the design and purpose of the section.”
If the proposed amendment to the charter were such as to offer reasonable protection to plaintiffs’ vested right in a mere change of form which would not render it less secure, as, for example, the offer of income dividend notes as was done in
Ainsworth v. Southeastern Drug Corp.,
95 Fed. (2d), 172, cited in defendants’ brief, much of the legal objection might be removed. In fact, the position of the stockholder with reference to his accrued dividends would be actually improved, since dividends are not the debt of the corporation until declared;
Power Co. v. Mill Co.,
154 N. C., 76, 69 S. E., 747; but we do not consider that the alternative offered plaintiffs is a free choice or that it preserves their right.
Free access — add to your briefcase to read the full text and ask questions with AI
Seawell, J.
1. One phase of this case came before this Court for a hearing at the Spring Term, and is reported as
Patterson v. Hosiery Mills, ante,
24. At that time there was a three-to-three division of the Court, and, under our practice, the judgment of the court below stood affirmed, without authority as precedent. The plaintiffs now contend that the judgment of the court below, upon the hearing of the order to show cause why the injunction should not be continued to the hearing, is the law of the case,
res adjudicata,
and determines the matter at the final hearing.
The hearing upon the order to show cause was simply upon the question whether the restraining order obtained by the plaintiffs should be continued to the hearing on the merits. That order was interlocutory, not final, and appeal to this Court was upon the ground that it disposed of a substantial right of the defendants with respect to the continuance of the injunction. C. S., 640.
The judge hearing the order to show cause why the injunction should not be continued to the hearing had no jurisdiction to hear and determine the controversy on the merits, and his findings of fact and conclusions of law were but instruments of decision in the matter before him. These findings and conclusions were not authoritative as “the law of the case” for any other purpose, and the judgment or order was not
res adjudicata
on the final hearing in the court below, and was not invested with that character by any action or nonaetion by this Court on appeal. North Carolina Practice and Procedure, McIntosh, page 993, section 876.
2. As a convenient approach to the merits of the subject under consideration, we must first examine the nature and status of the right which the plaintiffs conceive to be invaded by the defendants in the proposed issue of new preferred stock. The plaintiffs contend that the accrued accumulated dividends on their stock constitute a vested property right, not adversely affected by any charter agreement heretofore made or entered into by them; and within the protection of the consti
tutional provisions against tbe impairment of tbe obligation of a contract and tbe taking of property without due process of law.
Dividends on common stock are not segregated from tbe assets of tbe corporation, so as to become tbe property of tbe stockholder, or a debt recoverable by action at law, until declared. In tbe absence of statute or charter provision requiring distribution, they may be passed into tbe surplus, remain undivided profits, or be reinvested in tbe corporate enterprise, at tbe sound discretion of tbe directors. While tbe preferred stockholder is not a creditor of tbe corporation until tbe dividend is declared, bis right to that dividend stands upon a somewhat different footing.
^
While as a matter of law tbe right to receive dividends, even on preferred stock, is made to depend on tbe actual existence of earnings, be has, in appropriate, cases, a remedy in equity to compel tbe payment of bis dividends; and we think, meantime, tbe right to their equitable pro- 'Z tection. Dividends are cumulative under plaintiffs’ stock, and tbe right to receive them out of earnings does not abate because they were not promptly declared. Tbe right of tbe plaintiffs, to receive dividends at tbe expiration of stated periods during which they are earned, and tbe maturing of tbe dates upon which tbe premiums were due, created a definite obligation on tbe part of tbe corporation to pay such dividends, out of appropriate funds, of course, which must be considered a vested property right, although circumstances might intervene to postpone or prevent its enjoyment.
We think tbe plaintiffs have here a vested property right, of whicKj they may not be divested without due process of law, and which may not be destroyed by legislative impairment of tbe contract out of which tbeyj arose.
3. Not suffering such a degradation of quality as would destroy their character as property, rights of this kind are subject to many conditions arising out of tbe relation of the stockholder to other stockholders, to the corporation itself, and to its creditors, which might interfere with the fruition of the contract; but an examination of the charter, with the cited statutes in mind, convinces us that the condition sought to be imposed by the proposed amendment to the charter was not in contemplation of the parties at the time the contractual relation was created by the purchase of plaintiffs’ stock; and we find nothing in the articles of incorporation, as they stood at that time, to indicate that plaintiffs subjected themselves to an express or implied waiver, or consented in advance to an amendment which would practically destroy the right to the accumulated dividends.
Indeed, upon reading and analyzing the statutes relied on by defendants as authority for the corporate amendment — C. S., 1131 and 1156— and reading therewith the pertinent provisions of the charter, we find
nothing in either inconsistent with the view that they are intended to be prospective with respect to dividends to be earned upon the stock. Whether the law itself makes the amendment, or as now, confers the power of amendment to the corporation, it will not be construed to operate retrospectively to the detriment of rights already vested under the old charter.
Greer v. Asheville,
114 N. C., 678, 19 S. E., 635;
Fenner v. Tucker,
213 N. C., 419, 423, 196 S. E., 357. A contrary construction of the statute, giving authority to the retroactive provisions of the charter amendment under consideration, would do violence to the Constitution and would compel us to view the proposed action as the taking of property without due process of law.
We find the statement of the Court in
Keller v. Wilson and Company,
190 Atl., 115 (1936), an appropriate expression on-this subject, under a statute which is at least as liberal toward corporate reorganization as ours:
“Section 26 of the General Corporation Laws is'the section authorizing amendments of corporate charters. It authorizes nothing more than it purports to authorize, the amendment of charters. The cancellation of cumulative dividends already accrued through passage of time is not an amendment of a charter. It is the destruction of a right in the nature of a debt, a matter not within the purview of the section. The cancellation of the right to such dividends is foreign to the design and purpose of the section.”
If the proposed amendment to the charter were such as to offer reasonable protection to plaintiffs’ vested right in a mere change of form which would not render it less secure, as, for example, the offer of income dividend notes as was done in
Ainsworth v. Southeastern Drug Corp.,
95 Fed. (2d), 172, cited in defendants’ brief, much of the legal objection might be removed. In fact, the position of the stockholder with reference to his accrued dividends would be actually improved, since dividends are not the debt of the corporation until declared;
Power Co. v. Mill Co.,
154 N. C., 76, 69 S. E., 747; but we do not consider that the alternative offered plaintiffs is a free choice or that it preserves their right. They have the choice of accepting in exchange for their accumulated dividends shares of the not-so-attractive common stock, or of standing aloof and seeing their stock displaced by a new issue, upon which the corporation intends to pay dividends in contravention of the vested prior rights of the plaintiffs. Or, if the suggestion is that the plaintiffs must delay action and stand pat on their legal rights until the injury becomes more imminent and the objectionable dividends are about to be paid, rather thanjsnjoin the issue of the stock, we may say that, even then, plaintiffs’ action must rest in equity, since the directors do not intend to declare a dividend and thereby give the
plaintiffs tbe right of an action at law. The whole scheme, from its initiation to its consummation, must be considered together, and this action is not premature.
If the proposed amendment is merely unauthorized with respect to its retroactive effect on plaintiffs’ accumulated dividends, the threatened action of the corporation is at least
ultra vires
and subject to injunctive relief in an action by the stockholders whose rights are endangered. Either premise leads to the conclusion that the action of the trial court should be sustained.
The judgment is
Affirmed.
Devin, J., took no part in the consideration or decision of this case.