Relating to dividends; [News items];

              34 HASKINS & SELLS
th
M a y
Relating to Dividends
THERE is perhaps no subject connected
with accountants' reports which is of
more importance than dividends. The
subject has a popular interest because it
touches intimately the relations of cor­porations
with stockholders. From the
stockholders' point of view, safety of prin­cipal
is an important consideration; but
the interest of the stockholder focuses
very sharply on the return from an invest­ment.
The subject is of more than pass­ing
interest at the present time because
of present and recently past economic
conditions, and the tendency on the part
of corporations to omit entirely, or reduce,
dividends, particularly on common shares.
The accounting procedure, in order to
be technically correct, should follow the
legal prescriptions, which permit dividends
to become an actual liability only after
proper declaration by the directors. The
typical dividend imposes no difficulty upon
the accountant in its handling; the divi­dend
is declared, it is charged against the
profits or against surplus, and set up as an
actual liability.
There are, however, so many typical
cases arising today that each such case
must be made the subject of consideration
and study on the part of the accountant.
This is particularly true where the cor­porations
are large, the amounts involved
are important, the shares have a wide
distribution, and the financial affairs of
the corporation are followed by a public
keen for information.
Shares carrying cumulative preference
rights as to dividends require special con­sideration.
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.
The wording of financial instruments,
by-laws, contracts, and agreements is
frequently obscure, and sometimes mis­leading,
as to the rights of stockholders
and the duties of corporate representatives.
In one contract of consolidation, the fol­lowing
provision was made:
"The several shares of the preferred stock
shall be entitled from and after
the issue of such shares respectively, to re­ceive
out of the net profits of the company
semi-annual dividends at the rate of six per
cent. (6 per cent.) per annum. Said dividends
shall be cumulative; that is to say, if not
earned and paid in any given year, they shall
accrue and accumulate, as if an interest
charge, but shall be paid only out of net
profits."
The crux of the situation, in this case,
is found in the words "shall be entitled,"
which perhaps suggest a definite expression
as to the rights of stockholders to receive
dividends. It is customary, however, in
interpreting agreements of this character,
to search for the intent, as indicated by
the entire verbiage, rather than certain
isolated words or phrases. It is therefore