Scottish Court of Session Decisions

The Arizona Copper Company, Limited, was originally incorporated on 11th August 1882 for the purpose of acquiring and working certain copper mines in Arizona, U.S.A.

In 1884 a new company was incorporated which took over the property and undertaking of the old company, with all its rights and liabilities.

By article 7 of the articles of association of the new company (which was in the same terms as the corresponding article in the old company) it was provided—“Subject to the provisions of the said agreement the holders of preferred shares shall be entitled to receive out of the profits of each year a cumulative preferential dividend for such year at the rate of 10 per centum per annum on the amount for the time being paid up on the preferred shares held by them respectively, and the surplus profits in each year shall belong, one-half to the holders of the preferred shares, and the other half to the holders of the deferred shares.”

An action was raised by Alexander Miln, Baltic Street, Dundee, and Mr John Gill, S.S.C., Edinburgh, against the Arizona Copper Company, concluding, infer alia, for declarator—“ Seventh, that under and in terms of the articles of association and constitution of the said company, the holders of the preferred shares thereof are not entitled to receive out of the profits of the current year or any future year a cumulative preferential dividend for any former year, but are entitled to receive out of the profits of each year a preferential dividend at the rate of 10 per centum per annum on the amount for the time being paid up on the preferred shares held by them respectively, and that one-half of the surplus profits in each year beyond the said preferential dividend on the preferred shares belong to the holders of the preferred

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shares, and the other half to the holders of the deferred shares.”

The pursuers, who were holders of 75 and of 400 deferred shares in the company respectively, averred—“The directors have represented that the preferred shares are entitled to a cumulative dividend of 10 per cent. per annum from the commencement of the company, and that the arrears of such dividend amount to £700,000 or thereby, and they have also represented that the deferred shares were of little or no value, and that they could not be expected to participate in any dividend for thirty years to come. The profits of the company for the first half of the past year have been declared by the board to be over £75,000, and the profits for the whole year ending 30th September 1898 may be expected to be at least double that amount. It takes only £63,306 to pay a dividend of 10 per cent. on the preferred shares for the year. So that, according to the pursuers' contention, there will be a large surplus for division between the preferred and the deferred shares at the next annual meeting of the company in February 1899.”

The defenders pleaded that on a sound construction of the articles the pursuers were not entitled to decree.

The Lord Ordinary ( Pearson) on 18th March 1899 pronounced an interlocutor, by which, inter alia, he assoilzied the defenders from the seventh conclusion of the summons, and allowed the parties a proof before answer of their averments in support of certain other conclusions.

Opinion.—[ After dealing with the other conclusions his Lordship proceeded]—“The seventh conclusion, to which I now turn, raises a question of considerable importance and interest. It goes pretty deeply into the other parts of the case, but it admits of being decided separately, and was placed by both parties in front of the argument. It is, whether the preferential dividend upon the preferred shares is cumulative, within the ordinary meaning of that term, or whether (to use the words of the conclusion) the holders of these shares are ‘entitled to receive out of the profits of each year a preferential dividend at the rate of 10 per cent. per annum,’ the surplus profits beyond that going, one-half to them and one-half to the deferred shareholders.

This depends primarily on the terms of the articles of association. By the 7th article it is provided that, subject to the provisions of a certain agreement, the holders of preferred shares ‘shall be entitled to receive out of the profits of each year a cumulative preferential dividend for such year at the rate of 10 per cent. per annum on the amount for the time being paid upon the preferred shares held by them respectively, and the surplus profits in each year shall belong one half to the holders of the preferred shares and the other half to the holders of the deferred shares.’ Article 149 provides that if the company should be wound up, the surplus assets should be applied in the first place in repaying to the holders of the preferred shares the amount paid up thereon, the residue being divided equally between the holders of the preferred and the deferred shares, one half to each, subject as therein mentioned. As to interim payments of dividend, it was provided by the articles of the original company that the directors might ‘at any time in every year pay such sums on account of dividend on the paid-up capital of the company, as they may think fit.’ This was not carried down into the articles of the reconstructed company, but in 1895 an article was added (article 123A), which provides that the board may from time to time pay to the members, on account of the next dividend on the preferred or deferred shares, such interim dividend as in their judgment the position of the company justifies.

What then is the right of the preferred shareholders under the 7th article of association? Are they entitled to have the short-coming of one year made up out of the profits of subsequent years? The original prospectus of the company on which subscriptions were obtained, is, in its description both of the preferred shares, and of the terms on which the vendors had agreed to accept deferred shares, conclusive as to the intention of the promoters that the dividend on the preferred shares should be truly a cumulative preferential dividend in the ordinary sense. But the decision of the question must depend on the true construction of the articles. The 7th article containing as it does the prominent and distinctive term ‘cumulative,’ seems at first sight to be free from doubt, but on a closer examination it proves to be a model of ambiguity. It is as if the draughtsman had had before him a typical non-cumulative clause and a typical cumulative one, and had combined them.

