Also known as: share dividends · stock dividend
Written by attorneys — see sources below.
A distribution of additional shares of a corporation's stock to its existing shareholders on a pro rata basis and without consideration. The board of directors may fix the record date for determining which shareholders receive the distribution.
Silverline Industries has only one class of common stock outstanding. Its board declares a ten percent share dividend but lacks sufficient authorized shares to issue the new stock. The board adopts an amendment to the articles increasing the authorized shares by exactly the amount needed for the dividend and files the amendment without a shareholder vote. The amendment permits the corporation to distribute the additional shares to all existing holders.
Southland Foods announces a share dividend of one new common share for every ten shares already held by its common shareholders. The corporation issues the new shares directly to Sean Steele and all other holders without requiring any payment or additional consideration. The distribution maintains the same ownership percentages among all common shareholders.
Spectrum Financial's board considers declaring a share dividend to conserve cash while still rewarding shareholders. Sebastian Santos, a minority holder, argues that the corporation should instead retain earnings for expansion. The board proceeds with the pro rata share dividend after determining that the issuance satisfies solvency requirements and treats all common shareholders equally.
The Ford Motor Company was organized under Michigan statutes with an authorized capital stock of $2,000,000. By July 1916 the company had capital invested in property and accounts receivable of $78,278,418.65 and, after subtracting liabilities other than capital stock, more than $60,000,000. It also held nearly $54,000,000 in cash or cash equivalents. Its total assets exceeded $132,000,000 and its surplus approached $112,000,000. In June 1915 the executive officers and directors discussed and agreed upon a general plan to duplicate the existing plant and erect a smelter on the River Rouge. The plan called for maintaining the current selling price through the 1915-1916 model year, accumulating surplus to fund the expansion, and then reducing the price of each car by $80 beginning August 1, 1916, while aiming for eventual annual production of 1,000,000 vehicles. Henry Ford, who controlled the company, stated that his ambition was to employ still more men and to put the greatest share of profits back into the business rather than distribute them. After declaring only the regular dividend in October 1915, the company entered the 1916-1917 model year with the capacity to produce and sell more than 500,000 cars at the prior price. It reasonably might have expected a profit for the year of upwards of $60,000,000. Instead it appropriated $11,825,000 for the smelter. The plans required an expenditure sooner or later of $9,895,000 for duplication of the plant and for land and other expenditures $3,000,000. Minority shareholders demanded a further special dividend. The minority shareholders filed suit in Michigan circuit court seeking to enjoin the expansion and to compel distribution of profits. Three judges heard the application for a temporary restraining order. The case then proceeded to a hearing on the merits before the trial judge, who entered a decree that was appealed to the Michigan Supreme Court.
View caseA board may amend the articles without shareholder approval when the corporation has only one class of shares outstanding and the increase in authorized shares is limited to the amount necessary to issue the share dividend. This authority appears in the Model Business Corporation Act and applies only to that narrow purpose.
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Shareholders need not pay consideration for shares received in a share dividend. The Model Business Corporation Act expressly authorizes issuance of shares pro rata and without consideration to existing shareholders of the same class.
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A board cannot exclude shareholders within the same class from a share dividend. The governing statute requires pro rata distribution to all holders of the relevant class or series, and selective exclusion violates that equal-treatment mandate.
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The board may fix a record date for determining shareholders entitled to a share dividend, but the date may not be retroactive. If the board sets no record date, the date of board authorization serves as the record date.
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…of the fact that it had been^ upon an occasion, agreeable to the plaintiffs to increase the capital stock to $100,000,000 by a stock dividend of $98,000,-000. These things go only to answer other contentions now made by plaintiffs and do not and cannot operate to estop them to demand proper dividends upon the stock they own. It…