Supreme Court of Canada
International Power Co. v. McMaster University / In re Puerto Rico Power Co., [1946]
S.C.R. 178
Date: 1946-01-24
International Power
Company, Limited (Respondent and Mise-en-cause) Appellant;
and
McMaster University and others
(Respondents) Respondents.
and
Montreal Trust
Company ès qual. (Petitioner)
1945: October 18, 19, 22; 1946: January 24.
Present: Rinfret C.J. and Kerwin,
Taschereau, Rand and Estey JJ.
Company—Winding-up—Assets realized by
liquidator—Preference and common stocks re-imbursed in full at par—Distribution
of surplus assets—Rights of preferred shareholders—Interpretation of terms of
preference—Extent of priority—Equal division of surplus assets among preferred
and common shareholders—Preferred shareholders receiving per share dividend
greater than those received by common shareholders—Whether "equality"
to be made between them before division—Seven per cent cumulative preference as
to dividends—Right to higher dividend than specified by by-law—Claim for
equalization as between preferred and common shareholders of certain dividends
paid to them—Companies Act, R.S.C. 1906, c. 79, ss. 47, 49.
The Porto Rico Power Company, incorporated in
1906 under the Dominion Companies Act with a capital of $3,000,000
divided into 30,000 common shares, increased its capital in 1909 and 1911 by
creating each year preference stock for an amount of $500,000. The by-laws,
dealing with the rights of the preference shareholders, provided that such
shares shall be "entitled out of * * * net earnings * * * to cumulative
dividends at the rate of seven per cent. per annum for each and every year in
preference and priority to any payment of dividends on common stock and further
entitled to priority on any division of the assets of the company to the extent
of its repayment in full at par together with any dividends thereon then
accrued due and remaining unpaid." The Company, in January 1944, then in
voluntary liquidation under the Winding-up Act, had in its treasury more
than $6,000,000. The liquidator, after having made a preliminary distribution
by which the preference and common shareholders were reimbursed in full at par,
still had surplus money amounting to $500,000. Up to the winding-up of the
Company, the preference shareholders had received the stipulated dividends of 7
per cent., aggregating per share $239.75 and $200.11 for the first and second
issues; while the holders of common stock had received in dividends a smaller
aggregate of $188.50. The latter had received, until 1931, dividends lower than
7 per cent. per year; but, from 1931 to 1942, the annual dividend had been 8
per cent. and, in 1943, 49i per cent. The liquidator, by way of petition, then
sought the direction of the Bankruptcy Court as to the distribution of the
surplus amount of $500,000, submitting that the holders of common shares were
alone entitled to it. The preferred shareholders, represented by the
respondents,
[Page 179]
claimed, first, that there should be an
equalization as between them and the common shareholders of certain dividends
paid before liquidation, and, so, that they should be paid the amounts in
excess of 7 per cent. received by the common shareholders from 1931 until
liquidation, and, secondly, that they should then share equally with the common
shareholders in the balance of $500,000. These claims were disallowed by the
Bankruptcy Court, which made an order in accordance with the conclusions of the
petition. On appeal, the dismissal of the first claim advanced by the preferred
shareholders was affirmed, but it was held that the preferred and common
shareholders were entitled to share equally in the distribution of the
Company's surplus assets. The common shareholders appealed from that judgment
before this Court and the preferred shareholders cross-appealed.
Held, affirming
the judgment appealed from (26 C.B.R., 170), The Chief Justice dissenting in
part, that, under the by-laws of the Company, the preference shareholders,
subject to their rights with regard to dividends and priority to be repaid at
par, have otherwise all the rights of the common shareholders; and, once the
preference and the common stocks have been reimbursed in full at par, the
preference shareholders are further entitled to share pari passu in the
distribution of all surplus assets of the Company with the common shareholders.
Per The Chief
Justice (dissenting in part):—But for the very reason that the common and
preference shareholders should be put on the same footing for the purpose of
such division, they should have received previously "equal
treatment," outside of priorities to which the latter are entitled, the
fundamental principle of "equality" being basically the essence of
the Canadian Companies Act. In the present case, the preference
shareholders did in fact receive per share dividends greater in the aggregate
than those received by the holders of common shares; and, if the judgment
appealed from is allowed to stand, there would be "inequality"
between all shareholders. Therefore, before any division of surplus assets is
made, the common shareholders should first be paid the sum representing the
difference between the aggregate dividends paid to them and the aggregate
dividends paid to the preferred shareholders; and, thereafter, the balance of
the surplus assets should then be distributed equally between all shareholders.
Held, also,
that the claim of the preference shareholders that they should be paid on a
basis of equality of dividends with the common shareholders must be dismissed.
The preference shareholders are not entitled to any greater amount than 7 per
cent. on their shares per annum, notwithstanding dividends at a higher
rate having been paid on common shares in any year.
APPEAL and CROSS-APPEAL from the judgment of
the Court of King's Bench, appeal side, province of Quebec, reversing in part the judgment of the
Superior Court, Boyer J., sitting in Bankruptcy.
[Page 180]
The material facts of the case and the
questions at issue are stated in the above head-note and in the judgments now
reported.
Geo. A. Campbell K.C. for the appellant.
Aimé Geoffrion K.C. and A. S. Bruneau K.C. for the respondents McMaster University and others.
J. Senécal K.C. for
the Liquidator respondent.
The Chief
Justice (dissenting in part)—The cross-appeal should be
dismissed, for the reasons given by my brother Kerwin with whom I am fully in
accord in this respect.
On the main appeal however, I have to make the
following observations: The by-laws providing for the issue of the preference
shares as set out in the supplementary letters patent confirming them are as
follows:
The said increased capital stock of five
hundred thousand dollars shall be preference stock entitled out of any and all
surplus earnings whenever ascertained to cumulative dividends at the rate of
seven per cent. per annum for each and every year in preference and priority to
any payment of dividends on common stock, and further entitled to priority on
any division of the assets of the company to the extent of its repayment in
full at par together with any dividends thereon then accrued due and remaining
unpaid.
The Porto Rico Power Co. Ltd., now in
liquidation under the Winding-up Act and whose liquidator is the
Montreal Trust Company, was incorporated under the Dominion Companies' Act of
1906; and by force of section 4.9 of that Act,
holders of shares of such preference stock
shall be shareholders within the meaning of this Part, and shall in all
respects possess the rights and be subject to the liabilities of shareholders
within the meaning of this Part: Provided that in respect of dividends, and in
any other respect declared by by-law as authorized by this Part, they shall, as
against the ordinary shareholders, be entitled to the preferences and rights
given by such by-law.
That is the law of Canada and the law which must be applied in the premises, notwithstanding
any ruling handed down by courts having to apply different laws or statutes.
For that reason, may I say with respect, most of
the authorities, to which the Court has been referred, can have no application
to the decision which we have to render.
[Page 181]
That decision depends on the language of the
by-laws under authority of which the preference shares were issued and the
issue was set by Viscount Haldane in Will v. United Lanket
Plantations Co..
