tenant claimed a number of shares of new common stock as represented by accumulated dividends on the old preferred stock. The Court held that the life tenant was entitled to nothing and that there could be no allocation until the new shares had been sold by the trustee. The Court stated:
' * * * The life tenant insists that such stock be presently awarded to her representing the amount of the undeclared dividends in arrears and all accumulated profits and earnings above the intact value. The court below, in part, made this award. This action was premature and should not have been taken. Before the corporate reorganization, the trustee on behalf of the life tenant could not have required the corporation to declare and pay arrearages of dividends except in circumstances not herein averred. The new shares, or any part of them, were not issued in payment of such arrears. The new stock was issued in exchange for the old stock. In the reorganization the value of the arrearages for dividends was considered. But it is only upon the sale or distribution of the stock, or upon the declaration of a stock dividend, or where otherwise the interest of the trustee or beneficiaries ceases in the stock, or where there is a distribution of accumulated profits and earnings, that these matters may be adjudicated. The rule of apportionment, however, requires the intact value of the principal to be preserved. If an apportionment is made at this time, it is clearly within the realm of possibility that there could be a change in the corporation's financial status before the stock is sold or distributed. Such change might impair the intact value of the principal and there would then exist no assets with which to recoup the loss. In Buist's Estate, 297 Pa. 537, 541, 147 A. 606, 607, we decided 'the merger of two or more corporations is neither a sale nor a liquidation of corporate property, but a consolidation of properties, powers, and facilities of the constituent companies.' We specifically held, (197 Pa. 542, 147 A. 608): 'The issuance of the new capital stock is merely the issuance of new evidence of ownership to the shareholders. Accepting shares of stock in the merged company is not tantamount to a distribution or division of assets which calls for an apportionment between life tenant and remaindermen.' Also, (207 Pa. 543, 147 A. 608) 'The life tenant is not entitled to any division until (1) the increased value is declared as a cash dividend, or (2) distributed in the form of a stock dividend, or (3) the affairs of the (corporation) are wound up so that assets are distributed to those entitled to receive them, or (4) there is a sale of this stock so that the connection of shareholder is entirely severed.' We have never reversed or modified this decision.'
The question involved here was before the Orphans' Court of Allegheny County, Pennsylvania, in the Estate of Lewis Walker, Sr., Deceased, 95-A of 1943 and 95-C of 1943. There, as here, the trustee treated as principal the shares of new stock of Talon, Inc. received in October, 1947 in exchange for the stock of Hookless Fastener Company theretofore held pursuant to the plan of recapitalization. The trust agreements vested the power to make apportionment in the trustees. The Auditing Judge held that the life beneficiaries were not entitled to apportionment until the new stock was sold, stating:
'The trustees have made no apportionment and deny the right thereto. It is their opinion that there has been no impairment of the corpus of this trust as it existed at the time when the transfer of surplus to capital and the exchange of stock was made and no extraordinary dividend was intended or declared. There is no testimony which shows that they have made any mistake and no testimony indicating that they have been arbitrary or faithless in the exercise of the power to apportion exclusively committed to them by the trustor. The absence of fraud or mistake leaves the court powerless to substitute its judgment for that of the Trustees.'
'The testimony shows that this corporation has had remarkable success and is at the present time a prosperous, going concern, producing profitably a very useful article of commerce. It is true that the patents which have been the basis of its success have expired and that future competition will test the ability of the present and future managers of Talon, Inc. to continue the success of the past and maintain the financial standing. The issuances of the preferred stock charged upon all of the assets of the corporation and distribution of it in dividends to the life beneficiaries may impair the value of the corpus of this estate. The Guardian and Trustee Ad Litem has correctly reported that this stock, when distributed, is an extraordinary dividend. Notwithstanding the distribution of preferred stock to life beneficiaries, for which credit is taken in the account, it does not appear that the intact value of the corpus has been impaired, but, there can be no assurance from anything that appears in this record now that future payments will not impair the intact value. The acceptance of the preferred stock dividends by the life beneficiaries with their lien on all of the common stock, including the corpus of this trust which is to be preserved for the remaindermen, is an advantage given to them which was not contemplated by the trustor and tends to defeat the scheme planned for remaindermen. The creation of the preferred stock for the purpose of paying dividends jeopardizes their interest.
' King's Estate, 1944, 349 Pa. 27, 36 A.2d 504, 153 A.L.R. 488 Stearne, J., is offered as a complete bar to a decree favorable to the Exceptants. It holds that there can be no apportionment until after a sale of the stock by the Trustees. Whether it would be a bar to an apportionment while the Trustees hold the stock of Talon, Inc., if the payment of extraordinary dividends continues and decreases the value of the remaindermen's interest, without a sale of the stock would be a difficult question to answer and places a burden on the accounting trustees to see that there is no invasion of the corpus, if they are not exonerated by the discretion given to them by the trust agreement. For present purposes we are obliged to observe the rule of King's Estate, supra, and hold that apportionment by the Court is not a right available to the Exceptants.'
I conclude from the above cases that the transfer of $ 1,282,500 from the surplus account of the Hookless Fastener Company to its capital account, or the issuance of new stock in exchange for its common stock, or either or both, was not the equivalent of a declaration of a stock dividend, or an apportionable distribution of earnings.
Plaintiff is entitled to judgment with costs. Let an order be prepared and submitted.
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