Dividends to Shareholders

Statute of Limitations on Failure to Pay Dividends to Shareholders

Statute of limitations issues on claims for failure to pay dividends to shareholders.

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Time Limits on Forcing the Corporation to Pay Dividends to Shareholders.

A claim to force the corporation to pay dividends to shareholders is based on the premise that the corporation is holding money on behalf of the shareholders. In a claim for suppression of dividends, as in Patton v. Nicholas or Morrison v. St. Anthony Hotel, as re-interpreted by the Texas Supreme Court inRitchie v. Rupe, the shareholder asserts that the corporation's failure to pay dividends to shareholders was a breach of fiduciary duty and either pursues a derivative claim based on breach of the directors' fiduciary duties to the corporation and obtains a mandatory injunction ordering the payment of dividends to all shareholders. Where the derivative remedy is unavailable or inadequate, the shareholder may sue the corporation individually based on breach of trust seeking injunctive relief or damages. If dividends have been declared but not paid, then the shareholder has an individual action against the corporation for payment of debt. If dividends have been in fact been paid to some, but never declared, then the shareholder may seek an equitable remedy to have the Court find a constructive declaration of dividends and order the corporation to pay the dividends to the minority shareholders. In a constructive dividend action the claim arises out of fiduciary duties but payment obligation is simply based on a debt.

The statute of limitations for both claims based on fiduciary duties and claims based on debt is four years. The discovery rule typically applies to fiduciary duty claims but not to debt or contract claims. So what if the corporation has been holding the shareholders' money for more than four year? That was the situtation that confronted the Texas Supreme Court inYeaman v. Galveston City Co., in which dividends had been declared and paid over a period of 72 years, but no dividends had been paid to one of the shareholders and his heirs. The The corporation asserted the statute of limitations. The Supreme Court rejected the defense and ordered the corporation to account for and pay to the shareholders their dividends.

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Tolling Limitations When a Corporation Fails to Pay Dividends to Shareholders

Specifically, with respect to claims for failure to pay dividends to shareholders and for wrongful payment of disproportionate de facto dividend claims, a unique tolling doctrine has developed in Texas law. First, each dividend is a separate transaction, and each refusal to pay is also separate cause of action. Therefore, the statute of limitations does not apply to the failure to pay dividends to shareholders in the four years preceding the lawsuit in any event. Second, the corporation is deemed to hold all unpaid dividends in trust for the benefit of the shareholder and such dividends are payable to the shareholders upon demand. Under Texas law, the shareholder “is under no obligation to draw or demand his dividends within any prescribed period. He may leave them with the corporation, if he chooses, and be under no default. The debt which a declared dividend creates on the part of the corporation to the stockholder is one payable only on demand, as is the obligation of a bank to its depositors. It is not subject to limitation until there has been a demand upon the corporation and a refusal to pay.” Therefore, if the shareholder never makes demand, and the corporation never serves notice of no intent to pay, the limitations never begins to run, and the corporation continues to be liable even for a period as long as 72 years.

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However, “it is not necessary that a specific demand for dividends should be made, and the same should be refused, in order to put the statute of limitation in motion. If the acts or words or both, of the corporation, clearly and unequivocally indicate to a stockholder that the corporation will not pay a dividend to him, this
would be equivalent to a demand and refusal for the payment of such dividend.” The shareholder must have clear notice of the refusal to pay,  and because of the fiduciary relationship, the diligence required of the shareholder is not “as prompt and as searching an inquiry into the conduct of the other party as where the parties were strangers or were dealing with strangers.”  The mere opportunity or power to investigate is not sufficient to start the running of the statute of limitations; actual notice, not constructive notice, is required.

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