The point in dispute is one of
construction, and construction must always depend on the terms of the
particular instrument; it is only to a limited extent that other cases decided
upon different documents afford any guidance. I make that observation because a
good deal of authority has been cited in the course of the argument, and
reference has been made to dicta of various learned judges. But in all those
cases they were dealing with documents which were different from those we have
to construe, and our primary guide must be the language of the documents we
have before us.
To which the Earl Loreburn in the same case
added at page 18:
My lords, I do not think that any light can
be thrown upon the construction of this particular resolution by considering
language that was used, whether by way of decision or of conjecture, in the
construction of perfectly different contracts by other learned judges. There is
nothing more unfortunate than the tendency which appears to influence some
minds that you can attain to certainty in the interpretation of one set of
sentences by considering the analogy of other different sentences.
Now, if we look at section 49 of the Dominion Companies'
Act of 1909, we find that holders of preference stock are shareholders and
shall in all respects possess the rights
and be subject to the liabilities of shareholders within the meaning of this
Part.
It follows that, under our law, holders of
preference stock are primarily shareholders on the same footing as ordinary
shareholders. But section 49 adds the proviso that
in respect of dividends and in any other
respect declared by by-law as authorized by this Part, they (the preference
shareholders) shall, as against the ordinary shareholders, be entitled to the
preferences and rights given by such by-law.
The preference shareholders and, in this
particular case, the respondents have therefore all the rights of the ordinary
shareholders (in this case the appellant); but in addition, they have the
preferences and rights given by the by-laws under which the preferred shares
were issued.
Moreover, if we will now refer to the by-laws
which govern the case, we find that the preference stock is entitled
(1) out of any and all surplus earnings
whenever ascertained to cumulative dividends at the rate of 7 per cent. per
annum for each and every year in preference and priority to any payment of
dividends on common
[Page 182]
stock; (2) and further entitled to priority
in any division of the assets of the company to the extent of its repayment in
full at par together with any dividends thereon then accrued due and remaining
unpaid.
The claim by the preference shareholders for
additional dividends provided for in the first part of the by-law formed the
subject of the cross-appeal and has now been finally disposed of.
The main appeal concerns the meaning of the
second part of the by-law dealing with the division of the assets of the
company, and on that point, I have this to say:
Like the Court of King's Bench, I think the
second part of the by-law, having to do with the division of the assets of the
Company, deals only with the priority to which the preference shareholders are
entitled. In my view, it means that, "to the extent of its repayment in
full at par" i.e. to the extent of the repayment in full at par of the
preference stock, the holders of that stock are entitled to a priority as
against the common shareholders. They will be reimbursed of the amount of their
stock "in full at par" before the common shareholders are reimbursed
of the amount of their stock.
But, should there be a surplus remaining after
both the preference shareholders and the common shareholders have been so
reimbursed, then, as the by-law is silent on the subject, the first part of
section 49 of the Companies' Act comes into play and for the purpose of
the division of those surplus assets, there are no longer preference
shareholders and common shareholders, there are left only holders of shares in
all respects possessing "the rights and subject to the liabilities of
shareholders within the meaning of" the Companies' Act.
So far therefore, I agree with the proposition
that after the preference stock has been reimbursed in full at par and the
common stock has also been reimbursed, with regard to the surplus assets then
remaining, both the preference and the common stock holders must be put on the
same footing for the purpose of division; but, for that very reason, my view is
that, in the present case, the judgment of the Court of King's Bench (appeal
side) must be modified.
It is common ground in this case that the holders
of preference stock, up to the winding-up of the Company,
[Page 183]
have received dividends aggregating $239.75 or
$200.11 per share while the holders of common stock have received in dividends
only an aggregate of $188.50 per share.
Although the Court of King's Bench fully
acknowledged that fact, which is undisputed, and although the judges of the
Court insisted upon the fundamental principle, under our law, of the equality
of shareholders, yet they took no account of the fact and they delivered a judgment
which, if it should be allowed to stand, would do away with the principle of
"equal treatment" between the preference and common shareholders,
outside of the priorities to which the preference shareholders are entitled.
For if all the shareholders are now to be allowed to divide share and share
alike the surplus assets now in the hands of the liquidator, it will follow
that, on the aggregate and outside of their priorities, the preference
shareholders will have received or will receive in the end, a larger amount
than the common shareholders, although there are in the hands of the liquidator
ample funds both to cover the amounts to which the preference shareholders are
entitled in priority and to meet the fundamental requirement of equality
between all shareholders outside of the priority.
As stated in the judgment of Boyer J. "the
principle of equality invoked by the contestants should work both ways".
From the incorporation of the company in
liquidation up to the date of the winding-up order herein, the preference
shareholders, as remarked by MacKinnon J. in the Court of King's Bench, did in
fact receive per share dividends greater in the aggregate than those received
by the holders of common shares.
As matters now stand, the preference
shareholders have received in full the 7 per cent. per annum cumulative
dividends to which they were entitled under the by-laws and the supplementary
letters patent. They have also been reimbursed in full at par, of the whole of
the payments they made in purchase of the preference stock. On the other hand,
under the scheme proposed by the judgment appealed from, the common
shareholders would receive payment in full at par of the stock paid for by
them, but in respect of dividends, they stand in the proportion of
[Page 184]
$239.75 per share, paid in the aggregate to the
holders of preference stock of the first issue, to approximately $200.11 per
share to those of the second issue and to only $188.50 per share to the holders
of common shares.
There would follow this inequality: that the
common shareholders have therefore received as dividends per share less than
the preference shareholders.
I cannot see how to reconcile such a result with
the principle of equality which is basically the essence of the Canadian Companies'
Act, which is the principle on which the Court of King's Bench pretends to
proceed and which indeed is the very foundation of the claims made by the
preference shareholders in the present case. In the absence of any provisions
to the contrary, the rights of the shareholders are equal and they should
participate in the distribution of profits and assets in proportion to their
interest in the company of which they are shareholders.
In the Court of King's Bench, Stuart McDougall
J. very well said:
Under our system it seems to me that we
should start with that equality as a basis and then endeavour to determine if
it has been derogated from by the by-laws or charter.
Astbury J. in In re Fraser and Chalmers
Limited said at
page 120:
All shareholders are entitled to equal
treatment unless and to the extent that their rights in this respect are
modified by the contract under which they hold their shares.
It is what, with respect, the judgment appealed
from has disregarded. If the respondents were to be paid what the Court of
King's Bench gave them, they would, in the aggregate, receive more than the
appellant and there would be no equality as between the shareholders.
According to the ruling case of Steel Company
of Canada v. Ramsay,
dividends do not mean yearly dividends but dividends in the aggregate, and the
holders of common shares should be entitled to be paid dividends equal in
amount to those paid to the holders of preferred shares, before the latter
become entitled to participate further.
Of course, it is objected in the present case
that we are no longer dealing with profits as such, but rather with the
division of the remaining assets. But I think the objection
[Page 185]
is answered by Lindley L.J., in In Re
Bridgewater Navigation Co.. At
page 329, Lord Justice Lindley says:
The problem is no longer what is to be done
in the way of dividing the profits of a going concern; the problem now is how
much of the whole assets of the company belongs to one class of shareholders
and how much to another; and if it appears that some of those assets consist of
the undrawn profits of one of those classes, such undrawn profits ought to be
distributed among the members of that class unless some sufficient reason to
the contrary can be shown, and in this case there is no such reason.
