Perferred surplus;

              26 HASKINS & SELLS March
Preferred Surplus
By JOHN R. WILDMAN
ARECENT decision in the Wabash
case (Barclay et al v. Wabash Railway
Company), affecting as it does the matter
of dividends, again calls attention to the
possibility in the future of a change in the
cardinal principle which long since has
guided accountants in considering the rela­tion
of dividends to surplus. The principle
is, that dividends are chargeable against
surplus only when declared. The decision
in question, if affirmed ultimately by the
United States Supreme Court, will chal­lenge
seriously continued adherence to that
principle, in cases where there are pre­ferred
shares.
A characteristic of dividends is that they
are spontaneous; that they do not accrue
like interest, but set up a right to surplus
on the part of the holders of shares, only
when declared. This principle holds even
though shares carry cumulative rights, the
effect of which is to deny to the holders of
junior issues any dividends until all ac­cumulations
in favor of preferred share­holders
have been satisfied.
The courts generally have been disin­clined
to dictate to directors with respect
to dividends, and to leave to their judg­ment
the question of whether or not surplus
should be so distributed. Occasionally, ac­countants
have been required to interpret
certain passages in certificates of incorpora­tion
where dividend provisions seemed to
make dividends akin to interest and to
decide whether or not surplus should be
assigned to shareholders regardless of
action by directors. Generally, the pre­vailing
rule has been that no charge against
surplus should be made, notwithstanding
the existence of a cumulative right, until
directors have authorized the charge by
declaration of the dividend.