## Facts

- A Delaware corporation had outstanding first preferred stock (cumulative 5% dividend priority) and common stock.
- The charter stated first preferred holders were entitled to an annual 5% dividend “out of the net earnings of the company” before any dividend could be paid on junior stock, and arrears had to be paid before any junior dividends.
- The corporation accumulated substantial arrears in preferred dividends over many years but began paying preferred dividends starting in 1950.
- In June 1954, the board declared another dividend on the first preferred stock.
- The parties agreed the corporation had net earnings for the current and immediately preceding fiscal years and that payment would not impair the preferred capital account.
- Common shareholders asserted there was an overall deficit affecting common-stock capital and sought to enjoin the preferred dividend.
- The trial court refused to enjoin payment, holding the dividend lawful; common shareholders appealed.

## Issues

1. Whether the charter’s requirement that preferred dividends be paid “out of the net earnings of the company” restricted the corporation from paying cumulative preferred dividends from current earnings while common-stock capital showed a deficit.
2. Whether, absent an explicit charter restriction, Delaware law permits payment of cumulative preferred dividends from current (or recent) net profits when preferred capital is unimpaired.

## Decision

- The Supreme Court of Delaware affirmed the denial of an injunction and upheld the dividend.
- The court held the charter did not contain a clear restriction barring preferred dividends from current net earnings because of a deficit in common capital.
- Under Delaware law, cumulative preferred dividends could be paid from current (or immediately preceding year) net profits if the capital of the class receiving the dividend was not impaired.

## Legal Principles

- Statutory dividend authority governs unless the charter contains a clear and unmistakable limitation on that authority.
- A charter clause stating dividends are payable “out of net earnings” is generally read as a standard earnings-source provision, not as a special restriction requiring restoration of all past losses before any dividend may be paid.
- Under Delaware law, absent a contrary charter restriction, a corporation may pay cumulative preferred dividends out of current or recent net profits despite impairment of common capital, so long as the capital of the dividend-paying class is unimpaired and statutory requirements are met.

## Conclusion

The court upheld payment of the June 1954 preferred dividend, concluding that general “net earnings” language in the charter did not override Delaware’s statutory permission to pay cumulative preferred dividends from current profits when preferred capital is unimpaired, even if common capital remains impaired.


Weinberg v. Baltimore Brick Co., 114 A.2d 812 (Del. 1955)