Applying the words of Lindley L.J. to the case
now before us, I must repeat: "In this case there is no such reason",
i.e. there is no reason why before any division of the surplus assets, in fact,
before the liquidator could consider that there are surplus assets, he should
not first equalize the payments made to the preferred shareholders and those
made to the common shareholders so that each class of shareholders shall
receive equal treatment. In the premises, this cannot be done unless and until
the common shareholders receive the amount of dividend per share, which so far
the preferred shareholders have received over and above that paid to the common
shareholders.
That is the only result consistent with the
fundamental equality of rights in the matter of dividends as between the
preference and common shareholders, taking into consideration the amounts paid
in the aggregate on each class of shares down to the liquidation. This, to my
mind, is the proper application of the decision of the Privy Council in the Ramsay
case and
also appears to be the conclusion reached by MacKinnon J. in the present case.
The Ramsay case was a
Canadian case and the decision of the Judicial Committee in that respect
constitutes an authoritative statement of the law applicable in this case.
If the rule of parity between shareholders must
prevail and if all shareholders are entitled to equal treatment, unless and to
the extent that their rights are modified by the contract under which they hold
their shares, the rule would not be followed if the preferred shareholders,
having received substantially more in dividends than the common shareholders
and still holding that advantage, should
[Page 186]
be allowed to divide equally with the common
shareholders the surplus assets now in the hands of the liquidator.
My conclusion is that, here, the proper advice
to be given the liquidator is, that the common shareholders and that is to say,
among others, the appellant, should first be paid the sum representing the
difference between the aggregate dividends paid to the preferred shareholders
and the aggregate dividends paid to the common shareholders, up to the date of
the liquidation, and that the judgment of the Court of King's Bench (appeal
side) should be modified accordingly.
Outside such modifications, the judgment of the
Court of King's Bench in the main appeal should not be further disturbed. As
agreed, the costs of all parties both in the main appeal and in the
cross-appeal should be against the estate.
Kerwin J.—Porto Rico Power Company, Limited, is being wound-up under the
provisions of the Dominion Winding-up Act, and the liquidator sought the
direction of the Bankruptcy Court in Quebec by two petitions, with the second
of which only are we concerned. The liquidator therein requested the Court to
direct it to distribute a sum of $500,000, and any additional assets which
might thereafter become available in its hands, among the holders of the common
shares of the Company. The holders of those shares and of the preferred shares
had been repaid in full the amount paid for them. Upon the hearing of the
petition, the preferred shareholders, represented by the present respondents,
claimed first that there should be what they termed an equalization as between
the preferred and common shareholders of certain dividends which had been paid
by the Company before liquidation, and second, that they should share equally
with the common shareholders in the balance of the $500,000 and in the
additional assets. These claims were disallowed and an order made in accordance
with the conclusions of the petition. On appeal the Court of King's Bench
agreed with the dismissal of the first claim advanced by the preferred
shareholders but decided that the preferred and common shareholders were
[Page 187]
entitled to share equally in the distribution of
the Company's surplus assets. It is from that judgment that International Power
Company, Limited, representing the common shareholders, appeals and that McMaster University and others, representing the preferred shareholders, cross-appeal.
Porto Rico Power Company, Limited, was
incorporated by letters patent dated August 29th, 1906, under the provisions of
the Dominion Companies Act, 1902, chapter 15. After some years of
operation, the directors of the Company decided to increase its capital by
creating and issuing $500,000 of preference stock. In 1909 this was done by
by-law no. 10 and confirmed by supplementary letters patent in accordance with
the provisions of the Companies Act, R.S.C. 1906, chapter 79. Clause 2
of by-law no, 10 provides:—
2. That the said increased capital stock of
five hundred thousand dollars shall be preference stock entitled out of any and
all surplus net earnings whenever ascertained to cumulative dividends at the
rate of seven per cent. per annum for each and every year in preference and
priority to any payment of dividends on common stock; and further entitled to
priority on any division of the assets of the Company to the extent of its
repayment in full at par together with any dividends thereon then accrued due
and remaining unpaid.
By-law no. 10 and the supplementary letters
patent provided for further increases of capital stock by the issue of
additional preference stock on the same terms, and to rank pari passu in
all respects with the $500,000 of preference stock authorized by the by-law. In
the exercise of the right so reserved, the capital stock of the Company was by
by-law increased by the further sum of $500,000 by the creation of an
additional 500,000 preference shares of $100 each. The relevant wording of this
by-law and the confirming supplementary letters patent is substantially
identical with the phraseology in by-law 10.
In due course all the preference stock was
issued, and at liquidation amounted in the aggregate to $1,000,000 fully paid.
For upwards of thirty years, without interruption, dividends at the stipulated
rate of 7 per cent. were paid on all preference shares from time to time
outstanding, and so continued down to the 31st of December, 1943, shortly before liquidation.
Down to that date the holders of preference stock of the first issue were
[Page 188]
paid dividends amounting to $239.75 per share,
and the holders of the second issue were paid dividends amounting to
approximately $211 per share, whereas the common stock holders received only
$188.50, paid at varying rates in some of the years and including a special
dividend of 49·50 per cent. in 1942.
The respondents' contention is that the
preferred shareholders were entitled to participate in dividends equally per
share with the common shareholders after each class had received 7 per cent.
dividends in each year. As to this claim and as to the claim to share in the
surplus assets, the position of the respondents is that the Companies Act of
1909 did not permit any restriction upon what they term the rights of preferred
shareholders in common with all other shareholders but that, on the contrary,
the Act permitted merely the granting of a preference and priority. They also
argue that the by-law on its true construction did nothing more. The trial
judge disagreed with these contentions but the Court of King's Bench, while
apparently holding the view that the Act did not authorize the suggested
restriction, decided, on the wording of the by-law, that no such restriction
was in fact imposed. However, on the first claim, that Court decided that the
silence or acquiescence of the holders of preferred stock over a period of
thirteen years was a bar to the holders of preference shares now seeking to be
put on a footing of equality.
The applicable statutory provisions of the Companies
Act of 1909 are sections 47 and 49, which read as follows:—
47. The directors of the company may make
by-laws for creating and issuing any part of the capital stock as preference
stock, giving the same such preference and priority, as respects dividends and
in any other respect, over ordinary stock as is by such by-laws declared.
2. Such by-laws may provide that the
holders of shares of such preference stock shall have the right to select a
certain stated proportion of the board of directors, or may give them such
other control over the affairs of the company as is considered expedient.
* * * *
49. Holders of shares of such preference
stock shall be shareholders within the meaning of this Part, and shall in all
respects possess the rights and be subject to the liabilities of shareholders
within the meaning of this Part: provided that in respect of dividends, and in
any other respect declared by by-law as authorized by this Part, they shall, as
against the ordinary shareholders, be entitled to the preferences and rights
given by such by-law.
[Page 189]
Subsections 3 and 4 of section 57, which have
been referred to, really have no application as they deal merely with the
result of the increase or reduction of capital which might be effected only by
supplementary letters patent.
