IMO ESTATE OF DUDLEY B. DAWSON, DECEASED Amended 07-15-94
Case Date: 06/09/1994
Docket No: SYLLABUS
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(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
IN THE MATTER OF THE ESTATE OF DUDLEY B. DAWSON, DECEASED (A-89/90-93)
Argued February 1, 1994 -- Decided June 9, 1994 -- Amended Opinion Filed July 15, 1994
CLIFFORD, J., writing for a unanimous Court.
This appeal addresses the interpretation and application of the term "stock dividend" as used in
Dudley Dawson's will. The specific question is whether trustees of a testamentary trust should allocate eight
different stock distributions to income or to principal. The will provided that in administering the trust, the
trustees should allocate stock dividends to income and allocate stock splits to principal. The will did not
define the terms "stock dividend" or "stock split."
In three prior intermediate accountings, the Chancery Division defined the term "stock dividend" by
referring to the traditional rule, which focuses on a capitalization of assets. Accordingly, in those earlier
accountings, the Chancery Division allocated stock distributions to income whenever the issuing corporation
had made journal entries transferring assets from a surplus account to a capital account. In the fourth
intermediate accounting, however, the trial court adopted the New York Stock Exchange rule to distinguish
between stock dividends and stock splits. Pursuant to that rule, the trial court characterized stock
distributions as dividends if they constituted less than twenty-five percent of the outstanding shares of stock
and as splits if they equal twenty-five percent or more of the outstanding shares.
On appeal, the Appellate Division reversed, rejecting the Chancery Division's twenty-five percent
rule and relying instead on the traditional approach.
The Supreme Court granted certification.
HELD: There is a rebuttable presumption that a stock distribution of less than twenty-five percent of the
outstanding shares is a stock dividend and a distribution of twenty-five percent or more of the
outstanding shares is a stock split. In looking behind the transaction, courts should inquire into
all the facts and circumstances surrounding the distribution, including: 1) the effect of the
distribution on the market price of the stock; and 2) the issuing corporation's description of the
transaction. Furthermore, the doctrine of collateral estoppel does not bar the Court from
applying the rebuttable presumption in this case.
1. An examination of Dawson's will and the circumstances of its execution demonstrate Dawson's clear
intention to override the statutory allocation of stock dividends to principal. Thus, the court should enforce
his instructions. Less clear is what Dawson meant by the term "stock dividend." However, because Dawson
intended to benefit both his wife and his collateral decedents, the Court will not craft a definition of "stock
dividend" that results in dispositions going automatically to income, benefiting only his wife, Anna Dawson.
Thus, sources outside the will must be used to guide the Court in defining "stock dividend." (pp. 10-13) 2. Stock distributions usually involve three accounts: 1) the capital stock or stated-capital account; 2) the capital-surplus or additional-paid-in-capital account; and 3) the retained earnings account. Capital stock or stated capital represents the total par value of all the shares of stock that a corporation has issued. Par value is an arbitrary amount that a corporation sets as the value of a share interest in the corporation. Capital surplus or additional-paid-in-capital represents the amount in excess of par value paid toward the purchase of newly-issued stock. Retained earnings are the accumulated profits from the corporation's operations. According to Generally Accepted Accounting Principles, the term "stock dividend" describes a
corporation's issuance of additional shares of stock to existing shareholders based on their proportionate
interests in the corporation. The purpose in issuing a stock dividend is to distribute earnings and a stock
dividend does not change a corporation's or its shareholders' proportionate interest therein. When a
corporation effects a stock dividend, it normally issues only a proportionately small number of shares,
generally less than twenty-five percent. A stock split, on the other hand, involves a stock distribution of more
than twenty to twenty-five percent of outstanding shares. A corporation will use a stock split to reduce the
market price of its stock, thereby making the stock more attractive to potential buyers. After a stock split,
the total dollar amount of each existing stockholder's equity remains the same, but the par value per share
changes in proportion to the change in the number of shares of stock outstanding. In this case, the eight
distributions in question had characteristics of both a stock dividend and a stock split. (pp. 13-16)
3. The traditional approach views the characteristic feature of a stock dividend as the capitalization of
assets. A stock dividend is found when a corporation transfers assets from surplus (retained earnings or
capital surplus), from which a corporation may pay cash dividends, to a capital account, from which a
corporation may not pay cash dividends. Although New Jersey cases have accepted the traditional approach,
that approach is outdated and produces absurd results. A rule that more accurately reflects the issuing
corporation's intention: whether to reduce the market price of its shares to attract more investors, or to
recognize its capital structure, or to distribute earnings, is needed. (pp. 16-23)
4. A distribution will be a stock dividend if it is less than twenty-five percent of the sharehold.
However, twenty-five percent is treated as a rebuttable presumption, and courts may look behind a
transaction to determine what the issuing corporation intended to accomplish through the transaction. In
looking behind the transaction, courts should inquire into all the facts and circumstances surrounding the
distribution and the use of the word "dividend" should not be controlling. Applying this newly-adopted rule
to this case, all eight distributions are stock splits and the trustees should allocate them to principal. All
eight transactions involved distributions of more than twenty-five percent of the issuing corporations'
respective shareholds; there was a significant decrease in the market value of the shares; in most cases, the
transfers from surplus accounts to capital accounts were quite small; and, in seven out of the eight
distributions, the issuing corporations themselves characterized the transactions as stock splits. (pp. 23-25)
5. The doctrine of collateral estoppel does not preclude the Court from applying its newly-adopted rule
to the Dawson estate accounting. The issues litigated in the fourth intermediate accounting are not identical
to the issues litigated in the three prior intermediate accountings; the issuing corporations and their
respective stock distributions were not the same in those accountings and the issues to be litigated in the
accountings are different as well. Moreover, no sufficient identity of parties exists. Because the beneficiaries
represented in the prior accountings did not have the same interests as the interest of the guardian ad litem's
wards, collateral estoppel does not apply. (pp. 25-29)
6. Finally, the doctrine of virtual representation does not require a different result. And, even if the
elements of collateral estoppel clearly did exist, the Court would not apply that doctrine in the circumstances
of this case. (pp. 29-30)
Judgment of the Appellate Division is REVERSED and the judgment of the Chancery Division
requiring the trustees to allocate the eight disputed stock distributions to principal is REINSTATED.
