ASSIGNMENT
1. Paul Bunyan is the owner of noncumulative 8 percent preferred stock in the Broadview Corporation, which had no earnings or profits in 2015. In 2016, the corporation had large profits and a surplus from which it might properly have declared dividends. The directors refused to do so, however, instead using the surplus to purchase goods necessary for the corporation’s expanding business. The corporation earned a small profit in 2017. The directors at the end of 2017 declared a 10 percent dividend on the common stock and an 8 percent dividend on the preferred stock without paying preferred dividends for 2016.
a. Is Bunyan entitled to dividends for 2015? For 2016? Explain.
b. Is Bunyan entitled to a dividend of 10 percent rather than 8 percent in 2017? Explain.
2. Alpha Corporation has outstanding four hundred shares of $100 par value common stock, which has been issued and sold at $105 per share for a total of $42,000. Alpha is incorporated in State X, which has adopted the earned surplus test for all distributions. At a time when the assets of the corporation amount to $65,000 and the liabilities to creditors total $10,000, the directors learn that Rachel, who holds one hundred of the four hundred shares of stock, is planning to sell her shares on the open market for $10,500. Believing that this will not be in the best interest of the corporation, the directors enter into an agreement with Rachel to buy the shares from her for $10,500. About six months later, when the assets of the corporation have decreased to $50,000 and its liabilities, not including its liability to Rachel, have increased to $20,000, the directors use $10,000 to pay a dividend to all of the shareholders. The corporation later becomes insolvent.
a. Does Rachel have any liability to the corporation or its creditors in connection with the reacquisition by the corporation of the one hundred shares? Explain.
b. Was the payment of the $10,000 dividend proper? Why or why not?
3. Almega Corporation, organized under the laws of State S, has outstanding twenty thousand shares of $100 par value nonvoting preferred stock calling for noncumulative dividends of $5 per year; ten thousand shares of voting preferred stock with $50 par value, calling for cumulative dividends of $2.50 per year; and ten thousand shares of no par common stock. State S has adopted the earned surplus test for all distributions. As of the end of 2012, the corporation had no earned surplus. In 2013, the corporation had net earnings of $170,000; in 2014, $135,000; in 2015, $60,000; in 2016, $210,000; and in 2017, $120,000. The board of directors passed over all dividends during the four years from 2013 through 2016, because the company needed working capital for expansion purposes. In 2017, however, the directors declared on the noncumulative preferred shares a dividend of $5 per share, on the cumulative preferred stock a dividend of $12.50 per share, and on the common stock a dividend of $30 per share. The board submitted its declaration to the voting shareholders, and they ratified it. Before the dividends were paid, Payne, the record holder of five hundred shares of the noncumulative preferred stock, brought an appropriate action to restrain any payment to the cumulative preferred or common shareholders until the company paid to noncumulative preferred shareholders a full dividend for the period from 2013 to 2016. Decision? What is the maximum lawful dividend that may be paid to the owner of each share of common stock?
4. Sayre learned that Adams, Boone, and Chase were planning to form a corporation for the purpose of manufacturing and marketing a line of novelties to wholesale outlets. Sayre had patented a self-locking gas tank cap but lacked the financial backing to market it profitably. He negotiated with Adams, Boone, and Chase, who agreed to purchase the patent rights for $5,000 in cash and two hundred shares of $100 par value preferred stock in a corporation to be formed. The corporation was formed and Sayre’s stock issued to him, but the corporation has refused to make the cash payment. It has also refused to declare dividends, although the business has been very profitable because of Sayre’s patent and has a substantial earned surplus with a large cash balance on hand. It is selling the remainder of the originally authorized issue of preferred shares, ignoring Sayre’s demand to purchase a proportionate number of these shares. What are Sayre’s rights, if any?
5. Wood, the receiver of Stanton Oil Company, sued Stanton’s shareholders to recover dividends paid to them for three years, claiming that at the time these dividends were declared, Stanton was in fact insolvent. Wood did not allege that the present creditors were also creditors when the dividends were paid. Were the dividends wrongfully paid? Explain
