A mining company had set aside and invested, from the proceeds of working its mines, large sums from time to time, to an amount which finally exceeded its capital. By concerted, though individual action, the shareholders, at the recommendation of the directors, then sold their shares at a high premium, under a contract with the buyer by which certain specified assets representing part of this reserved surplus, should be "reserved out of the interests in said property passing to the purchasers" by reason of the transfers of the shares, and the former shareholders should "receive the benefits of said reserved assets." Provision was then made by the directors for turning these assets into cash, under the management of trustees appointed for the purpose, and a dividend "of the said assets" payable by these trustees at a future time was voted, and afterwards paid. Held that this transaction was substantially a liquidation of the affairs of the company as they had been conducted under the old management; that those receiving the dividends took them not as shareholders but because they had formerly been shareholders; and therefore, as between a remainderman and the holder of a life interest in shares thus sold, the moneys divided were capital and not income.
BALDWIN, J.
The Pennsylvania Coal Company was engaged in the business of mining coal. Shares in such company are a wasting investment. There are two modes of conducting its affairs. The capital invested in a mine may be gradually paid back to the shareholders in the shape of dividends from the proceeds of working it; or part of these proceeds may be retained, for reinvestment, from time to time, in the purchase of new mines to take the place of the old ones as they become exhausted or unprofitable. Morawetz on Priv. Corp. §§ 442, 830.
The Pennsylvania Coal Company adopted the latter policy. It established a large "Coal Land Renewal Fund" and also put aside a "Surplus" fund, each of which, in 1901, was nearly or quite as large as its capital stock.
The testator contemplated the possibility of a reorganization of the company, and made a certain provision for that contingency. The only mode of reorganization which he had in mind was the creation of one or more companies to succeed to its business and property. There is another mode, by which the corporate organization remains externally the same, but the ownership and control is changed from within, by a transfer of the shares to a new set of shareholders, through their individual but concerted action. Such action was taken by the shareholders of the Pennsylvania Coal Company, and the resolution adopted by the directors was in furtherance of it. The manifest purpose was to enable the purchasers of the stock to continue the business of the corporation upon the same basis of nominal capitalization, but without participation in a considerable portion of the profits previously accumulated. Woodbridge v. Pratt Whitney Co., 69 Conn. 304, 330. There was, in effect, a liquidation of the affairs of the company, as they had been conducted under the old management.
The dividend declared from these accumulated profits was not a stock dividend. That mode of distribution was not possible; for the object of the whole transaction was to cut off the old shareholders from any future participation in the concerns of the company. The provisions of the Public Acts of 1889, p. 41, Chap. 72, therefore do not apply.
Nor was it a cash dividend. It was in terms one consisting of certain specified assets. While the cash which might be on hand at a certain future date was included, its amount was not and could not be stated. The other assets were to be converted into cash; but this was to be effected by trustees, under an active trust which might endure for a considerable period of time. These trustees were substantially in the position of liquidators. The sums which they might ultimately realize and pay over were uncertain. The beneficiaries of the trust, to whom the payments were to be made, were to receive them not as shareholders in the company, but because they had formerly been shareholders.
The $10,000 received by the society's committee is therefore to be regarded as a part of the accumulated property or "floating capital" of the corporation distributed in liquidation, and belongs wholly to the capital of the trust fund. Gifford v. Thompson, 115 Mass. 478; D'Ooge v. Leeds, 176 id. 558, 57 Northeastern Rep. 1025.
The Superior Court is so advised.