JUSTICES HANDLER, O'HERN, GARIBALDI and STEIN join in JUSTICE CLIFFORD's opinion.
CHIEF JUSTICE WILENTZ and JUSTICE POLLOCK did not participate.
SUPREME COURT OF NEW JERSEY
IN THE MATTER OF THE ESTATE
OF
DUDLEY B. DAWSON, DECEASED,
Late of Boonton, Morris
Argued February 1, 1994 -- Decided June 9, 1994 --
On certification to the Superior Court,
Appellate Division.
Richard Kahn argued the cause for appellant
guardian ad litem, pro se.
Howard G. Wachenfeld argued the cause for
appellant Manufacturers Hanover Trust
Company, Trustee (Tompkins, McGuire &
Wachenfeld, attorneys; Mr. Wachenfeld and
Brian M. English, on the brief).
Edward John Trawinski argued the cause for
respondent, Edwin W. Kimball (Schenk, Price,
Smith & King, attorneys; Douglas S. Brierley,
on the brief).
The opinion of the court was delivered by This appeal poses the issue of the correct interpretation and application of the term "stock dividend" as used in the testator's will. The narrow question is whether trustees of a testamentary trust should allocate eight different stock distributions to income or to principal. The will provided that in administering the trust, the trustees should allocate stock
dividends to income and allocate stock splits to principal. The
will did not define those terms, however.
In three prior intermediate accountings, the Chancery
Division, Probate Part, had defined the term "stock dividend" by
referring to the traditional rule, which focuses on a
capitalization of assets. Accordingly, in those earlier
accountings that court had allocated stock distributions to
income whenever the issuing corporation had made journal entries
transferring assets from a surplus account to a capital account.
In the fourth intermediate accounting, however, the trial court
adopted a different test to distinguish between stock dividends
and stock splits. Adopting the New York Stock Exchange rule, the
trial court characterized stock distributions as dividends if
they constituted less than twenty-five percent of the outstanding
shares of stock and as splits if they equalled twenty-five
percent or more of the outstanding shares. In an unpublished
opinion, the Appellate Division reversed the trial court's
judgment, rejecting that court's twenty-five-percent rule and
relying instead on the traditional approach. We granted
certification to determine the correct rule.
On December 1, 1952, the testator, Dudley Dawson, executed a will. At that time, he was married to his second wife, Anna
Coffin Dawson. Dawson's first wife, Julia G. Dawson, had died on
December 25, 1939, and he married Anna on June 13, 1941. The
testator did not have any children with either of his wives.
Anna, however, had three children from a previous marriage. When
Dawson executed his will, his closest relatives other than his
wife were: (1) Elizabeth Dawson Dumont, a sister, who died
without issue in 1961; (2) Elizabeth Dawson Birch, a niece, and
Raymond Dawson, Jr., a nephew, both children of Raymond Dawson, a
deceased brother; and (3) Louis W. Dawson, Palmer C. Dawson, and
Nicholas J. Dawson, nephews and children of Nicholas Dawson, also
a deceased brother.
Dudley Dawson died on May 11, 1957. At the time of his
death, his closest surviving relatives were his wife, Anna; his
sister, Elizabeth; and his niece and four nephews by his deceased
brothers, Raymond and Nicholas. His will left nothing to his
sister, Elizabeth, or to Anna's children. The testator did make
several specific bequests, however, including a bequest to his
wife, Anna, of personal property and $5,000. Paragraph "NINETEENTH" of the testator's will directed his executors to pay Anna quarterly the income from the estate during the period that the executors controlled the estate. Paragraph "TWENTIETH" established a residuary trust, instructing the trustees to (1) pay the entire net annual income from the trust to Anna during her life, in quarterly installments; and (2) pay
the income from the trust after Anna's death to "my nieces and
nephews, and the issue of any deceased niece or nephew, * * * in
equal shares per stirpes * * *." The will provided that the
trust would exist as long as the rule against perpetuities (now
codified at N.J.S.A. 46:2F-1 to -8) would allow, namely, twenty-one years after the death of the survivor of the named niece,
nephew, grandniece, and three grandnephews. The trustees were
directed to distribute the trust funds thereafter "to my nieces
and nephews and the issue of any deceased niece or nephew, in
equal shares per stirpes * * *." Paragraphs "THIRTY-FOURTH" and
"THIRTY-FIFTH" named Dawson's wife, Anna, and the Hanover Bank
(later Manufacturers Hanover Trust Company, and currently
Chemical Bank) as executors and trustees.
When Dawson executed his will in 1952, the New Jersey
Principal and Income Act, N.J.S.A. 3A:14A-1 to -9, provided that
dividends paid in stock should be allocated to principal,
N.J.S.A. 3A:14A-4A(a), and that dividends paid other than in
stock should be allocated to income, N.J.S.A. 3A:14A-5A(a).