Certain rights are common to the holders of all
shares under Part I of the Act in which sections 47 and 49 are found but not
all the rights of any shareholder are found in any part of the statute. While
the judgment of the Privy Council in Steel Company of Canada v. Ramsay, does not refer to the provisions of the
Act, it will be noticed from the report of this case in the Court of Appeal for
Ontario that
counsel for the company argued:—
Under secs. 47, 48 and 49, preference
shareholders may be given priority when the fund shall be distributed; but
apart from that, all shares, preference and common, must be placed on an equal
basis when the distribution is made, i.e., at the time of the distribution it
must be a "rateable distribution".
No reference is made in any of the judgments in
any oí the Courts to the statutory provisions, and the judgment of the Privy
Council, therefore, cannot be taken as a pronouncement upon the point. However,
it has arisen in Holmsted v. Alberta Pacific Grain Co. Limited, where the court of appeal of Alberta, affirming the decision of Ford J.
decided that the powers given the directors of a company were not restricted to
giving preferences. I agree with those judgments and particularly the statement
of Chief Justice Harvey that preference shareholders
have the rights and liabilities which are
common to all shareholders and in addition they have the preferential rights
conferred by the by-law. It (section 49) does not say nor can I see any reason
to think it means, that they possess all the rights of any shareholder.
The fact that in 1924 Parliament amended section
47 does not alter my opinion in this respect as the amendment deals with
deferred as well as preferred stock.
Having the power to provide that so far as
dividends are concerned the holders of preference shares should be entitled to
cumulative dividends at the rate of seven per cent. per annum, and to nothing
more, is that what the by-law provides? I think it does because, as pointed
[Page 190]
out by Viscount Dunedin in the Ramsay case, it has been decided by the House of Lords
in Will v. United Lanket Plantations Company Limited, that, ordinarily speaking, when a
preferred shareholder receives his preferred dividend, he can ask no more. So
far as the claim now under consideration is concerned the remarks of Earl
Loreburn in the Will case (2), at page 19, are, I think, apposite:—
My lords, I have no doubt myself in regard
to this particular resolution, that the people who took the preference shares
under it knew perfectly well that they were taking shares with a preferential
dividend of 10 per cent. I think they would have been rather surprised,
although no doubt they would have been gratified, if they had been told that
they were about to receive the almost boundless additional advantages which
have been held out to them in the arguments we have been hearing.
While there are differences between companies in
England and those incorporated
under the Dominion Companies Act, the decision in the Will case
(2) applies equally here as is indicated by Viscount Dunedin's reference to it
in the Ramsay case.
The question remains as to whether, having
similar powers with reference to surplus assets, the directors exercised it.
The true nature of the fund in dispute is, I think, nowhere better expressed
than in the reasons for judgment of Mr. Justice Eve in In re William
Metcalfe & Sons, Ld., where
he says:—
The expression "surplus assets"
in this and similar cases signified something different from the expression
"capital"; surplus assets are part and parcel of the property of the
company not required for the discharge of its liabilities or for returning to
the shareholders the capital they have paid up; they are part of the joint
stock or common fund which, at the date of the winding-up, represented the
capital of the company, but they are no part of the repayable capital. It has ex
hypothesi been repaid before they came into existence.
His judgment was affirmed by the Court of Appeal
and in the judgments in that court are found references to most, if not all,
prior decisions.
While in Birch v. Cropper, the House of Lords was concerned with a
company, the articles of which contained no provision as to the distribution of
assets on its winding-up, the inclusion in the present case in the by-law of
the words
[Page 191]
and further entitled to priority on any
division of the assets of the Company to the extent of its repayment in full at
par together with any dividends thereon then accrued due and remaining unpaid
can I think make no difference. The remarks of
Lord Macnaghten at page 543, referring, of course, to a company incorporated
under the British Companies Act of 1862, apply as well to the Porto Rico
Company,—that every person who becomes a shareholder becomes entitled to a
proportionate part in the capital of the company and unless otherwise provided,
entitled as a necessary consequence to the same proportionate share in all the
property of the company, including its uncalled capital. In the present case
the priority of repayment in full at par applies to the preference stock and
has no application to the right of a holder of such stock to a share in the
surplus assets as above defined. The reasoning in Williams v. Renshaw to which we were referred, seems to
overlook this distinction.
For these reasons, therefore, I am of opinion
that the Court of King's Bench came to the right conclusion as to the surplus
assets, and that both Courts came to the right conclusion with respect to the
respondents' claim for equality of dividends. Upon this view of the matter, no
question arises as to the propriety of the allowance of interest at five per
centum per annum from February 2nd, 1944, upon the division of the sum of
$500,000. If the conclusion now arrived at had been reached by the judge of
first instance, that sum would have been distributed among the holders of
preference shares at that time.
The appeal and cross-appeal should be dismissed
and the costs of all parties paid by the liquidator out of the assets of the
Company.
The judgment of Taschereau and Estey J.J. was
delivered by
Taschereau J.—The Porto Rico Power Co. Ltd. was incorporated under the Dominion Companies Act of
1902, by letters patent dated the 29th of August, 1906. Its original authorized
capital was $3,000,000 divided into 30,000 common shares of $100 each, all of
which were issued and
[Page 192]
fully paid. In 1909, the Company increased its
capital by creating and issuing $500,000 of preference stock, divided into
5,000 shares of $100 each, and again in 1911, a further increase of $500,000
raised the amount of preference stock to $1,000,000 and, as a result of which,
the total capitalization of the company was $4,000,000.
The provisions of both supplementary letters
patent, dealing with the rights of the preference shares are the following:—
The said increased capital stock of five
hundred thousand dollars shall be preference stock entitled out of any and all
surplus net earnings whenever ascertained to cumulative dividends at the rate
of seven per cent. per annum for each and every year in preference and priority
to any payment of dividends on common stock, and further entitled to priority
on any division of the assets of the company to the extent of its repayment in
full at par together with any dividends thereon then accrued due and remaining
unpaid.
The main holdings, if not the only, of the Porto
Rico Power Company, Limited were the shares of a certain Porto Rican
subsidiary, the assets of which were expropriated by the Porto Rico Water
Resources Authority, of the Porto Rican Government. As a result of this
transaction, the Montreal Trust Company, in its quality of liquidator of Porto
Rico Power Company, Limited, now in voluntary liquidation, had in its treasury
more than $6,000,000 available for distribution amongst both classes of
shareholders. The present appellant owns 29,357 of the 30,000 common shares of
the Porto Rico Power Company, Limited, and the respondents are the holders of a
substantial number of preference shares.
The Montreal Trust Company of Montreal was
appointed liquidator on the 26th of January, 1944, and was authorized by the
Court to make a preliminary distribution of $100 per share to the preference
shareholders and $150 per share to the holders of common stock, and it also
prayed the Court to determine how the surplus money amounting to $500,000
should be distributed. The Montreal Trust Company submitted that the holders of
common shares are alone entitled to share in any surplus assets available for
distribution after payment by priority of $100 per share to the preference
shareholders, plus dividends thereon accrued due and remaining unpaid, and that
the holders of preference shares are
[Page 193]
entitled only to said payment by priority of
$100 per preference share and dividends thereon accrued and remaining unpaid,
and that they are not entitled to share pro rata with the holders of
shares of common stock in any surplus assets. The contention is that the rights
of the holders of the preference shares of stock of the Porto Rico Power
Company Limited, in liquidation, are completely and exhaustively set out in the
by-laws and supplementary letters patent and that, after having received
cumulative dividends at the rate of 7 per cent. per annum, which in fact they
have received, they are entitled to only $100 per share in the distribution of
the assets of the company which is the repayment in full of their shares at
par.
