## Facts

- A Delaware corporation with both preferred and common stock entered dissolution and was liquidated under a court-appointed receiver.
- The preferred stock carried a 7% cumulative dividend preference, payable during operations only out of net profits or surplus.
- The charter’s liquidation provision stated that, upon dissolution, preferred holders were entitled to receive par value plus “unpaid accrued dividends” before any distribution to common stockholders.
- The corporation had no surplus or net profits; the liquidation fund consisted of remaining capital assets.
- Preferred holders claimed priority payment of par plus accumulated unpaid dividends from the liquidation proceeds.
- Common holders objected, arguing dividend arrears could not be paid from capital and that preferred holders were limited to their par preference.
- Additional distribution questions arose because some shares were issued at a premium above par and some shares were only partially paid.

## Issues

1. Whether cumulative preferred dividend arrears are payable from the remaining capital assets in liquidation, ahead of any distribution to common stockholders, absent explicit charter authorization to invade capital.
2. Whether premiums paid above par affect shareholders’ proportional rights in distributing a depleted capital fund on dissolution.
3. Whether holders of partially paid shares may participate in distribution of depleted capital on equal footing with fully paid shares without first accounting for unpaid subscription amounts.

## Decision

- The court held that accrued but unpaid cumulative preferred dividends were not payable from capital in liquidation absent clear, unmistakable charter language authorizing payment from capital.
- The court rejected the preferred holders’ claim to receive dividend arrears from the liquidation fund and limited their priority to the par-value liquidation preference stated in the charter.
- The court held that premiums paid above par are disregarded in determining proportional participation in a depleted capital distribution on dissolution.
- The court held that partially paid shares must “equalize” with fully paid shares of the same class (by accounting for unpaid subscription amounts) before participating in distribution of depleted capital.

## Legal Principles

- Cumulative dividend arrears do not, without explicit charter language, become a charge against capital or a liquidation claim payable from capital assets.
- A liquidation preference referring to “par plus unpaid accrued dividends” is strictly construed and will not be read to permit invasion of capital unless the charter clearly so provides.
- Stock preferences must be clearly expressed; no preference is implied or extended by strained construction.
- In distributing a depleted capital fund upon dissolution, shareholders of the same class participate based on par-value footing; premiums paid above par do not increase distribution rights.
- Holders of partially paid stock cannot share equally with fully paid stock of the same class in a depleted-capital distribution until unpaid subscription amounts are brought into account.

## Conclusion

The court ruled that, absent unmistakable charter authorization, cumulative preferred dividend arrears are not payable from capital in liquidation; it also required equal treatment within a class by disregarding premiums and requiring partially paid shares to equalize before sharing in depleted-capital distributions.


Penington v. Commonwealth Hotel Constr. Corp., 17 Del. Ch. 394, 155 A. 514 (Del. Ch. 1931)