Paragraph "THIRTY-FIRST" of Dawson's will, however -- the
paragraph in dispute in this action -- gave the following
directions in respect of the trustees' allocation of stock
distributions:
All gains and losses on the sale or redemption of securities shall be added to or subtracted from corpus, but all stock dividends and all rights to subscribe to stocks shall be treated as income and shall
be distributed to the income beneficiary or
beneficiaries as such. Neither my executors
nor my trustees shall be required, nor are
they authorized[,] to set aside from income
any sums to provide for the amortization of
premiums in the purchase of securities.
The first intermediate accounting of the trust covered the
period from June 6, 1960, when the trust first received the
assets from the testator's estate, until November 22, 1967. At
that accounting, the parties agreed to the allocation between
principal and income of the shares from most of the stock
distributions to the trust. They disagreed, however, about the
proper allocation of two distributions. One distribution
concerned American Electric Power Company (American Electric)
stock: the trust initially held 300 shares; American Electric
distributed to the trust 300 additional shares; and American
Electric adjusted the par value of its stock, transferring funds
from its capital-surplus account to its capital-stock account.
The other distribution concerned Ohio Edison Company (Ohio
Edison) stock: the trust initially held 400 shares; Ohio Edison
distributed to the trust 400 additional shares; and Ohio Edison
adjusted the par value of its stock, transferring funds from its
premium-on-common-stock account and from its earned-surplus
account to its capital account. The question before the trial court on that first intermediate accounting was whether those two distributions were stock splits (allocable to corpus under the terms of the trust)
or stock dividends (allocable to income under the trust's terms).
The trial court allocated both stock distributions to income as
dividends, relying on this Court's decision in In re Trust of
Arens,
41 N.J. 364, 375 (1964) (noting that in stock split "no
change whatever is made in any corporate accounts," but that
stock dividend involves "capitalization of earnings by a transfer
* * * from the earned surplus account to a capital account").
The trial court found that inasmuch as "[i]n both cases there was
a capitalization of earnings," the distributions were stock
dividends and thus allocable to income under the terms of the
trust. Similarly, in later approving second and third
intermediate accountings, the same court applied the disputed
stock distributions to income when the issuing corporations
transferred funds from a surplus account or from undivided
profits to the capital-stock account. After the death of Anna Coffin Dawson in September 1989, the trustees' filed with the Chancery Division a fourth intermediate accounting, running from May 12, 1981, to September 3, 1989, and a fifth intermediate accounting, covering the period September 4, 1989, to December 17, 1989. The court, now presided over by a different judge from the one who had heard the previous applications, appointed a new guardian ad litem to represent the interests of the minor defendants (the guardian ad litem who had represented their interests in the previous accountings had died), and extended the guardian ad litem's representation to
include the unborn parties in interest. That new guardian ad
litem then challenged the trustees' proposed allocation to income
of eight stock distributions that the trust had received during
the period of the fourth intermediate accounting. See Appendix,
infra at ___-___ (slip op. at 30-34) (describing each stock
distribution). All the disputed stock distributions involved
transfers of funds to the issuing corporations' capital-stock
accounts, but the guardian ad litem urged the court to adopt a
new rule in respect of how to determine whether a stock
distribution is a dividend or a split.
The trial court, in an oral decision, noted that Dawson's
will evidenced substantial concern for his wife as well as for
his collateral descendants; therefore, the court concluded that
in deciding whether to allocate the stock distributions to income
or to principal, it could not rely with confidence on notions of
which beneficiaries the will favored. Moreover, that the trust
contained no provisions for the invasion of principal also
indicated to the trial court that the testator had a "meaningful
objective" in preserving the corpus. The court therefore determined that the relevant considerations in determining whether a distribution is a stock dividend or a stock split are whether the distribution effects a rearranging of the principal assets of the trust or whether the distribution is a slight enhancement, that is, an income payout.
Reasoning that corporate-accounting concepts have changed and
that the rules of stating the capital of corporations have little
relation to the issue of allocation of stock distributions to a
trust's income or principal beneficiaries, the court advocated a
common-sense, functional approach: it adopted the rule advanced
by the guardian ad litem and used by the New York Stock Exchange.
That rule states that
if a stock distribution amounts to less than
[twenty-five] percent of the sharehold[,]
* * * it should be treated as income and paid
out to the income beneficiaries. If it is
[twenty-five] percent or more, it should be
treated as simply an adjustment in the way in
which a principal asset is held.
Although noting that the twenty-five-percent benchmark was
somewhat arbitrary, the trial court felt the rule made
"functional sense." Applying that rule to the eight stock
distributions involved, the court concluded that the income
beneficiaries would receive no distribution. The trial court next determined that principles of collateral estoppel did not preclude it from adopting the twenty-five-percent rule. In the three prior intermediate accountings the court had not considered the issues posed here "in the context of the adversarial interests of the current income beneficiaries * * *." Moreover, "there have been very substantial evolutions in concepts [of accounting, corporate financial management, and estate management] between the time of
the earlier adjudications in this case and the present
adjudications."
Finally, the trial court decided that the law-of-the-case
doctrine did not compel a different result: (1) the case has
spanned a very long period of time; (2) substantial differences
exist in the financial and analytical contexts of the current
litigation and the prior adjudications; and (3) the parties are
not the same here as they were in the prior accountings.
The Appellate Division, in an unpublished opinion, reversed
the judgment of the trial court. Viewing that court's twenty-five-percent rule as arbitrary, the Appellate Division determined
that the trial court should have applied the rule of Arens,
supra,
41 N.J. 364, that "the key distinguishing factor between
stock dividends and stock splits [is] the capitalization of
corporate earnings and the resultant transfer of funds from
surplus to capital accounts." Applying the Arens rule, the
Appellate Division then concluded that all eight of the contested
stock distributions were dividends (and thus allocable to income
under the will) because all eight involved a transfer of funds to
stated capital.