Where a preferential dividend is intended to be non-cumulative, it is sometimes so expressed in the articles by adding the words ‘without any right in case of deficiency to resort to subsequent profits.’ But, as Mr Palmer significantly puts it (1 Company Precedents 653–4), another form is sometimes preferred, as not expressly calling attention to the contingency of the profits being deficient, namely, that the holders of preference shares shall be entitled to be paid out of the profits of each year a preferential dividend for such year at the rate of 10 per cent. per annum.

It is obvious that as soon as a particular year is alluded to, the argument that the preferential dividend is non-cumulative is greatly strengthened. Even where the holders were declared entitled to their preference dividend ‘out of the net profits of each year,’ this was held sufficient to exclude a claim for cumulative dividend in the case of Staples (Law Rep. 1896, 2 Ch. 303). That case seems to me to go a considerable length, for after all the expression ‘the net profits of each year’ might be regarded as merely descriptive of the only possible fund out of which any dividend, whether cumulative or non-cumulative, could be paid. But where (as here) the holders are to receive the dividend not only ‘out of the profits of each year,’ but ‘for

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such year,’ then even if the dividend be declared preferential, it is not cumulative. The rule, in short, seems to be this, that where no particular year is alluded to, a preferential dividend is held to be cumulative ( Henry, 1857, 1 De Gex & Jones, 606; Webb, 1875, L.R. 20, Equity 556); but that even a description of the preferential dividend as payable out of the net profits of each year will make it non-cumulative ( Staples, cit.)

This rule, however, was settled in a series of cases, in none of which was the word ‘cumulative’ used—the question in all being whether a dividend admittedly preferential was also cumulative. Here it is expressly described as a ‘cumulative preferential dividend,’ There can, therefore, be no question that the preference dividend is to be a cumulative one. The question is, how is that to be reconciled with the distinct references to a particular year; and if they cannot be reconciled, which is to prevail?

The pursuers maintain that the word ‘cumulative’ is here to be read in a special and narrow sense, meaning ‘cumulative within the year,’ and not as between one year and another. They point to the fact that by the original articles the directors might ‘at any time in every year pay such sums on account of dividend on the paid-up capital of the company as they may think fit;’ and that although this was omitted from the articles of the reconstituted company in 1884 and so remained for eleven years, it was restored in 1895 by the addition of article 123A, which empowered the board from time to time to pay to the members on account of the next dividend on the preferred or deferred shares, such interim dividend as in their judgment the position of the company should justify. If, then, the board were to pay the preference shareholders an interim dividend at the rate of say only 8 per cent. per annum for the first quarter or half year, the word ‘cumulative’ would entitle them to have that shortcoming made up within the year, if the profits should admit of it. The expression is thus equivalent to a declaration that they are to be entitled to a cumulo or aggregate preferential dividend of 10 per cent. within each year, whatever may have been the rates of interim payments, but not to a cumulative dividend as between one year and another. In my opinion, so to read the word is to read all meaning out of it; for I think the same result would necessarily have followed if the word had been omitted. Moreover, it is to read the word in a sense not merely narrower than, but different from, its accepted meaning, which I take to be cumulative as between one dividend period and another; and the dividend period is unquestionably a period of twelve months, whether interim payments are made or not.

If it be said that this construction renders meaningless the expressions in the article which refer to a particular year, I do not think so. The expression ‘out of the profits of each year points out the source and the only source from which a dividend is to be paid in each year, whether the dividend is to be preferential or not, and whether it is cumulative or not. The expression ‘for such year’ presents more difficulty, but when a concrete case is put, the language seems appropriate enough. If in 1897 the profits admitted only of a 5 per cent. dividend to the preference shareholders, while in 1898 they admitted of a 15 per cent. dividend to them, I see no impropriety or inaccuracy in describing the latter as ‘the dividend for 1898.’

I therefore think that the pursuers are not entitled to the declaration which they ask for in the seventh conclusion of the summons, and I assoilzie the defenders from that conclusion.”

The pursuers reclaimed, and argued—The clause must be construed as a whole, and it contained words of reference to a particular year which negatived the respondent's view. The word “cumulative” did not in reality add anything to the clause, for “preferential” would be quite enough by itself to imply a cumulative dividend as between one year and another, if it were not for the words which confined it to each particular year—Buckley on the Companies Acts, 353. The essential characteristic of a non-cumulative clause was that the dividend should, as here, be paid out of the profits of each particular year—Palmer's Company Precedents, i., p. 359 and 482; Staples v. Eastman's Photo. Company, L.R. [1896], 2 Ch. 303. Accordingly the true meaning of the clause was that the preference shareholders were entitled to a cumulo or aggregate preferential dividend of 10 per cent. within each year, whatever may have been the rates of interim payments, but not to a cumulative dividend as between one year and another.

Argued for respondents—It was not impossible to have a non-cumulative preference dividend unless the word “non-cumulative” was used. The reclaimers' argument was based on the fact that the clause designated the source from which the dividend was to be paid and that period, but it was quite unnecessary that these should be designated, and they in no way detracted from the clear intention of the clause. The case was ruled by Henry v. Great Northern Railway Company, 1857, 1 De G. and J. 606; Webb v. Earle, 1875, L.R., 20 Eq. 556. The case of Staples did not apply, because there the word “cumulative” was not used.