PREFERENTIAL RIGHTS OF

SHAREHOLDERS.

A re

Questions of some nicety occasionally arise in ascertaining the rights of the respective classes of shareholders in a company. The imporant point practically is to see that in drawing the constitution of the company the position and privileges of the various classes be clearly defined. If this is done it will save much trouble and possible recrimination afterwards. cent decision here,1 while it does not introduce any novel principle into company law, reaffirms some points of much practical moment. As in all such case the decision expended on the construction of certain clauses in the articles but principles of interpretation emerged which are of general importance.

The case was brought for the purpose of settling certain questions which had arisen between the "A" Preference and the "B" Preference shareholders. It seems seems the company some years ago was in financial difficulties and its creditors agreed to scheme whereby they compounded their claims for "A" Preference shares and the original preference shares were cut down in value and became "B" Preference. In carrying out this arrangement a special resolution was passed that out of the profits of the company after making due provision for depreciation and reserve fund the "A" Preference shareholders should receive as a first charge thereon a cumulative preferential dividend at the rate of 8 per cent, and that the holders of the "B" Preference should receive as a second and postponed charge a preferential dividend at the rate of 5 per cent.

For some years after this re-organization the revenue of the company did little more than meet current expenses. For some

(1) Ferguson & Forrester, Ld., v. Buchanan, 1920, 1 S. L. T. 85.

time no dividend was paid to the "A" shareholders and since 1904 no dividend was paid to the "B" shareholders. The arrears of dividend on the "A" preference shares have now however been paid up to date and there remained a substantial balance after providing for depreciation and reserve at the credit of profit and loss account available for division among the shareholders. The question then arose and this was the point on which the opinion of the Court was sought, whether the "B" Preference shareholders were entitled to receive out of the distributable profits in any year not only a preferential dividend of 5 per cent for that year but also a similar dividend for each and every preceding year in which the distributable profits had not sufficed for the payment of a dividend on the "B" Preference shares in preference to the rights of the ordinary shareholders and other postponed interests.

In dealing with this question the Court in the first place pointed out that the words of the special resolution referred to provided for payment out of the profits of the company and reminded the parties of the well marked distinction in company law between providing that dividends are to be paid out of "the profits of the company" and to be paid "out of the profits of each year" of the company. In this case they could not read the words of the resolution "out of the profits of the company" as meaning anything else than that the profits there referred to were the whole profits of the company.

The argument was next used as against the B Shareholders that as regards the holders of the A preference shares their dividend was stated to be a "cumulative preferential dividend" whereas the word "cumulative" was not related as regards the preference dividend of the B preference shareholders. The relation of this

point to the way in which the profits were defined in the special resolution was shown to be very material. According to the definition in Stroud's Dictionary of Law Terms "a preferred dividend is prima facie cumulative so that the failure of profits wherewith to pay it in any one year will be made good out of any profits that may be made in a subsequent year;" and Palmer in his Company Law points out that the use of the word cumulative prevents doubt. But on the construction of the resolution before them in which that word was omitted as regards the "B" shares, the Court held no hesitation in finding that a preference dividend out of profits implies a dividend out of the whole profits and not out of the profits of an particular year thus effecting a "cumulative preference." "If support for this position were needed it will be found in the case of Foster v. Coles. There the dividend was originally declared to be a cumulative preference dividend. In a subsequent amended set of articles the word "cumulative" was struck out and it was simply left to be a preference dividend. But it was held that though the change had been effected it made no difference as regards the cumulative character of the right for in any event, as the judge in that case observed, the preference share holders were entitled to have any deficiency in their dividends made up out of the profits of the subsequent years. And again there is the case of Patrick Hillhead and Maryhill Gas Co. Ld. v. Taylor.3 There was a distinction taken there between certain of the dividends in respect that one of them was declared to be a charge for dividend for the year and "all arrears" whereas these words did not occur as regards certain of the other dividends; it was urged therefore that dividends where the words did not occur were not to be cumulative. But the Lord Presi

dent there said this: "The fourth rule is that 'in payment to the preferential shareholders if any of their dividends according to their respective priority.'" With regard to that rule it is said that the words 'all arrears' which occur in rule 1 are omitted and it is therefore contended that the directors are not entitled to pay arrears of these dividends. I think that it is far too strict, I may say too fanciful a construction of the rule. If the rights of preference shareholders are such as I have stated them to be I cannot think they can be cut off by any such construction of the articles of association." And accordingly the omission of these words in regard to the dividend to one set of shares was not held sufficient to deprive them of the preferential character so as to make them non-cumulative.

In short the use of the terms preferential and "cumulative preferential" in describing dividends is not conclusive, the reality of the matter has to be looked at and the reality of it is in the manner in which a preference dividend is paid-whether out of the profits of each year or out of the profits of the company. The Lord Justice Clerk in the case we are dealing with tersely stated the position in the following words: "Reading the clause as a whole it seems to me that the A Preference shareholders and the B Preference shareholders are given a charge on the profits which entitles them to get out of the profits whether they were for the year actually in question or for any subsequent year that would make their dividends preferential dividends in the ordinary sense of the term and that to my mind means a preferential cumulative dividend. I think if there had been no other word than preferential that that would involve that it was cumulative."

Glasgow, Scotland.

DONALD MACKAY.

JUDICIAL DISCRETION.

