- 85 -
to declare and pay dividends, it had to pay prescribed amounts of
dividends with respect to the ELC preferred stock, which amounts
were cumulative, before it could pay any dividends with respect
to the ELC common stock. We find that the preferential dividend
provision involved in Erie Lighting Co. v. Commissioner, supra,
was not mandatory,26 see 12 Fletcher Cyclopedia of Corporations,
sec. 5445 (perm. ed. 1986), and that it is materially different
from the mandatory dividend provision involved in the present
case. In so finding, we have not only relied on and construed
the language of the preferential dividend provision as set forth
by the court in Erie Lighting Co. v. Commissioner, supra, we also
have been mindful that that court found that under the applicable
State law and ELC's bylaws the management of the business and
affairs of ELC, and thus, inter alia, the power to determine
whether or not to declare and pay dividends, were entrusted to
its board of directors. Petitioners, however, appear to dispute
that finding of the court in Erie Lighting Co. They contend that
26 Even assuming arguendo that the dividend provision in Erie
Lighting Co. v. Commissioner, 93 F.2d 883 (1st Cir. 1937), had
required the ELC board to declare and pay dividends, the parties
in that case did not advance any arguments with respect to the
impact of any such mandatory dividend provision on the classifi-
cation of the preferred stock involved there as voting or nonvot-
ing stock for purposes of the applicable consolidation provi-
sions. Consequently, the court in Erie Lighting Co. did not have
occasion to, and did not, address the effect of a preferred stock
mandatory dividend provision on whether such stock was voting or
nonvoting stock and did not reach its holding on the basis of any
such alleged mandatory provision.
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