The respondents intervened to contest the
petition of the liquidator claiming that the preference shareholders are
entitled to equal treatment in all respect with the common shareholders, except
to the extent to which the said preference shares are given a priority by the
supplementary letters patent and the by-laws of the company. They further
alleged that no limitation whatsoever is placed upon the rights of the
preference shareholders, and all that the said by-laws and supplementary
letters patent provide is the extent of the priority given to the preference
shareholders.
The respondents further claimed that the company
in liquidation has paid dividends to the common shareholders in excess of the 7
per cent. received by the preference shareholders, and that the said dividends
paid to the common shareholders constitute an advance in respect of which the
preference shareholders are entitled to be placed on an equal basis.
Mr. Justice Boyer dismissed the contention of
the McMaster University and directed that the $500,000
and all further assets subject to distribution should be distributed to the
common shareholders only, and to the exclusion of the preferred shareholders.
The Court of King's Bench allowed the appeal of
the McMaster University,
ordered that the judgment a quo be modified to the extent of ordering,
and ordered, the liquidator to distribute amongst the holders of preference
[Page 194]
shares the sum of $500,000 in proportion to
their holdings of said shares, with interest at the rate of 5 per cent. per
annum from the 2nd day of February, 1944. The Court of King's Bench further
ordered the liquidator to distribute amongst the holders of preference and
common shares in proportion to their holdings of the said shares, without any
distinction, any or all balance of surplus assets available for distribution,
but dismissed the claim of preferred shareholders as regards dividends.
The decision of this case depends upon the true
construction of the essential words of the supplementary letters patent and
by-laws already cited. It is clear, I think, that under the Dominion Companies
Act, a preferred shareholder has all the rights and liabilities of a common
shareholder. This proposition is found in section 49 of the Companies Act, R.S.C.
1906, chap. 79, which reads as follows:—
Holders of shares of such preference stock
shall be shareholders within the meaning of this part, and shall in all
respects possess the rights and be subject to the liabilities of shareholders
within the meaning of this part.
The preferred shareholders are however entitled
to additional preferences and rights which are authorized by section 47 of the
Act, which is to the effect that the directors of the company may make by-laws
for creating and issuing any part of the capital stock as preference stock,
giving the same such preference and priority, as respects dividend and in any
other respect, over ordinary stock as is by such by-laws declared, and this is
confirmed by subsection 49, which, after stating that holders of shares of
preference stock are shareholders within the meaning of the Act, says that they
are, as against the ordinary shareholders, entitled to the preferences and
rights given by the by-laws.
Many judgments have been cited by both parties.
As it will be seen the consensus of opinion appears to be that preference
shareholders have all the rights and liabilities of common shareholders, and
that the additional preferences and priorities, to which they may be entitled,
must be found in the by-laws and supplementary letters patent of the company.
[Page 195]
The oldest case is, I think, the case of Birch
v. Cropper. In
that case, the articles of association of an English company incorporated under
the Companies Act of 1862 provided that the net profits for each year
should be divided pro rata upon the whole paid-up share capital, and
that the directors might declare a dividend thereout on the shares in
proportion to the amount paid up thereon. The articles contained no provisions
as to the distribution of assets on the winding-up of the company. The original
capital consisted of ordinary shares partly paid up. Afterwards, preference
shares were issued entitling the holders to a dividend at a fixed rate with
priority over all dividends and claims of the ordinary shareholders. The
preference shares were fully paid up. The undertaking having been sold under an
Act which made no provision for the distribution of the purchase money amongst
the shareholders, the company was voluntarily wound up and assets remained for
distribution. It was held by the House of Lords, reversing the decision of the
Court of Appeal, that in distributing the assets "amongst the members
according to their rights and interests in the company" and in adjusting
"the rights of the contributors amongst themselves", the liability of
the ordinary shareholders for the unpaid balance of their shares must not be
disregarded; and that, after discharging all debts and liabilities and repaying
to the ordinary and preference holders the capital paid on their shares, the
assets ought to be divided amongst all the shareholders, not in proportion to
the amounts paid on the shares, but in proportion to the shares held.
At page 531, Lord Herschell said:—
To treat them as partners receiving only
interest on their capital and not entitled to participate in the profits of the
concern, or to regard them as mere creditors whose only claim is discharged
when they have received back their loan, appears to me out of the question.
They are members of the Company, and as such shareholders in it as the ordinary
shareholders are; and it is in respect of their thus holding shares that they
receive a part of the profits. I think, therefore, that the first contention of
the appellant wholly fails.
At page 543, Lord Macnaghten says:—
Every person who became a member of a
company limited by shares of equal amount becomes entitled to a proportionate
part in the capital of the company, and, unless it be otherwise provided by the
regulations
[Page 196]
of the company, entitled, as a necessary
consequence, to the same proportionate part in all the property of the company,
including its uncalled capital.
And at page 546, Lord Macnaghten says also:—
The ordinary shareholders say that the
preference shareholders are entitled to a return of their capital, with 5 per
cent. interest up to the day of payment, and to nothing more. That is treating
them as if they were debenture-holders, liable to be paid off at a moment's
notice. Then they say that at the utmost the preference shareholders are only
entitled to the capital value of a perpetual annuity of 5 per cent. upon the
amounts paid up by them. That is treating them as if they were holders of
irredeemable debentures. But they are not debenture-holders at all. For some
reason or other the company invited them to come in as shareholders, and they
must be treated as having all the rights of shareholders, except so far as they
renounced those rights on their admission to the company. There was an express
bargain made as to their rights in respect of profits arising from the business
of the company. But there was no bargain—no provision of any sort—affecting
their rights as shareholders in the capital of the Company.
In In re Espuela Land and Cattle Company, it was held:—
There is no general rule that where
preference shareholders have a preference as to repayment of capital they can
have no further share in surplus assets. The question depends on the
construction of the memorandum and articles of association. But if these
documents contain no provisions on the point, surplus assets must in a
winding-up be divided amongst all the shareholders, ordinary and preference, in
proportion to the nominal value of the shares.
In this case, Mr. Justice Swinfen Eady says at
page 193:—
There remains the question how the assets
which remain after paying preference capital, interest thereon, and ordinary
capital are to be distributed.
Mr. Younger, who claimed the whole surplus
on behalf of the ordinary shareholders, contended that where priority of
repayment on a winding-up is secured to the preference capital the preference
shareholder is entitled to that repayment, but not to any further interest in
the capital of the company, in the same manner as where a right to a fixed
preferential dividend is secured to preference shareholders they take that
fixed amount and nothing more, however large the revenue of the company may be.
