## Facts

- Avon Products, Inc. planned to cut its common-stock cash dividend from $2.00 per share annually to $1.00 per share to conserve cash.
- To offer income-oriented stockholders a temporary substitute for the prior dividend level, Avon issued a series of preferred stock known as Preferred Equity-Redemption Cumulative Stock (PERCS), with a term running through September 1, 1991.
- The PERCS instruments included:
  - An “Optional Redemption” feature allowing Avon to redeem PERCS during the term at prices set by a schedule; and
  - An “Accelerated Redemption” provision giving PERCS holders enhanced redemption rights if Avon “shall pay” common-stock dividends “at a cumulative rate per year” above a stated threshold (described in the case materials as $1.50 per common share), along with certain other specified events.
- Wertheim Schroder & Co. acquired about 138,000 shares of PERCS.
- On February 7, 1991, Avon’s board declared:
  - A regular quarterly common-stock dividend of $0.35 per share; and
  - A special common-stock dividend of $3.00 per share, payable on September 16, 1991, to common stockholders of record on September 4, 1991.
- Avon later redeemed the PERCS on June 3, 1991 using the Optional Redemption feature and the schedule price, rather than the more favorable terms associated with Accelerated Redemption.
- Wertheim sued Avon in the Southern District of New York, asserting breach of contract and related theories, arguing that Avon’s February 1991 dividend actions triggered Accelerated Redemption.
- Avon moved for summary judgment.

## Issues

1. Whether Avon’s February 1991 declaration of a $3.00 special dividend (together with regular dividends) meant Avon would “pay” common-stock dividends “at a cumulative rate per year” exceeding the PERCS threshold, triggering Accelerated Redemption.
2. Whether the Accelerated Redemption trigger depended on dividend declaration or on actual payment of dividends, given the PERCS language focusing on what Avon “shall pay.”
3. Whether Wertheim could rely on the implied covenant of good faith and fair dealing (or similar theories) to obtain Accelerated Redemption where Avon redeemed PERCS under the express Optional Redemption terms.

## Decision

- The court granted Avon’s motion for summary judgment on the core contract claim that Accelerated Redemption was triggered by the February 7, 1991 dividend declarations.
- The court construed the Accelerated Redemption provision as turning on the payment of dividends at an annualized rate above the stated threshold, not on a dividend declaration that would be paid later.
- The court rejected the view that a declared, deferred-payment special dividend automatically established that Avon was paying dividends “at a cumulative rate per year” above the trigger level as of the declaration date.
- The court treated Avon’s June 3, 1991 redemption of PERCS under the Optional Redemption feature as consistent with the PERCS terms.
- In discussing the legal effect of dividend declarations, the court noted the corporate-law rule that once a cash dividend is declared it becomes a fixed obligation and cannot be rescinded, but it did not treat that rule as satisfying the PERCS contract’s “shall pay” trigger.

## Legal Principles

- The rights of preferred stockholders are defined by the certificate of designation and related instruments, interpreted under ordinary contract rules.
- When contract language is clear, summary judgment is appropriate, and the court will enforce the written terms as drafted.
- Contract provisions keyed to amounts a party “shall pay” may be read to require actual payment, not merely a declaration of intent to pay at a later date.
- The implied covenant of good faith and fair dealing cannot be used to impose obligations that contradict the contract’s express allocation of rights (including express redemption mechanisms).
- Under corporate law, once a cash dividend is declared, it generally becomes a fixed obligation of the corporation to stockholders and is not subject to rescission.

## Conclusion

In Wertheim Schroder & Co. v. Avon, the Southern District of New York held that Avon’s February 1991 declaration of a $3.00 special common-stock dividend, payable months later, did not trigger the PERCS Accelerated Redemption provision, which the court read as requiring the payment of dividends at a cumulative annual rate above the contractual threshold; because Avon redeemed PERCS under the expressly permitted Optional Redemption terms, the court granted summary judgment to Avon on Wertheim’s core breach-of-contract theory.


Wertheim Schroder & Co. v. Avon, 1993 WL 126427 (1993)