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Simple English definitions for legal terms
cast-iron-pipe doctrine
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A quick definition of cast-iron-pipe doctrine:
The cast-iron-pipe doctrine, also known as the dividend-credit rule, is a principle that states that a company must use its reserve fund, which is made up of unpaid dividends on preferred stock, to pay dividends on preferred stock before paying dividends on common stock. This means that preferred stockholders have priority over common stockholders when it comes to receiving dividend payments from the company.
A more thorough explanation:
The cast-iron-pipe doctrine, also known as the dividend-credit rule, is a principle that states that a company's reserve fund, which is created from unpaid dividends on preferred stock, must be used to pay subsequent dividends on preferred stock before any dividend payments are made on common stock.
For example, if a company has both preferred and common stock, and it has accumulated a reserve fund from unpaid dividends on preferred stock, it must use that fund to pay dividends to preferred stockholders before paying any dividends to common stockholders.
This doctrine is important because it ensures that preferred stockholders receive their dividends before common stockholders, which is fair since preferred stockholders have a higher priority in receiving dividends.