This, however, is merely a question of the
construction of the memorandum and articles. There is not any rule of law that
shareholders having a fixed preferential dividend take that only. It is quite
open to a company to distribute its revenue first in paying a fixed
preferential dividend, then in paying a dividend of like amount to the ordinary
shareholders, and then dividing any surplus revenue of any year rate-ably
between the preference and ordinary shareholders. An instance
[Page 197]
of this is found in Webb v. Earle. The documents embodying the constitution
of the company determine how its revenue shall be distributed; and in like
manner they determine how any surplus assets are to be divided. An instance of
a provision that preference shares shall confer certain rights, "but shall
not confer any further right to participate in profits or surplus assets,"
occurred in In re South African Supply and Cold Storage Co.. In the absence, however, of any provision
to the contrary, the rights of the shareholders are equal. Where the shares are
of unequal amounts the surplus assets must be distributed rateably according to
the nominal amount of the shares, unless some provision to the contrary is to
be found in the memorandum or articles: In re Wakefield Rolling Stock Co.; Birch v. Cropper.
The judgment in the case of Will v. United
Lankel Plantations Co. did
not deal with the distribution of the assets of the company but only with the
right to dividends, and the House of Lords came to the conclusion that, on the
construction of the by-law, a contract or a bargain for a 10 per cent. dividend
was complete as to dividends, and that the preferred shareholders were not
entitled to share in the dividends in excess of that amount. The only point in
dispute was one of construction, and as Viscount Haldane said,
construction must always depend on the
terms of the particular instrument
and
our primary guide must be the language of
the documents we have before us.
Lord Atkinson said:
It is said that the earlier part of the
resolution by making him a shareholder gives him a right to some additional
dividend on distribution. It does not appear to me to be at all capable of that
construction.
In that same case, where only the right to dividends
was discussed before the House of Lords, Lord Justice Farwell had said in the
Court of Appeal:—
To my mind the considerations affecting
capital and dividend are entirely different. The preference given to capital is
in the winding-up, and the preference claimed to be given to dividend here is
in a going concern; and I do not think that you can reason from what will
happen to capital in a winding-up to what ought to happen to dividend while the
company is a going concern.
In In re National Telephone Company much turned on the wording of some of the
preferred share provisions.
[Page 198]
The first preferred stock was entitled to a
cumulative dividend of 6 per cent. per annum and no more, and to a preferential
payment of the amount paid up out of the assets of the company in the event of
the company being wound up
in priority to any payment in respect of
the ordinary shares of the company but to no other participation in profits.
The second preferred shares were given the right
to participate rateably in the surplus profits with the common shareholders,
and it was provided that in winding up
the surplus assets shall be applied in the
first place in repaying the holders of the original preference shares, the full
amount paid up thereon, and subject thereto in repaying to the holders of the
second preference shares the full amount paid up thereon in priority to any
payment in respect of the ordinary shares of the company.
Next, the surplus assets were to be applied in
repaying to the holders of the third preference non-cumulative shares the full
amount paid up thereon, and the fourth preferred was in the event of winding up
to
rank for repayment of the full amount paid
up thereon, together with a bonus of 5 per cent. in priority to the common
stock.
The appellants have relied upon this judgment
and particularly upon the following passage of Mr. Justice Sargant:—
It appears to me that the weight of
authority is in favour of the view that, either with regard to dividend or with
regard to the rights in a winding-up, the express gift or attachment of
preferential rights to preference shares, on their creation, is prima facie a
definition of the whole of their rights in that respect, and negatives any
further or other right to which, but for the specified rights, they would have
been entitled.
But this expression of opinion of Mr. Justice
Sargant was later overruled in two cases.
In In re Fraser & Chalmers Limited Mr. Justice Astbury, after considering the
Espuela and National
Telephone cases
as well as the Will case,
expressed his preference for the decision of Mr. Justice Swinfen Eady in favour
of the preference shareholders.
At page 120, Mr. Justice Astbury says:—
All shareholders are entitled to equal
treatment unless and to the extent that their rights in this respect are
modified by the contract under which they hold their shares.
[Page 199]
And at page 121, he further adds:—
It seems to me impossible to say that,
because it is provided that certain debts of the company shall be paid in a
winding-up in a particular order, a fund remaining after doing so which is not
expressly, nor by implication, referred to at all, and which forms part of the
general assets of the company, shall be divided between some, to the exclusion
of other shareholders.
The ordinary shareholders contend that the
express rights given to the preference shareholders by these resolutions
contain the whole of their rights as such. It is clear however that they do
not. They have voting and other rights as corporators, and I see no reason for
construing this contract as depriving them of a right to share in an ultimate
surplus that is not referred to, any more than as depriving them of voting and
other rights of shareholders which are in the same position.
The other case which overruled the decision in
the National Telephone Company case,
is the case of Anglo-French Music Company Limited v. Nicoll. In that case the preferred shareholders
were entitled to a fixed 7 per cent. cumulative dividend with right to
repayment of capital before any dividend is paid or capital repaid to the
holders of ordinary shares, with right to a further participation in dividends.
At page 391 Mr. Justice Eve says:—
The point I have to consider is this: does
the provision in the bargain providing for what is to happen in the event of
the assets being insufficient to repay all the capital operate to preclude the
preference shareholders, in the event of the assets being more than sufficient
to repay all the capital, from participating in the excess? I see no reason why
it should do so * * * I do not think it is accurate to say that the whole
bargain between the two classes of shareholders is to be found in the
memorandum, except to this extent, that the rights of each class are thereby
finally determined in respect of all matters expressly or by necessary
implication therein dealt with.
In the present case the respective rights
of the two classes to the profits of the company are expressly dealt with—so
also are the rights in the event of an insufficiency of assets to repay all the
capital in a winding-up—but I cannot see anything which deals either expressly
or by necessary implication with the rights of either class in the event of the
assets being more than sufficient to repay the capital.
Mr. Justice Eve who gave the judgment in the
case of Anglo-French Music Company Limited v. Nicoll,
made a further similar pronouncement in In re Madame Tussaud & Sons,
Limited. In
that case His Lordship held that, according to the constitution of the company,
the prima facie presumption in favour of equality of distribution
amongst all the shareholders ought to obtain, and the surplus
[Page 200]
assets were distributed amongst all the
shareholders pro rata, in proportion to the amount paid up on their
shares.
The appellant relied on the Collaroy Company,
Limited v. Giffard case. The
company's memorandum after stating that the capital was 300,000 divided into
10,000 preference shares of 10 each and 20,000 ordinary shares of 10 each,
declared that such preference shares should confer "the right" to a
fixed cumulative preferential dividend at the rate of 5 per cent. per annum on
the capital paid up thereon, and "shall rank" both as regards
dividends and capital in priority to the ordinary shares. It was held that the
memorandum and article contained an exhaustive delimitation of "the
right" of the preference shareholders, and that in the event of a
winding-up they would be, entitled to a return of their capital, but not to
participate in surplus assets. This judgment was given by Mr. Justice Astbury
who had previously given the judgment in the Fraser & Chalmers case. It would seem that both decisions are
contradictory, but a careful reading of the judgment leads me to a different
conclusion. The learned Justice stated in the first part of his judgment a
proposition that cannot in his mind be questioned, and it is that:—
The annexation to preference shares of a
right to receive back their capital in a winding-up in priority to the ordinary
shares does not prima facie exclude the preference shareholders from
participation in the ultimate surplus assets if any.