We granted both Manufacturers Hanover Trust Company's and
the guardian ad litem's petitions for certification, ___ N.J. ___
(1993), and now reverse.
In deciding whether to allocate the stock distributions to
income or to corpus, we look first to the testator's will to
determine, if we can, whether that instrument favored his wife
(thus encouraging an allocation to income) or his collateral
descendants (thus favoring an allocation to principal). In doing
so, we "ascertain and give effect to the 'probable intention of
the testator.'" Fidelity Union Trust Co. v. Robert,
36 N.J. 561,
564 (1962) (quoting Fidelity Union Trust Co. v. Robert,
67 N.J.
Super. 564, 572 (App. Div. 1961)); accord In re Accounting of
Thompson,
53 N.J. 276, 299 (1969); In re Estate of Conway,
50 N.J. 525, 527 (1967); In re Estate of Cook,
44 N.J. 1, 6 (1965).
"[I]n ascertaining the subjective intent of the testator, courts
will give primary emphasis to [the testator's] dominant plan and
purpose as they appear from the entirety of [the] will when read
and considered in the light of the surrounding facts and
circumstances." Fidelity Union Trust Co., supra, 36 N.J. at 564-65; accord In re Estate of Branigan,
129 N.J. 324, 332 (1992);
Darpino v. D'Arpino,
73 N.J. Super. 262, 268 (App. Div. 1962);
Zwoyer v. Hackensack Trust Co.,
61 N.J. Super. 9, 12-13 (App.
Div. 1960). Examination of Dawson's will and of his circumstances when he executed it renders one aspect of his intent abundantly clear: Dawson intended to override the statutory allocation of stock
dividends to principal. In 1952 the Legislature adopted the New
Jersey Principal and Income Act, N.J.S.A. 3A:14A-1 to -9. That
Act provided that absent a different allocation scheme in a trust
instrument, trustees should allocate stock dividends to
principal. See N.J.S.A. 3A:14A-2B; N.J.S.A. 3A:14-4A(a). When
Dawson executed his will in December of that year, he directed
his trustees to allocate stock dividends to income. Accordingly,
the testator's intent to override the statutory allocation is
clear and a court should enforce his instructions. We note that
that result would be the same even under today's statutory
allocation because the new allocation scheme -- requiring
trustees to allocate stock dividends to principal unless the
distribution is six percent or less of the number of shares of
the corporation the trust holds, N.J.S.A. 3B:19A-13(a) -
likewise is triggered only when the trust instrument is silent on
the allocation. See N.J.S.A. 3B:19A-3.
Less clear, however, is what the testator meant by the term
"stock dividend." Although Dawson's will states specifically
that the trustees should allocate stock dividends to income, the
will does not define the term "stock dividend." The estate of
Anna Coffin Dawson argues that inasmuch as Dawson's primary
intention was to benefit his wife, the Court should interpret the
term "stock dividend" to favor her estate by allocating all the
disputed distributions to income.
We do not agree that the will so readily demonstrates an
intent to benefit only, or even primarily, the testator's wife.
As the trial court observed, "The reality is that he evidenced
[in the] dispositions * * * substantial concern for his
collateral descendants as well as a very substantial concern for
his wife. * * * The fact is he cared about both sets."
Moreover, noticeably absent in the will is a provision frequently
used in other trust instruments allowing trustees to invade
principal for the benefit of the life beneficiary (here, Anna
Coffin Dawson) in specified circumstances.
Thus, because Dawson intended to benefit both his wife and
his collateral descendants, we will not craft a definition of
"stock dividend" that results in the dispositions going
automatically to income, benefitting only Anna Coffin Dawson. As
this Court has noted, an
allocation * * * to corpus will inure to the
benefit of both [the life beneficiary and the
remaindermen]; the life cestui will
immediately get the value of its use for life
and the remainderman will receive the balance
of its value, without subjecting the estate
to the expense of attempting to ascertain by
inexact means, the equities between the
parties.
[In re Estate of Fera,
26 N.J. 131, 144
(1958).]
Under the circumstances we turn to sources beyond the will for guidance in defining "stock dividend." See, e.g., In re Estate of Munger, 63 N.J. 514, 522-23 (1973) (determining that
neither will nor extrinsic circumstances defined term
"securities" and accordingly looking to other sources to define
it); Wilson v. Flowers,
58 N.J. 250, 263-64 (1971) (looking to
extrinsic sources to define term in will).
We first review our basic understanding of equity accounts
on a corporation's balance sheet as a prelude to our explanation
of why the manipulation of those accounts has historically
influenced our characterization of stock distributions. Stock
distributions usually involve three accounts: (1) the capital-stock or stated-capital account, (2) the capital-surplus or
additional-paid-in-capital account, and (3) the retained-earnings
account. Concerning the first, capital stock or stated capital
represents the total par value of all the shares of stock that a
corporation has issued. 11 William M. Fletcher, Fletcher
Cyclopedia of the Law of Private Corporations § 5079 (Lenore M.
