## Facts

- A stockholder holding non-cumulative preferred shares sued a railroad corporation and its directors over dividend policy.
- From 1937–1947, the corporation’s net income in each year exceeded the annual dividend amount associated with the non-cumulative preferred stock, but the board declared no preferred dividends.
- In 1948, 1949, and 1950, the board declared dividends on the preferred stock.
- In 1950, the board also declared a $1.50 per share dividend on the common stock without paying any dividends intended to compensate for the preferred dividends not declared from 1937–1947.
- The trial court found the directors’ non-declaration of preferred dividends during 1937–1947 reflected sound business judgment, made to protect the corporation’s financial position and the interests of creditors, preferred and common shareholders, and the public, given the company’s economic and regulatory conditions.
- The complaint sought relief compelling payment of prior-year preferred dividends and/or preventing the 1950 common dividend absent payment of the earlier omitted preferred dividends.

## Issues

1. Whether the directors abused their discretion by failing to declare dividends on non-cumulative preferred stock from 1937–1947 despite sufficient annual net income.
2. If the earlier non-declaration was not an abuse, whether the directors nevertheless had a legal duty to declare “make-up” dividends for the omitted non-cumulative preferred dividends before declaring a common dividend in 1950.

## Decision

- The court of appeals affirmed dismissal of the complaint.
- It held the trial court’s factual findings supporting the directors’ dividend decisions were supported by the record and not clearly erroneous.
- The directors did not abuse their discretion in withholding preferred dividends from 1937–1947.
- Because the preferred stock was non-cumulative and the original withholding was not an abuse of discretion, the directors were not required to declare later dividends to compensate for prior omitted preferred dividends.
- The directors did not abuse their discretion by declaring a 1950 common dividend without first paying “back” preferred dividends.

## Legal Principles

- Decisions to declare dividends are committed to directors’ business judgment; courts will not intervene absent bad faith, fraud, or abuse of discretion.
- For non-cumulative preferred stock, undeclared dividends generally do not accrue into later years; absent contractual terms to the contrary or an actionable abuse of discretion, holders have no right to compel later payment of omitted dividends.
- On appeal, a trial court’s fact findings sustaining directors’ exercise of business judgment are reviewed under a clearly erroneous standard, and appellate courts will not substitute their judgment for that of directors where the record supports the directors’ reasons.

## Conclusion

The court upheld the directors’ conservative dividend policy and the later payment of common dividends, holding that non-cumulative preferred shareholders could not compel retroactive dividends and that judicial review of dividend decisions is highly deferential absent proof of bad faith or abuse of discretion.


Guttmann v. Ill. Cent. R. Co., 189 F.2d 927 (2d Cir. 1951)