New York Law Review

Tag: dividends

  • Deering Milliken, Inc. v. Clark Estates, Inc., 43 N.Y.2d 540 (1978): Entitlement to Dividends in Stock Sale Agreements

    Deering Milliken, Inc. v. Clark Estates, Inc., 43 N.Y.2d 540 (1978)

    When a contract is made for the future transfer of beneficial interest in stock, and the contract is silent regarding dividends declared before payment and delivery, the dividends remain the property of the seller.

    Summary

    Deering Milliken, Inc. (buyer) sued Clark Estates, Inc. (seller) to determine which party was entitled to dividends declared on Albany Felt Company stock between the signing of the stock purchase agreement and the delivery of the stock. The contracts were silent on the issue of dividend entitlement. The New York Court of Appeals held that because the agreements contemplated a future sale, not a present transfer of beneficial ownership, the dividends declared before the stock transfer belonged to the seller. The absence of explicit language transferring present beneficial ownership was crucial to the court’s decision.

    Facts

    Deering Milliken, Inc. entered into agreements on March 31 and April 5, 1967, to purchase stock in Albany Felt Company from the Clark Estates, Inc. The agreements stipulated that minimal payment was due upon signing, a partial payment on May 1, 1967, and the remaining balance on August 1, 1967. Delivery of the stock certificates was scheduled to occur upon full payment. A condition of the purchase was that Deering Milliken had to be satisfied with Albany Felt’s financial condition. The contracts did not specify which party was entitled to dividends declared between the agreement dates and the stock transfer date.

    Procedural History

    Albany Felt declared a regular quarterly dividend on May 24, 1967, payable on July 1 to shareholders of record on June 16. The stock certificates were delivered to Deering Milliken on June 19 and August 1, 1967, after full payment. The sellers rejected the buyer’s demand for the dividends. The Appellate Division ruled in favor of the sellers. The New York Court of Appeals affirmed the Appellate Division’s decision.

    Issue(s)

    Whether, in the absence of express contractual language, the buyer or seller is entitled to dividends declared on stock between the signing of a stock purchase agreement and the delivery of the stock certificates when the agreement contemplates a future sale.

    Holding

    No, the seller is entitled to the dividends because the agreements executed were contracts for the future sale of stock, not for the present transfer of beneficial ownership. Thus, the sellers remained the beneficial owners when the dividend was declared.

    Court’s Reasoning

    The court emphasized that the intention of the parties, if clearly expressed, would control the outcome. However, since the agreements lacked express provisions regarding interim dividends, the court had to construe the agreements to determine the parties’ intent. The critical determination was whether the contracts manifested present sales or agreements to make future sales. The court stated, “In the absence of an agreement to the contrary, the buyer under an executory contract to sell stock is not entitled to dividends until the legal title to the stock has passed to him.”

    The court highlighted the terminology used in the agreements, such as “Seller will sell to Buyer” and “shares to be sold,” as indicative of future occurrences rather than a present transfer of beneficial ownership. The court also noted the express conditions that allowed the buyer to avoid payment if not satisfied with Albany Felt’s financial condition. This indicated that the buyer was not necessarily obligated to complete the purchase. The court concluded that the sellers, as the actual and beneficial owners of the shares when the dividend was declared, were entitled to the distribution.

    The court distinguished this case from others where a present sale and transfer of beneficial interest had occurred. The court also noted that the sellers wanted to defer the sale of the stock for tax advantages and rejected a proposal that “the agreement be cast in terms of a present sale and purchase.”

    The court further clarified, “Although the inclusion of an obligation for payment of interest by the buyer from the date of the contract’s execution would have supported a claim of a present sale… its absence does not necessarily lead to a contrary result.” In this instance, the sellers may have negotiated for a higher purchase price instead of including an interest obligation in the agreement.

  • People ex rel. Union Trust Co. v. Coleman, 126 N.Y. 433 (1891): Taxation of Corporate Franchise Based on Dividends

    People ex rel. Union Trust Co. v. Coleman, 126 N.Y. 433 (1891)

    Dividends declared from surplus funds accumulated prior to the enactment of franchise tax laws are not considered ‘dividends made or declared’ for the purpose of computing franchise taxes under those laws.

    Summary

    The New York Court of Appeals addressed whether a dividend paid from a corporation’s surplus, accumulated before the enactment of franchise tax laws, should be included when calculating the corporation’s franchise tax. The Court held that such dividends should not be included. The tax is on the corporate franchise, measured by dividends declared during the tax year. Dividends from previously accumulated surplus do not reflect the current year’s value of the franchise. Including them would be contrary to the spirit and intent of the tax law, which aims to measure the value of the privilege of doing business during the year in question.

    Facts

    The Union Trust Company had a capital of $2,000,000. On January 1, 1881, the company had a surplus of $201,942.64, accumulated from past earnings. In January 1881, the company declared a dividend of $12,500 (6.25% of its capital stock) from current earnings. In February 1881, the company also resolved to distribute $100,000 from its surplus fund to its stockholders, in anticipation of a charter extension. This $100,000 was earned before January 1, 1880.

    Procedural History

    The case originated from a dispute over the amount of franchise tax owed by the Union Trust Company. The lower court calculated the tax based on a dividend rate of 56.25% (including both the $12,500 and the $100,000 dividends). The Union Trust Company appealed. The Court of Appeals reversed the lower court’s decision, holding that the $100,000 dividend should not have been included in calculating the franchise tax.

    Issue(s)

    Whether a dividend paid out of a surplus fund, accumulated from earnings prior to the enactment of the franchise tax law, constitutes a ‘dividend made or declared’ during the relevant tax year for the purpose of calculating the franchise tax.

    Holding

    No, because the franchise tax is intended to measure the value of the corporate franchise during the year in question, and a distribution of previously accumulated earnings does not accurately reflect that value. The Court amended the judgement, excluding the $2,500 in tax associated with the $100,000 dividend from surplus.

    Court’s Reasoning

    The Court reasoned that the franchise tax is not a tax on dividends themselves or on the corporation’s property, but rather a tax on the privilege of operating as a corporation. The amount of dividends declared during the year is simply a measure of the annual value of that franchise. The court emphasized, “As dividends can be legally made only out of earnings or profits, and cannot be made out of capital, they are assumed to approximate as nearly as practicable the just measure of the tax which should be imposed upon the corporation for the enjoyment of its franchise.” The court distinguished between current earnings and previously accumulated surplus. The Court stated that including a distribution of surplus earned in prior years would be contrary to the spirit and intent of the law: “A division of property thus previously acquired could not have been within the contemplation of the framers of the act, in fixing upon the annual dividends as a measure of the value of the franchise of the corporation, and even if a dividend within the letter of the act, to construe it as a dividend for the purposes of the act would be so contrary to its spirit and intent, that such a construction is inadmissible.” The Court cited Bailey v. Railroad Co., 106 U.S. 109, where the Supreme Court held that a tax on dividends should only apply to earnings accrued after the passage of the tax law. The Court concluded that the tax should be calculated based only on the dividend of 6.25% paid from current earnings.