28 
STOCK DIVIDENDS 
the contrary, his interest pertains not to any part, divisible or indivisible, but 
to the entire assets, business, and affairs of the company. Nor is it the interest 
of an owner in the assets themselves, sinee the corporation has full title, legal 
and equitable, to the whole. The stockholder has the right to have the assets 
employed in the enterprise, with the incidental rights mentioned; but, as stoek- 
holder, he has no right to withdraw, only the right to persist, subject to the risks 
of the enterprise, and looking only to dividends for his return. If he desires to 
dissociate himself from the company he can do so only by disposing of his stock. 
For bookkeeping purposes, the company acknowledges a liability in form to 
the stoekholders-equivalent to the aggregate par value of their stock, evidenced 
by a “capital-stock account.” If profits have been made and not divided they 
create additional bookkeeping liabilities under the head of “profit and loss,” 
“undivided profits,” “surplus account,” or the like. None of these, however, 
gives to the stockholders as a body, much less to any one of them, either a claim 
against the going concern for any particular sum of money, or a right to any 
particular portion of the assets or any share in them unless or until the directors 
conclude that dividends shall be made and a part of the company’s assets segre- 
gated from the common fund for the purpose. The dividend normally is pay- 
able in money, under exceptional circumstances in some other divisible prop- 
erty; and when so paid, then only (excluding, of course, a possible advantageous 
sale of his stock or winding up of the company) does the stockholder realize a 
profit or gain which becomes his separate property, and thus derive income 
from the capital that he or his predecessor has invested. 
In the present case the corporation had surplus and undivided profits invested 
in plant property and business, and required for the purposes of the corporation, 
amounting to about $45,000,000, in addition to outstanding capital stock of 
$50,000,000. In this the case is not extraordinary, The profits of a corpora- 
tion, as they appear upon the balance sheet at the end of the year, need not 
be in the form of money on hand in excess of what is required to meet current 
liabilities and finance current operations of the company. Often, especially in 
a growing business, only a part, sometimes a small part, of the year’s profits 
is in the property capable of division; the remainder having been absorbed in 
the acquisition of increased plant, equipment, stock in trade, or accounts re- 
ceivable, or in decrease of outstanding liabilities. When only a part is avail- 
able for dividends, the balance of the year’s profits is earried to the credit of 
undivided profits, or surplus, or some other account having like significance, 
If thereafter the company finds itself in funds beyond current needs it may 
declare dividends out of sueh surplus or undivided profits; otherwise it may 
go on for years conducting a suecessful business, but requiring more and more 
working eapital because of the extension of its operations, and therefore unable 
to declare dividends approximating the amount of its profits. Thus the sur- 
plus may increase until it equals or even exceeds the par value of the outstanding 
capital stock. This may be adjusted upon the books in the mode adopted in 
the case at bar—by declaring a “stock dividend.” This, however, is no more 
than a book adjustment, in essence not a dividend but rather the opposite; 
no part of the assets of the company is separated from the common fund, noth- 
ing distributed exeept paper certificates that evidence an antededent increase 
in the value of the stockholder’s capital interest resulting from an accumulation 
of profits by the company, but profits so far absorbed in the business as to 
render it impracticable to separate them for withdrawal and distribution. In 
order to make the adjustment, a charge is made against surplus account with 
corresponding credit to capital-stock account, equal to the proposed ““divi- 
dend”; the new stock is issued against this and the certificates delivered to the 
existing stockholders in proportion to their previous holdings. This, however, 
is merely bookkeeping that does not affect the aggregate assets of the corpora- 
tion or its outstanding liabilities; it affects only the form, not the essence, of 
the ‘liability’ acknowledged by the corporation to its own shareholders, and 
this through a readjustment of accounts on one side of the balance sheet. only, 
increasing ‘capital stock” at the expense of “surplus”; it does not alter the 
preexisting proportionate interest of any stockholder or increase the intrinsic 
value of his holding or of the aggregate holdings of the other stockholders as 
they stood before. The new certificates simply increase the number of the 
shares, with consequent dilution of the value of each share. 
A “stock dividend” shows that the company’s accumulated profits have been 
capitalized, instead of distributed to the stockholders or retained as Surplus 
available for distribution in money or in kind should opportunity offer. ar 
from being a realization of profits of the stockholder, it tends rather to postpone