Exception noted and filed;

              Bulletin HASKINS & SELLS 47
Exception Noted and Filed
THE May number of the Bulletin con­tained
an article entitled "Relating
to Dividends," in which the following
statement was made:
"It may be said probably without fear
of contradiction, that cumulative dividend
preference rights do not warrant or justify a
corporation in setting up or stating any divi­dend
liability in favor of stockholders having
such rights, until the dividend has been de­clared
by the directors."
It may reasonably be expected that a
broad general statement of this character
will be carefully read by the thoughtful
members of our organization, and criti­cally
tested by application to all sorts of
special cases, with a view to challenging
the statement in the event that it fails to
fit any given case.
As a result of such critical tests ap­plied
at various points throughout the
organization, one reader has found what
he believes to be an exception to the rule.
The exception is based on the following
excerpts from a law of the state of Michi­gan,
which law was effective from 1903
to May 10, 1917, in which latter year the
lines quoted were omitted entirely from
a superseding act:
"And the holder of such preferred stock
shall be entitled to a fixed dividend payable
quarterly, half-yearly, or yearly, which said
dividend shall be cumulative, payable at the
time expressed in said certificate, not to ex­ceed
eight per cent per annum, before any
dividend shall be set apart or paid on the
common stock."
and further:
"Provided, always, if at any time upon a
fair valuation of the assets of the corporation
the common stock shall be impaired in an
amount equal to ten per cent thereof, or any
dividend due on the preferred stock shall re­main
unpaid for sixty days, then holders of
the preferred stock shall have an equal right
with the common stock shares, etc."
This wording is, by the challenger of
the general statement, interpreted to im­ply
that there is no necessity for the
declaration or setting apart of the stated
dividend on preferred stock, since pre­ferred
dividends are expressly stated in the
law to be cumulative, due, and payable
at fixed dates expressed in the certificate;
and that an actual liability exists, even
though the dividend has not been de­clared,
and should be taken cognizance of
in the accounting records. It is further
stated that this liability should be con­sidered
as direct, if the earnings have
been sufficient to cover, and contingent
if the profits have been insufficient; and
that the dividends on this preferred stock
are practically equivalent in character
to interest on bonds.
We do not agree with the contention
set up by the challenger. We do not
consider that this case constitutes an ex­ception
to the rule; and our interpretation of
the extract from the law is that it merely in­tended
to convey certain preferred rights as
to dividends which would come ahead of any
distributions to common stockholders or
declarations of dividends on the common
shares. The crux of the whole situation, in
our opinion, is found in the word "before."
The discussion is possibly only an aca­demic
one, since there is some question,
because of the omission of the above ex­tract,
first quoted, from Act 254 of 1917,
amending Act 232 of 1903, as to whether
or not the preferred stock provisions re­ferred
to carry forward, even for corpora­tions
organized between 1903 and 1917.