Zajdel, ed., perm. ed. rev. vol. 1986). Par value is an
arbitrary amount that a corporation sets as the value of a share
interest in the corporation. Chadwick v. McClurg,
103 N.J. Eq. 55, 59 (Ch. 1928); 18 C.J.S. Corporations § 131 (1990). In
respect of the second account, capital surplus or additional
paid-in capital represents the amount in excess of par value paid
toward the purchase of newly-issued stock. 11 Fletcher, supra,
§ 5080. Thus, for example, if a corporation sells a $10 par
value newly-issued share of stock for $100, $10 of the proceeds
goes into the capital-stock account and $90 goes into the
capital-surplus account. (We do not discuss no-par stock because
none of the eight stock distributions disputed in this case
involves no-par stock.) The third account, involving retained
earnings, represents the accumulated profits from the
corporation's operations, i.e., the net sum of the corporation's
yearly profits and losses. According to Generally Accepted Accounting Principles (GAAP), the term "stock dividend" describes a corporation's issuance of additional shares of stock to existing shareholders based on their proportionate interests in the corporation. Martin A. Miller, Comprehensive GAAP Guide § 38.08 (1989). A corporation's purpose in issuing a stock dividend is generally to distribute earnings. Ibid. A stock dividend does not change a corporation's assets or its shareholders' proportionate interests therein. Financial Accounting Standards Board, 1989/90 Accounting Standards § C20.103 (1989). A corporation records a stock dividend in its journals by transferring "an amount equal to the fair market value of the stock dividend * * * from retained earnings to capital stock and, if appropriate, to paid-in capital." Miller, supra, § 38.08. When a corporation effects a stock dividend, it normally issues only a proportionately small
number of shares, i.e., less than twenty to twenty-five percent
of its outstanding shares. Id. at § 38.09.
A stock split, on the other hand, typically involves "a
stock distribution [of] more than 20" to 25" of the outstanding
shares * * *." Ibid.; see Accounting Standards, supra, The question presented is how to determine whether a distribution is a stock dividend or a stock split when the distribution has characteristics of both types of transactions. In this case, all eight distributions had journal entries showing transfers from a surplus account to a capital account (indicating stock dividend), but all eight also involved distributions of a
large number of shares that affected the market price (indicating
stock split). See Appendix, infra at ___-___ (slip op. at 30-34)
(describing disputed stock distributions).
The traditional approach views the characteristic feature of
a stock dividend as the capitalization of assets. That approach
will find a stock dividend when a corporation transfers assets
from surplus (retained earnings or capital surplus), from which a
corporation may pay cash dividends, to a capital account, from
which a corporation may not pay cash dividends. See 11 Fletcher,
supra, § 5359 (stating, "A stock dividend is a dividend payable
in reserved or additional stock of the corporation, instead of in
cash or in property, the purpose of which is generally to
capitalize a portion of the company's earnings in order to
conserve working capital." (footnote omitted)); 18 C.J.S.
Corporations, supra, § 294 (stating that "a stock dividend
involves the permanent retention of earnings in the business
through the capitalization of surplus; this retention of earnings
is evidenced by the distribution of shares which represent assets
transferred to capital" (footnote omitted)). Our cases have accepted the traditional approach to stock dividends. In Arens, supra, 41 N.J. 364, this Court had to determine whether to change the common law in respect of trustees' allocation of stock distributions. The common law had been the Pennsylvania rule (treating dividends as income if
declared from earnings accrued during the existence of the trust
but treating them as principal if declared from earnings accrued
before the existence of the trust), and the question was whether
to adopt in its place the Massachusetts rule (treating cash
dividends as income and stock dividends as principal). Id. at
367-68. Although the Legislature had enacted N.J.S.A. 3A:14-4A(a) and -5A(a) in May 1952, adopting the Massachusetts rule,
the issue in Arens was whether the Court should alter the common-law rule for pre-1952 trusts. Although not central to the
Court's ultimate decision to change New Jersey's common-law
allocation rule, the Court pointed out that a stock dividend
involves
a capitalization of earnings by a transfer on
the corporate books, from the earned surplus
account to a capital account, of an amount
fixed by the corporation as the price paid
In a later case, the Appellate Division relied on the traditional definition in Arens to describe a stock dividend. See In re Estate of Conway, 92 N.J. Super. 428 (1966), modified on other grounds, 50 N.J. 525 (1967). In Conway, a trustee of a testamentary trust requested instructions from the court on whether shares of stock distributed to a trust should be allocated to income or to principal. The Appellate Division
concluded that the distribution in question "retained the
essential characteristics of a stock dividend," id. at 446 -
that is, the issuing corporation had "transferred * * * undivided
profits to its permanent capital account, this being an amount
equal to the par value of the shares distributed." Id. at 445.
New Jersey case law therefore appears to have adopted the
traditional test for stock dividends, namely, whether a
capitalization of earnings accompanied the distribution.
Courts from other jurisdictions as well have identified
stock dividends by determining whether the issuing corporations
transferred funds from a surplus account to stated capital. See,
e.g., Keller Industries, Inc. v. Fineberg,
203 So.2d 644, 646
(Fla. Dist. Ct. App. 1967), cert. denied,
210 So.2d 868 (1968);
Anacomp, Inc. v. Wright,
449 N.E.2d 610, 617 (Ind. Ct. App.
1983); In re Estate of Mellott,
574 P.2d 960, 969 (Kan. Ct. App.
1977); Geier v. Mercantile-Safe Deposit and Trust Co.,
328 A.2d 311, 321 (Md. 1974); In re Fosdick's Trust,
152 N.E.2d 228, 232
(N.Y. 1958); Millar v. Mountcastle,
119 N.E.2d 626, 632 (Ohio
1953); In re Estate of Rees,
311 P.2d 438, 441 (Or. 1956); In re
Trust Estate of Pew,
158 A.2d 552, 555 (Pa. 1960). Following the traditional Arens approach, the Appellate Division in this case concluded (as had the trial court in the first three intermediate accountings) that the disputed
distributions were stock dividends when the issuing corporations
capitalized some amount of earnings. The guardian ad litem and
Manufacturers Hanover Trust Company argue, however, that the
traditional approach produces absurd results, that it is
outdated, and accordingly that the trial court for the fourth
intermediate accounting correctly replaced it with a different
rule. We agree. First, we agree with the observation concerning the peculiar results produced by a strict application of the traditional approach. Distributions to the trust of General Electric Company (General Electric) stock provide an excellent illustration of the incongruity that results from classifying stock distributions based solely on whether the issuing corporation transferred assets to a capital account. The first General Electric stock distribution occurred in June 1983. Before the distribution, the trust owned 1,200 shares of $2.50 par-value stock. The trust received an additional 1,200 shares of $1.25 par-value stock, and General Electric reduced the par value of the previously-held shares to $1.25 as well. Accordingly, the trust held 2,400 shares of $1.25 par-value stock in place of the 1,200 shares of $2.50 par-value stock it had owned previously. Before the distribution the market price of the shares was $105 per share, and after the distribution the market price was $53.25 per share. The cash dividend per share after the distribution changed from $0.85 per share to $0.475 per share, increasing slightly the
total cash dividends paid. General Electric characterized the
transaction as a two-for-one stock split, and no party to this
action disagreed with that characterization.