In support of this proposition Mr. Justice
Astbury cites the Espuela case, as
well as Fraser & Chalmers Limited (2) and Anglo-French Music cases. He further states that a provision may
be expressed in such a manner and in such a context that according to its true
construction, it does exclude preference shareholders from such a
participation, and the question that he had to decide was as to whether the
contract in the particular case he had to determine did exclude the preference
shareholders. On the construction of the contract he reached the conclusion
that the preference shareholders were excluded, and he seems to base his
judgment on a very narrow ground, namely, that the preference shareholders were
given "the right", to
[Page 201]
repayment of capital, and that the use of the
word "the" was limitative and produced a very different result from
the use of such words as a "right".
In the Metcalfe & Sons Limited case the Court of Appeal affirmed the decision
of Mr. Justice Eve who disagreed with the conclusion arrived at by Mr. Justice
Astbury in the Collaroy Company, Limited v. Giffard case, and Lord Hanworth says at page 158:
Personally I find myself inclined to agree
with Eve J. in not being able to follow the distinction between the Fraser
& Chalmers Limited, and
the Collaroy case (2).
And at the same page he also states:—
Therefore, looking at the authorities as a
whole, I come to the conclusion that there must be in respect of this balance
of surplus assets a parity between all the shareholders. I cannot find anything
in the present case which either expressly or impliedly is sufficient to
displace the rights which belong to the preference shareholders equally with
the ordinary shareholders, and the rule of parity among shareholders must
therefore prevail.
In the John Dry Steam Tugs Limited case the principle, that there being nothing in
the articles to modify or exclude the normal right of the preference
shareholders to share in the distribution of the surplus assets, was upheld and
the preference shareholders were declared to be entitled to rank pari passu with
the ordinary shareholders in the distribution of the assets of the company.
Another case reported in England is Re W. Foster & Sons
Limited. It
was there held that the question whether a liquidator ought to divide and
distribute the surplus assets amongst the holders of the ordinary shares alone,
or amongst the holders of the preference shares and the holders of the ordinary
shares pari passu, was governed by the decision In re William
Metcalfe & Sons Limited
The English Weekly Notes of May 27th, 1944, at page 143 refers to a decision
of Mr. Justice Cohen in In re Wood, Skinner & Company Limited, in which the preferred shareholders were
entitled to rank as regards dividends and capital in priority to the ordinary
shares. It was held that all shareholders are entitled to
[Page 202]
equal treatment unless and to the extent that
their rights are modified by the contract under which they held their shares.
Two other cases were cited by the appellant, but
nothing in the reasons for judgment can be found which is useful to help us in
the determination of the case at bar.
The first one is the case of Steel of Canada
Limited v. Ramsay. In
that case the preferred shareholders were entitled to a fixed cumulative
preferential 7 per cent. dividend, and were further entitled to share equally
with the common stock in additional profits after the holders of the ordinary
shares should have received dividends equal to those paid on the preferred
shares. The question was whether under this special clause the common
shareholders were entitled to be equalized with the preferred shareholders only
in respect of the current year or as regards other years. The judgment of the
Privy Council did not purport to deal with the division of surplus assets, but
was only dealing with the right to additional dividends.
The other case is Holmested et al. v. Alberta
Pacific Grain Company Limited. In
the by-law of the company it was provided that the cumulative preferred shares
would rank both as regards dividends and return of capital, in priority to all
common shares in the capital stock of the company, but did not confer any
further rights to participate in profits or assets. The preferred shareholders
commenced an action for a declaration that they were entitled to rank equally
with the holders of common shares on the distribution of the proceeds of the
sale of the company's assets and business. It was argued that the by-law
creating the said preferred shares, in so far as it purported to limit or
restrict the right of the preferred shares to participate in the
distribution of the profits or assets of the company was ultra vires of
the Grain Company, because section 47, as it read at that time (now amended by
14-15 Geo. V, chap. 33, sec. 16), authorized only priorities but not
restrictions. The Court came to the conclusion that the by-law was not
invalid and that the restriction was intra vires of the powers of the
[Page 203]
company. The decision in that case does not
apply to the case which has been submitted to this Court. In the Alberta
Pacific Grain case there
was a restriction attached to the preference shares, but such restriction does
not exist in the case which is submitted to this Court.
From all these numerous judicial pronouncements,
and from a careful reading of the Company's Act, I believe that one may
rightly gather that the rights of all classes of shareholders are on a basis of
equality, unless they have been modified by the by-laws or the letters patent
of the company, and, that the right to the return of invested capital, and the
right to share in surplus assets are quite different and distinct matters.
Holders of preference stock are shareholders
within the meaning of the Act, and they possess in all respects the rights, and
are subject to the same liabilities as the other classes of shareholders.
Section 49 on this point is quite clear and unambiguous. It is in virtue of
this section that the ordinary rights of preference shareholders are created.
These rights put them on an equal footing with the common shareholders as to
the sharing in surplus assets.
It is in the letters patent and the by-laws of
the company that have to be found the priorities that may be attached to
preference shares, and which are clearly authorized by section 47. It may of
course happen that these priorities are exhaustive of the rights of the
preference shareholders, and therefore negative any additional rights, or it
may be also that they create additional rights which coexist with the original
rights inherent to all classes of shareholders. But in order to determine the
true meaning and the legal effect of these preference and priority clauses, one
must necessarily look at the creating clauses in order to find if there is or
not an express or implied condition, which limits or adds to the ordinary
rights of the shareholders. It is a mere question of construction of these
clauses, which form part of the contract under which the shareholders hold
their shares.
I entirely agree with the Court of King's Bench
that the provisions of the by-laws of the company do not expressly or by
necessary implication, limit the rights of the holders of preference shares.
They do create priorities, but
[Page 204]
these priorities are in addition to the existing
rights, and are not a declaration of all the rights of this class of
shareholders. These priorities consist in a right for the preference
shareholders to be repaid of the invested capital at par, together with any
dividends accrued and remaining unpaid, but do not affect their right to share
in the profits. For the sharing in the profits, which is the fundamental right
to all shareholders, is a matter entirely different from the priority given to
the preference shareholder which is the additional privilege given to him.
In the present case the priority to repayment
on any division of the assets of the
company to the extent of its repayment in full at par together with any
dividends thereon then accrued due and remaining unpaid
is a definition of the existing priority as to
the sharing of assets, and cannot, I believe, be construed as a bar or a
limitation to any further rights.
For these reasons, I come to the conclusion that
the preference shareholders have a priority to be repaid at par, and that they
are further entitled to share pari passu in the distribution of the
assets of the company with the common shareholders, after the latter have
received payment at par.
The main appeal should therefore be dismissed.
It is the contention of the cross-appellant that
the stipulation for payment of cumulative dividends at the rate of 7 per cent.
per annum for each and every year, in preference and priority to any payment of
dividends on common stock, was not limitative in its terms and that in the
event of the common shareholders receiving, in any year, a dividend exceeding
the said rate of 7 per cent. per annum, then, the preferred shareholders were
entitled to be paid on a basis of equality.
