S.

One of the most cheerful things a corporation can do is to declare a
dividend, especially if it be a large one. Until a dividend is
declared the profits of a corporation are simply its assets, do not
belong to the stockholders, and should it become insolvent must be
used to pay creditors. But if a dividend has been declared and the
corporation afterwards becomes insolvent before paying it, the
stockholders may insist on its payment to them instead of paying it to
the creditors.

Dividends must be paid from net profits. They can never be taken from
the capital, for this would impair it and, if continued, result in the
insolvency of the corporation. The laws everywhere forbid this, and,
if violated, the directors are usually penalized. It is not an
infrequent thing to declare a dividend that has not been earned in
order to keep up the value of the stock, and enable the directors and
their friends to sell out before the true condition of things has
become public. Such action is a palpable fraud which the law
recognizes and for which the guilty ones must answer.

Nor can dividends be declared out of borrowed money, for this is no
profit, though money may be temporarily borrowed for this purpose. A
profit may have been actually made, which may not have been reduced to
money, that will justify a corporation in borrowing to pay a dividend,
assured that the loan will soon be repaid. But the rule or practice is
hedged about with limitations. Thus the premiums received by an
insurance company and interest on its capital stock constitute the
fund from which dividends are paid. Unearned premiums that have been
paid do not form a part of that fund, for, while the risk is still
running, the company may be obliged to pay them out in settling
losses.

The profits of coal and other mining corporations may be divided
without making any deduction for decrease in the value of the mine
from extracting minerals. The same principle applies to all
corporations organized to operate wasting property like a mine or
patent, though in thus dividing all its net profits and accumulating
no surplus the value of the property is lessened. Except such cases,
before a corporation can lawfully set apart its profit as a dividend,
a sufficient sum must be set aside to represent the wear and tear for
the purpose of creating a fund to renew and improve the property of
the corporation.

Dividends illegally declared and paid, not based on profits may