## Facts

- A Washington corporation issued cumulative preferred stock providing for 6% dividends “payable out of the company’s surplus profits.”
- The articles also stated that, upon liquidation, preferred shareholders were entitled to be paid the par value of their shares and “all accrued unpaid dividends” before any distribution to common shareholders.
- The corporation never earned net profits or accumulated surplus, and no dividends were declared or paid during its existence.
- On dissolution, after payment of all corporate debts and the par value of preferred shares, substantial assets remained for distribution.
- Liquidating trustees sought a declaratory judgment construing the liquidation preference and whether “accrued unpaid dividends” were payable in liquidation despite the absence of profits.
- The trial court ruled that preferred shareholders must be paid, from liquidation assets, 6% per annum on par from issuance to the liquidation date before any distribution to common shareholders.
- A common shareholder appealed, arguing Washington law barred dividend payments absent net profits; respondents argued the appeal should be dismissed for failure to serve notice on a trustee for a minor preferred shareholder.

## Issues

1. Whether the failure to serve notice of appeal on a trustee for a minor preferred shareholder deprived the appellate court of jurisdiction because the trustee was a necessary party.
2. Whether cumulative preferred shareholders were entitled, upon liquidation, to receive “accrued unpaid dividends” ahead of common shareholders when the corporation never had net profits or surplus.

## Decision

- The motion to dismiss the appeal was denied because the trustee was not a necessary party; preferred shareholders had a common interest adequately represented, and the adverse parties were the common shareholders.
- The judgment was affirmed.
- The court held the preferred shareholders were entitled in liquidation to receive both par value and accrued unpaid cumulative dividends at 6% per annum before any distribution to common shareholders, even though payment would come from liquidation assets rather than earned profits.

## Legal Principles

- Rights of preferred shareholders, including dividend and liquidation preferences, are contractual and defined by the corporation’s articles; those terms govern the distribution of assets on dissolution.
- A statutory restriction limiting dividends to net profits applies to ordinary dividend payments during the life of the corporation, not to post-dissolution distributions of remaining capital after debts are paid.
- Where corporate articles provide that preferred stock is entitled on liquidation to par plus “all accrued unpaid dividends” before any distribution to common stock, that priority is enforceable in liquidation even if no dividends were declared and the corporation had no profits.

## Conclusion

The court enforced the charter’s liquidation preference, requiring that remaining assets after debts be distributed first to cumulative preferred shareholders for par value plus accrued unpaid dividends, treating the payment as part of dissolution distribution rather than an unlawful dividend from capital.


Hay v. Hay, 230 P.2d 791 (Wash. 1951)