The preference shareholders have received each
year the stipulated dividends of 7 per cent. until the winding-up of the
company, and the common shareholders until 1931 have received dividends lower
than 7 per cent per year. However, from 1931 to 1942, the directors have
declared for the benefit of the common shareholders an annual dividend of 8 per
cent. and in 1943 this dividend was 49½ per cent. The preference shareholders
ask for equal treatment in
[Page 205]
the matters of dividends. I cannot agree with
this proposition, and it seems that the cases cited by the respondents on the
main appeal defeat this very contention.
The question, I think, has been settled by the
case of Will v. United Lanket Plantations Company, Limited. In that case the Court of Appeal decided that, in the distribution of
profits, holders of the preference shares were not entitled to anything more
than a 10 per cent. dividend, and in the House of Lords (1) Viscount Haldane
said:—
Moreover, I think that when you find—as you
do find here—the word "dividend" used in the way in which the
expression is used in the resolution and defined to be a "cumulative
preferential dividend" you have something so definitely pointed to as to
suggest that it contains the whole of what the shareholder is to look to from
the company.
The right to dividend, while the company is a
going concern and the right to capital and surplus assets in the winding-up,
are quite distinct. In the present case, the right of preference shareholders
is to be paid an annual dividend of 7 per cent. and they have a priority for
dividends accrued due and remaining unpaid. These dividends have been paid, and
the preference shareholders, as to dividends, have therefore received all that
they are legally entitled to.
The by-laws give priority to the preference
shareholders to obtain reimbursement of their invested capital, in addition to
their right to share in the division of assets, but a similar privilege as to
dividends is not given. In the latter case, the privilege is only to assure the
payment of a dividend of 7 per cent. which has been declared, and which at the
time of the winding-up accrued and remained unpaid. I should dismiss the
cross-appeal.
As agreed, all costs of the parties will be paid
by the liquidator out of the mass of the estate.
Rand J.—This is a controversy between holders of common and preferred
shares of the Porto Rico Power Company Limited in liquidation. Two claims are
made, one by each group. During the company's business life, the preferred
shareholders have received more than one-half of the total dividends declared:
but they claim that where in any year a dividend equal to that received by
[Page 206]
them is paid to the common shareholders, any
excess in that year must be shared equally by both classes. On the other hand,
the common shareholders contend that when the total amount of subscribed
capital has been repaid, the remaining or surplus assets belong exclusively to
them.
The provision of the supplementary letters
patent authorizing the issue of the preference stock was in these words:
The said increased capital stock of
$500,000 shall be preference stock entitled out of any and all surplus net
earnings whenever ascertained to cumulative dividends at the rate of 7 per cent
per annum for each and every year in preference and priority to any payment of
dividends on common stock, and further entitled to priority on any division of
the assets of the company to the extent of its repayment in full at par
together with any dividends thereon then accrued, due and remaining unpaid.
This authority was exercised under the Dominion Companies'
Act, R.S.C. 1906, chapter 79, sections 47 and 49 of which were at the time
as follows:
47. The directors of the company may make
by-laws for creating and issuing any part of the capital stock as preference
stock, giving the same such preference and priority, as respects dividends and
in any other respect, over ordinary stock as by such by-laws declared.
2. Such by-laws may provide that the
holders of shares of such preference stock shall have the right to select a
certain stated proportion of the board of directors, or may give them such
other control over the affairs of the company as is considered expedient.
* * *
49. Holders of shares of such preference
stock shall be shareholders within the meaning of this Part, and shall in all
respects possess the rights and be subject to the liabilities of shareholders
within the meaning of this Part: Provided that in respect of dividends, and in
any other respect declared by by-laws as authorized by this Part, they shall,
as against the ordinary shareholders, be entitled to the preferences and rights
given by such by-law.
I see no substance in the claim of the preferred
shareholders that their equality in dividends must be referred to each year's
distribution. On Mr. Geoffrion's basic assumption that all shareholders are
equal with certain additional rights annexed to the preferred shares, his
clients, having received substantially more in dividends than the common
shareholders, are still holding an advantage. The reasoning in Steel Company
of Canada Limited v. Ramsay,
although there it was expressly provided
[Page 207]
that participation of the preferred shareholders
in addition to the fixed rate of 7 per cent should be only when the ordinary
holders should have received "dividends equal to those paid on the
preferred shares", applies even in the absence of such a stipulation.
Certainly that would seem inescapable under the principle of section 49.
The language of the letters patent
the said increased capital stock * * *
shall be preference stock entitled out of any and all surplus net earnings
whenever ascertained to cumulative dividends * * * in preference and priority
to any payment of dividends on common stock
is claimed by the appellants to limit the
preference holders so far as dividends go to the rate of 7 per cent provided.
What is sometimes called a "preferential dividend" is simply a
dividend with certain preferential incidents. The latter in this case are the
fixed rate, the accumulation and the priority. What the resolution deals with
however is the entire right itself to dividend or to participation in profits,
with those incidents. Whether this commutation of the right rather than merely
declaring preferential additions is a violation of section 49 it is not, in
view of the dividend inequality, necessary to consider, but the particular
language used will be seen to be relevant to the second claim, that of the
holders of ordinary shares in the distribution of assets.
The provision in relation to that is quite
different in effect. Its subject does not purport to be the whole right to
share in assets; it deals only with a preferential incident, the right of
priority and priority only to the extent "of its repayment" meaning
the repayment of the capital paid in. The funds which we are considering are
surplus assets which were not paid in, and could not in any proper sense be
said to be repaid.
It is argued that you cannot have a share in the
abstract, that it is only to issued shares that incidents attach, and that
these arise only at the moment of issue. But the determination of
"preferential" rights involves an interpretation of qualifying
language, and before that is possible we must make assumptions of the
underlying
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substantive matter. The preference provision
would be meaningless in isolation, and its interpretation depends upon what we
attach to the concept of a share.
As declared by section 49, the holder of the
preferred share is none the less a shareholder because he has certain
advantages over ordinary shareholders: he places his property at the
fundamental risk; but the interpretation of the constituting provision will
depend upon whether we superimpose it upon the ordinary notion of share with
its incidents of voting, participating in profits and in assets when the
venture is over; or upon a skeleton of that concept such as a fractional
interest in a fund to which the resolution adds all significant
characteristics. Here again the essential fact obtrudes itself that all members
are of a common group, and I think the rule unassailable that postulates the
common and ordinary rights of shareholders as the underlying basis for the
interpretation: In re Wm. Metcalfe & Sons Ltd.. The question then is simply one of
construction: how far have those rights been clearly taken away? Here, in
relation to surplus assets, the right is left intact and taking that view, I do
not, again as in the other branch of the argument, find it necessary to
consider whether section 49 would have prevented any restriction of that right.
I would therefore dismiss both the appeal and
the cross-appeal with costs to be paid by the liquidator as agreed.
Appeal and cross-appeal dismissed, costs
to be paid by liquidator as agreed.
Solicitors for the appellants: Campbell,
Weldon, Kerry & Rinfret.
Solicitor for the respondents McMaster
University et al. A. S. Bruneau.
Solicitors for the Liquidator respondent:
Stairs, Dixon, Claxton, Senécal
& Lynch-Staunton.
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