The second General Electric distribution, disputed by the
parties here, occurred in June 1987. See Appendix, infra at ___
(slip op. at 32). Before the distribution the trust owned 2,400
shares of $1.25 par value stock. The trust received an
additional 2,400 shares of $0.63 par-value stock, and General
Electric reduced the par value of the previously-held shares to
$0.63 as well. Accordingly, the trust held 4,800 shares of $0.63
par-value stock in place of the 2,400 shares of $1.25 par-value
stock it had owned previously. Before the distribution, the
market price of the shares was $100.50 per share, and after the
distribution the market price was $51.875 per share. Thus, up to
that point, the first and second General Electric transactions
seem identical in form. The difference between the two
transactions is that in the second distribution, General Electric
transferred $0.005 per share (a total of $24.00) from surplus to
its stated-capital account to avoid having shares with a par
value of a fraction of a cent. General Electric characterized
the second transaction as a two-for-one stock split, but the
Appellate Division called it a stock dividend because the
corporation had transferred a token amount from surplus to stated
capital.
We perceive no practical difference, however, between the
two distributions that would justify characterizing the first as
a stock split and the second as a stock dividend. General
Electric clearly intended both transactions to reduce the price
of its stock without affecting corporate assets. Both
transactions did reduce the market price of the shares by about
fifty percent. Moreover, we can hardly describe the transfer of
a mere $24.00 to stated capital as an attempt by General Electric
to capitalize earnings. The transfer of that small amount, which
constituted nothing more than a ministerial act designed to
simplify the corporation's calculation of par value, should not
be the key determining factor in deciding the overall character
of the stock distribution.
Moreover, the financial-accounting rationale for the
traditional approach may have undergone erosion. Before 1988,
New Jersey statutes required corporations to issue cash dividends
out of surplus. See N.J.S.A. 14A:7-14(2) (stating that
"[d]ividends may be declared or paid * * * out of surplus only
its total liabilities. See N.J.S.A. 14A:7-14.1 (repealing
N.J.S.A. 14A:7-14(2)). Although that statute deals only with
cash dividends, it nevertheless suggests that the nature of a
stock distribution should no longer turn on the source of funds
for that distribution.
We are convinced that the better approach is a functional
one. As the General Electric stock-distribution example and the
changing financial-accounting rules tell us, letting the result
turn on whether a mere token transfer of assets to stated capital
has occurred emphasizes technical bookkeeping form over the true
effect of a transaction. We need a rule that more accurately
reflects the issuing corporation's intention: whether to reduce
the market price of its shares to attract more investors, or to
reorganize its capital structure, or to distribute earnings. At least one other court has experienced similar dissatisfaction with the traditional approach in its effort to classify a complicated stock distribution. In Rogers Walla Walla, Inc. v. Ballard, 553 P.2d 1372 (Wash. Ct. App. 1976), the issuing corporation had distributed to defendants 2,400 shares of no-par-value stock with a stated capital of $6 per share in exchange for 100 shares of $100 par-value stock. For each new share the corporation issued to defendants, it transferred $1.83 from earned surplus to capital stock. The trial court determined that the transaction was a twenty-four-to-one stock split.
Defendants argued, however, that the transaction was a stock
dividend, "contend[ing that] the capitalization of earnings
surplus * * * settles the issue of dividend versus split." Id.
at 1376.
The Ballard court disagreed with the defendants, stating
that "a capitalization of earnings incident to an increase in the
number of outstanding shares is far from conclusive as to whether
the transaction is properly designated a dividend or a split."
Ibid. The court looked instead to several other factors to
determine that the transaction was actually a split:
(1) It is clear that [plaintiff's] board of
directors intended the distribution be
treated as a split; (2) the distribution
resulted in a pronounced ratio of new shares
to old; ordinarily 25 percent is viewed as
the maximum share increase for a stock
dividend, as distinguished from a split; (3)
there was no recent history of [plaintiff's]
stock dividends to minimize this percentage
test; and (4) the per share unit value was
markedly diluted, from $100 par value to $6
stated value, by the transaction.
The rule that we adopt today is similar to the trial court's bright-line rule that a stock dividend is a distribution of less than twenty-five percent of the sharehold. We modify that rule only to temper its arbitrariness, by treating the twenty-five percent as a rebuttable presumption. Although twenty-five percent is usually the maximum share increase for a stock dividend, see Ballard, supra, 553 P. 2d at 1376 (stating that
"ordinarily 25 percent is viewed as the maximum share increase
for a stock dividend * * *"); Accounting Standards, supra, §
C20.106 (same); Miller, supra, § 38.09 (same); New York Stock
Exchange, Listed Company Manual § 703.02 (1983) (same), a twenty-five-percent cut-off may not work well in every case. So complex
are stock distributions that we cannot safely discern their
character by falling back on generalizations. Accordingly,
although twenty-five percent is the presumptive benchmark, courts
may look behind a transaction to determine what the issuing
corporation intended to accomplish through the transaction.