The fundamental rules respecting judicial discretion to be exercised by trial Courts have been torn to pieces and thrown to the winds. Repeated attempts to define the term "judicial discretion" have led to almost as much confusion as similar attempts to define the term "reasonable doubt." Does there never come a stage in such refinements when further definition and division is, at least, ill-advised?

Lord Coke defined judicial discretion as the "science or understanding to discern between falsity and truth, between wrong and right, between shadow and substance, between equity and colorable glosses and pretenses." He probably did not obscure the matter when he further added that discretion of Court was an "ability to discern by the right line of law and not by the crooked cord of private opinion." When the Colorado Supreme Court,1 following following many others of high repute, and particularly California, defined it as "an impartial discretion, guided and controlled in its exercise by fixed legal principles," it certainly skidded a trifle. Such a discretion may be so "guided," but if it may also be so "controlled" there is no discretion. The attempt to reason away this principle seems to be prompted by that view of its exercise expressed by the Supreme Court of Alabama when that Court said, "The discretion of a judge is the law of tyrants. It is always unknown. It is different in different men. It is casual and depends upon constitution and passion. In the best it is at times capricious. In the worst it is every vice, folly and madness to which human nature is liable." Long after, the same Court sought to soften the harshness of that language by attempting to distinguish between that kind of discretion which is vested in a jury and that kind which is vested in a Court, and succeeded only in making itself

ridiculous by the absurdity of its reasoning. New York has tried to draw a line between an absolute discretion in a trial Court and that which is governed by fixed legal rules, and it must be admitted that in this attempt New York is, if anything, a little less logical than Alabama. The looseness with which language is used in these definitions is well illustrated by the attempt of the Supreme Court of Nebraska to point out that certain matters are "largely within the discretion of the Court." What guide such a statement would furnish for a trial Court it is difficult to conceive. Is it not after all true that Senator Tracy best sizes up the situation when he says that "What is to be understood by a discretion that is governed by fixed legal principles is, I must be allowed to say, something that I have. not found satisfactorily explained, and what it is not easy for me to comprehend," and did not the Supreme Court of the United States lay down the correct rule when it said that "Whenever a statute gives a discretionary power to any person to be exercised by him upon his own opinion of certain facts, it is a sound rule of construction that the statute constitutes him the sole and conclusive judge of the existence of those facts?"8 The entire difficulty as to this subject is due to a misconception on the part of the people of the functions of a trial Court and an unconscious eagerness on the part of appellate Courts to exercise their own discretion where no discretion is

tenderness of his own conscience disappears in view of the rulings in some of the cases wherein it has been determined by appellate Courts that, although the chancellor found that his conscience was shocked, there was nothing to shock it; or where he determined that it was not shocked that it ought to have been.

I come now to the particular application of a rule of judicial discretion which I desire to point out, and the strange inconsistency in the law which has arisen by reason thereof. That is, the discretion which has been vested in trial judges to set aside the verdicts of juries which do not meet with their approval; in fact, the order which has been issued to them to do so in

such cases, in the face of the fact that they have been deprived of any right to control. those verdicts by the slightest expression of opinion concerning the facts upon which they are based.

Where the English common law rule and the rule of the federal Courts is followed. that the law is for the Court and the facts for the jury, under the guidance of the Court, and where, so long as the jury's province is plainly pointed out to them in the instructions, no mere expression of opinion on the evidence by the presiding judge is held to be error, little confusion results. Under such conditions judges expressed opinions when such expressions were necessary for the guidance of jurors, or refrained from doing so when they seemed unnecessary. But with the attempts by judicial construction, in some of the states where jurors are by constitutional provision made the judges of both the law and the facts, to confine them to the law as laid down by the Court in instructions, or tell them just what weight they should give to such instructions in determining what the law is, and constitutional or statutory enactments under which the slightest suggestion of opinion on the part of the trial judge constitutes fatal error, confusion doubly confounded has come upon us, and the boundary line between the province of

Court and the province of the jury has finally been reduced to so shadowy a line that its location is lost.

Attempts have been made in many of the states to right the rank injustice which often follows the verdict of a jury, where the judge is prohibited the expression of an opinion upon the facts, by authorizing the trial Court to substitute its own judgment for that of the jury, upon a motion for a new trial. The logical rule on this subject seems once to have been laid down by Chief Justice Brewer in this language: "When the evidence is nearly balanced or is such that different minds would naturally and fairly come to different conclusions there-. on, the trial judge has no right to disturb. the findings of the jury," but in the same opinion Justice Brewer sweeps his conclusion entirely aside by saying that when the judgment of the trial judge tells him. that the verdict is wrong, "that, whether from mistake or prejudice or other cause, the jury have erred and found against the fair preponderance of the evidence, then no duty is more imperative than that of setting aside the verdict." In other words, up to the point where the cause is finally submitted to a jury, the law is so jealous of the jury's prerogatives and so suspicious of the fairness and ability of the trial judge that he may not even suggest to the jury that he has an opinion upon the facts, but after jurors, without a ray of light from the bench, have undergone the perspiring grind of protracted debate, the strenuous struggle of a forty-eight-hour deliberation, taking desperate chances on a final disagreement, with the necessary result of a long and expensive second trial, and have finally returned such a verdict as might reasonably be expected under such circumstances, "no duty is more imperative" upon the trial judge than to set that verdict aside if he

(9) K. P. Ry. v. Kinkle, 17 Kas. 145.