We therefore adopt a rebuttable presumption that a
distribution of less than twenty-five percent is a stock dividend
and a distribution of twenty-five percent or more is a stock
split. In looking behind the transaction, courts should inquire
into all the facts and circumstances surrounding the
distribution, including (1) the effect of the distribution on the
market price of the stock and (2) the issuing corporation's
description of the transaction. We caution that of course a
corporation's mere use of the word "dividend" should not be
controlling.
The foregoing presumptive rule provides at least two
benefits: (1) it better reflects the true nature of stock
distributions than does the traditional rule, and (2) it is easy
to follow.
Anna Coffin Dawson's estate argues that the doctrine of collateral estoppel precludes this Court from applying a new definition of stock dividend in the fourth intermediate accounting. The estate asserts that inasmuch as the Chancery Division in the first intermediate accounting decided what method
to use to determine whether to characterize stock distributions
as dividends or splits, this Court may not use a different method
for the fourth intermediate accounting. We do not agree,
however, that collateral estoppel precludes us from applying our
newly-adopted rule to the accounting before us. For the doctrine of collateral estoppel to apply to foreclose the relitigation of an issue, the party asserting the bar must show that: (1) the issue to be precluded is identical to the issue decided in the prior proceeding, see Pittman v. LaFontaine, 756 F. Supp. 834, 841 (D.N.J. 1991) (stating that for issue to be precluded subsequent action must involve substantially similar or identical issues); (2) the issue was actually litigated in the prior proceeding, see ibid. (stating that "the litigant against whom issue preclusion is invoked must have had a full and fair opportunity to litigate the issue in the previous tribunal"); (3) the court in the prior proceeding issued a final judgment on the merits, see State v. Redinger, 64 N.J. 41, 45 (1973) (stating that collateral estoppel applies when "issue of ultimate fact has [ ] been determined by a valid and final judgment * * *"); (4) the determination of the issue was essential to the prior judgment, see Warren Township v. Suffness, 225 N.J. Super. 399, 408 (App. Div.) (stating that "[c]ollateral estoppel applies * * * to those [matters and facts] necessary to support the judgment rendered in the prior action"), certif. denied, 113 N.J. 640 (1988); and (5) the party against whom the
doctrine is asserted was a party to or in privity with a party to
the earlier proceeding. See Wunschel v. City of Jersey City,
96 N.J. 651, 658 (1984) (stating, "Central to the application of the
doctrine [of collateral estoppel] is that the party against whom
the doctrine is to be invoked must have been party to or privy to
the prior proceedings.").
Application of those requirements demonstrates that
collateral estoppel does not bar our applying a new rule in these
proceedings. First, the issues litigated in the fourth
intermediate accounting are not identical to the issues litigated
in the prior intermediate accountings. Although the prior
accountings did deal with the characterization of various stock
distributions as dividends or splits and with their resulting
allocation to corpus or to income, the issuing corporations and
their respective stock distributions were not the same in those
accountings: whereas in the first intermediate accounting the
trial court dealt with the allocation of stock distributions from
American Electric and Ohio Edison, here in the fourth
intermediate accounting we must determine how to characterize
distributions from Bellsouth, Citicorp, Dart & Kraft, General
Electric, Horizon Bancorp, and Pacific Telesis. Inasmuch as the
corporations and their corresponding stock transactions are
different, the issues to be litigated in the accountings are
different as well.
Moreover, no sufficient identity of parties exists. The interests of the unborn beneficiaries, who were not represented in the prior accountings but who are represented now by the guardian ad litem, did not receive in those prior accountings sufficient protection to bind them in this action. The conflict between the interests of the beneficiaries is clear. Although the minor beneficiaries who were represented in the first three accountings, which were rendered while Anna Coffin Dawson was still alive, did hold remainder interests in the trust at those times, many of those beneficiaries had the potential to become income beneficiaries in the foreseeable future. In fact, many of those persons would likely never live to receive the remainder; they would have to survive for twenty-one years after the death of the last survivor of the persons named in the will, all of whom were still alive, according to the guardian ad litem, at the time these accountings were filed. Accordingly, during the prior accountings, the interest of those beneficiaries did not lie completely with preserving the corpus. On the other hand, many of the minor and unborn beneficiaries now represented by the guardian ad litem would have been interested then, and are interested now, solely in preserving corpus because they will likely live to be the ultimate remaindermen. Therefore, because the beneficiaries represented in the prior accountings did not have the same interests as the interest of the guardian ad litem's wards, collateral estoppel does not apply. See Stegmeier v. St. Elizabeth Hosp., 239 N.J. Super. 475, 487-88 (App. Div.
1990) ("That the parties may have similar interest in the outcome
of the litigation * * * does not of itself establish privity of
interest for purpose of issue preclusion."); cf. Rutgers Casualty
Ins. Co. v. Dickerson,
215 N.J. Super. 116, 122 (App. Div. 1987)
(pointing out that fact that parties have similar interest in
outcome of litigation does not in itself establish privity of
interest for res judicata purposes).
Finally, the doctrine of virtual representation, codified at
Rule 4:26-3, does not require us to reach a different result.
That doctrine allows "a party to the action whose future interest
is the same as others having a future interest * * * [to
represent the interests of the others because] a necessary by-product of that party's own self-interested activity * * * will
constitute adequate protection of the interest of the non-parties." Pressler, Current N.J. Court Rules, comment on R.
4:26-3 (1993). However, the doctrine does not apply if "it shall
affirmatively appear in the action that there exists a conflict
of interest between the persons so joined and the persons not
joined." R. 4:26-3(a). We are satisfied that here the interests
of the beneficiaries conflict.
Even if all the elements of collateral estoppel did clearly
exist, however, we would not apply that doctrine in the
circumstances before us. This case would fit into an exception
to the doctrine's application:
[Plainfield v. Public Serv. Elec. & Gas Co.,
See also State, Dep't of Envtl. Protection & Energy v.
Santomauro,
261 N.J. Super. 339, 342 (App. Div. 1993)
("[C]ollateral estoppel is an equitable doctrine and need not be
applied 'if there are sufficient countervailing interests,' or if
it would not be fair to do so.") (quoting In re Coruzzi,
95 N.J. 557, 568, appeal dismissed sub nom. Coruzzi v. New Jersey,
469 U.S. 802,
105 S. Ct. 56,
83 L. Ed.2d 8 (1984)).
The issue before us is purely one of law: the definition of
a stock dividend. Moreover, we seek to avoid the inequitable
results associated with application of the traditional approach.
See supra, at ___ (slip op. at 19-21) (discussing General
Electric stock example). Accordingly, collateral estoppel does
not bar our adoption of a twenty-five-percent rebuttable
presumption to distinguish stock dividends from stock splits.
The judgment of the Appellate Division is reversed, and the
judgment of the Chancery Division requiring the trustees to
allocate the eight disputed stock distributions to principal is
reinstated.
Justices Handler, O'Hern, Garibaldi, and Stein join in this
opinion. Chief Justice Wilentz and Justice Pollock did not
participate.
The following descriptions of the eight disputed stock
distributions are from the complaint filed by Manufacturers
Hanover Trust Company in respect of the fourth and fifth
intermediate accounts.
(1) Bellsouth: May 31, 1984
The trust owned 300 shares of $1 par-value common stock.
Bellsouth distributed to the trust an additional 600 shares of $1
par-value common stock, transferring funds from capital surplus
to capital stock. The distribution did not reduce the par value
of the previously-held shares but it did reduce the market price
of the shares from $91 to $29.8125 per share (approximately
sixty-six percent). Before the distribution the cash dividend on
each of the shares was $1.95 and after the distribution it was
$0.65. Accordingly, the total cash dividend the trust received
was the same before and after the distribution (although the
amount of the dividend per share was less after the distribution,
the trust owned three times as many shares as before the
distribution). Bellsouth characterized the distribution as a
stock split.
(2) Bellsouth: March 3, 1987
The trust owned 900 shares of $1 par-value common stock.
Bellsouth distributed to the trust an additional 450 shares of $1
par-value common stock, transferring unissued shares out of
capital surplus into stated capital. The distribution did not
reduce the par value of the previously-held shares but it did
reduce the market price of the shares from $60.50 to $40.50 per
share (approximately thirty-three percent). The distribution
increased slightly the total cash dividends paid to the trust.
Bellsouth characterized that distribution as a stock split as
well.
(3) Citicorp: November 20, 1987
The trust owned 500 shares of $1 par-value common stock.
Citicorp distributed to the trust an additional 500 shares of $1
par-value common stock, transferring unissued shares from surplus
capital. The distribution did not reduce the par value of the
previously-held shares but it did reduce the market price of the
shares from $41.375 to $20.5625 per share (approximately fifty
percent). The total cash dividends paid on the stock remained
the same after the distribution. Citicorp characterized the
transaction as a two-for-one stock split.
(4) Dart & Kraft (now Kraft General Foods, Inc.):
June 24, 1985
(5) General Electric Company: June 4, 1987
The trust owned 2,400 shares of $1.25 par value common
stock. General Electric distributed to the trust an additional
2,400 shares of common stock with a par value of $0.63, reducing
the par value of the previously-held shares to $0.63 as well.
General Electric transferred $0.005 per share from surplus to its
stated-capital account to avoid having shares with a par value of
a fraction of a cent. The distribution reduced the market price
of the shares from $100.50 to $51.875 per share (approximately
fifty percent). General Electric characterized the transaction
as a two-for-one split.
The trust owned 1,500 shares of $4.00 par value stock.
Horizon Bancorp transferred to the trust an additional 750 shares
of $4.00 par-value stock, charging $4.00 against retained
earnings and crediting $4.00 to the common-stock capital account.
The distribution did not reduce the par value of any of the
previously-held stock but it did reduce the market price of the
shares from $30.50 to $20.625 per share (approximately thirty-three percent). The distribution also increased the total cash
dividends paid to the trust. Horizon Bancorp characterized the
transaction as a three-for-two split.
(7) Pacific Telesis Group: June 17, 1986
The trust owned 475 shares of $0.10 par value common stock.
Pacific Telesis distributed to the trust an additional 475 shares
of $0.10 par-value common stock, transferring for each additional
share issued $0.10 from the Additional Paid-In Capital Account to
the Common Stock Account. The distribution did not reduce the
par value of the stock previously held but it did reduce the
value of the shares from $101.25 to $50.375 per share
(approximately fifty percent). The total cash dividends paid to
the trust after the distribution remained the same. Pacific
Telesis characterized the transaction as a two-for-one stock
split.
The trust owned 950 shares of $0.10 par-value common stock.
Pacific Telesis distributed to the trust an additional 950 shares
of $0.10 par-value common stock, transferring for each additional
share issued $0.10 from the Additional Paid-In Capital Account to
the Common Stock Account. The distribution did not reduce the
par value of the previously-held shares but it did reduce the
value of the shares from $55.375 to $27.375 per share
(approximately fifty percent). The total cash dividends paid to
the trust increased after the distribution. Pacific Telesis
again characterized the transaction as a two-for-one stock split.
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