home | authors | books | about

Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XXIX

Commerce and Finance - Chapter XXIX

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII





A corporation is an artificial person created by law. It is a
personage entirely distinct from the individuals who form it or
conduct its affairs. Its members may all die and be succeeded
by others, but its existence is not affected thereby. It continues
on indefinitely or until its charter expires, or is forfeited or
surrendered. Corporations are of two kinds, public and private.
Public corporations are such as are created for public purposes,
viz., cities, towns, libraries, hospitals, etc. Private corporations
are such as are conducted for private purposes and for the benefit
of those directly connected therewith, as railroad, bank, insur-
ance, manufacturing and mercantile corporations.
Definition In the case of public corporations every citizen is

a member of the corporation. In the case of
private corporations only those are members who own shares
of stock. A close corporation is one with a limited membership,
no stock for sale to the public and vacancies filled by selection,
the prime object being to keep the profits of the company within
a small circle or family and immediate connections. Many of
the most profitable business corporations are conducted in
this way.

One of the primary reasons why a corporation, rather than a
co-partnership, is preferred by those intending to embark in an
enterprise is that when the capital stock is paid for by the



stockholders there is no further individual liability for debts
and obligations of the corporation, and in case of insolvency and
failure of the corporation, their loss is but the amount they
have already invested when they subscribe to their shares of
stock. If the stock is not fully paid up, the stockholder is
liable to creditors and the corporation for the unpaid balance,
while in a co-partnership business, conducted by individuals, each
individual is personally liable for the entire obligations of the
co-partnership of which he is a member.

Another reason for preferring a corporation to a co-partner-
ship is the facility it affords for procuring investments by the
public, who, by reason of the segregation of the entire capital
into numerous small shares, are enabled to make an investment
of such amount as the individuals desire. This method enables
4*J*ganizers and promoters to enlist in their enterprises the capital
of a multitude of investors, large and small, which they would
be unable to interest without such form of organization.

Corporations are creatures of the state, and are formed
either by special charter or compliance with the requirements of
a general statute. At the beginning of the century all corpora-
tions in this country were formed by special char-
^ QT ' but ow i n g to the corruption and bribery re-

sorted to in order to get charters passed through
the legislatures of the several states, containing favorable terms
and granting valuable privileges and monopolies, the constitu-
tions of most all of our states have been amended so as to
prohibit the legislatures from granting special charters. Many
corporations are formed for the purpose of conducting an or-
dinary business in competition with other houses, as banks,
railroads, etc., or for buying out or "taking over" established
concerns, while others are formed especially to develop or pro-
mote a particular franchise, invention or discovery. In the
latter case the value of the shares is largely fictitious, being
based upon the estimated future profits of the company. A


large portion of the capital stock goes to the inventor or dis-
coverer or promoter of the enterprise, as payment for his
services, and the rest is sold to the public, usually at a very low
price at first, and an increasing price as fast as the stock will
sell. It is in the formation and promotion of corporations that
serious evils and abuses have grown up in this country. Fraudu-
lent prospectuses are issued by skillful "promoters" versed in all
the arts by which stock is sold, representing that the enterprise
is fully afloat and the stock paid up, when in fact it has been
"paid up" only by worthless patents, or property purchased
at a gross over-valuation. The number of "bubbles" which are
floated every year, and in which the inexperienced and unwary
lose their savings, is astounding. In England this evil became
so great that in 1867 a law was passed requiring a public registry
of all contracts whereby stock was issued by a corporation in pay-
ment for any franchise or other property. Investigators claim
that over speculation is largely due to the formation of corpora-
tions that have no real excuse for existence, except the further-
ance of the personal aims of the promoters. The fullest possible
publicity concerning the initial acts of every new company is
believed to be the only remedy for the existing evils.

It frequently occurs that subscribing stockholders are not
required to pay the full amount of their stock upon subscrip-
tion, or when it is issued, but that the balance that may be due
the corporation is subject to the "call" of the
directors. The usual penalty imposed upon the
stockholders for failure to respond to the "call"
is the forfeiture and sale of their stock upon reasonable notice,
and the proceeds of such sale are used to pay the obligation
contracted by the subscriber. The subscriber is also liable to
the corporation for unpaid subscriptions, and failure to respond
to the "call" generally renders the subscriber liable to suit for
the recovery of the unpaid balance.

In corporations conducted for the benefit and profit of mem-


bers, the interest of each is represented by the number of shares
of stock which he holds. These shares of stock may be trans-
ferred or assigned, and the person to whom they
sioc? f are ^ nus transferred becomes entitled to all rights

belonging to the assignor. In case of death of a
shareholder his legal representatives succeed to the ownership of
the stock. The ordinary stock of a corporation is called common
stock to distinguish it from preferred or other kinds.

Each share of stock in a corporation has what is technically
termed a par value. This means the value indicated on the face
of the stock certificate itself, which usually ranges from $1 to
$100 per share. A great many mining corporations have stock at
a par value of $1, while manufacturing and mercantile corpora-
tions usually have stock at the par value of $100. Other cor-
porations have stock at the par value of $5, $10, $25 and $50 a
share. The entire issue of stock is universally of the same par
value. The par value of stock may differ from its
market value. The market value of stock is
usually ascertained from what the buying public
would pay for the stock in open market. Some stocks have a
market value much greater, even several times greater, than
their par value. This is usually caused by the large earnings
of the corporation making the stock a valuable investment, and
the demand of investors for stock regularly earning large divi-
dends causes the market value to appreciate. It, of course,
naturally follows that there are stocks in many corporations that
have no market value, and others whose market value is
less than the par value. It is not uncommon that stocks in
national banking corporations have a market value largely ex-
ceeding the par value, although the dividends are not necessarily
larger than stocks of other corporations of a lesser market value;
the usual careful management of national banks, coupled with
the watchfulness of government officers over their affairs and the
laws regulating them, insures to the public, in a very large


measure,, the safety of the investment and the stability of the
corporation itself, which frequently appreciates the value of the
stock of such institutions to a higher market value than stock in
other corporations earning much larger dividends.

Preferred stock is that which entitles its owner to profits
or dividends in preference to other stockholders. "Guaranteed/'
"preferential," "preference" and like expressions mean the same.
"Interest bearing" stock is a species of preferred
stock similar to a bond, since the company has
promised to pay interest in the nature of a fixed
dividend upon such stock, in preference to the common stock.
In case of preferred stock, its dividends are to be paid out of
the profits of the company first, and the common stock is then
entitled to what remains.

In the cases of certain trading and manufacturing concerns,
instead of issuing bonds for borrowed capital, they issue pre-
ferred stock, in one or more classes, such as first preferred, sec-
ond preferred and then common stock. Such stock usually has
"cumulative" dividends, which means that a dividend passed
at one period must be made up from future earnings before
the unpreferred shares receive any portion of the profits.

Such preference stocks are almost the same as bonds, the
difference being that they may or may not have preference of
claim against the assets of the company in case of failure, de-
pending upon the conditions under which they were issued,
and the dividends are not absolutely due and payable, like the
interest on a bond. In a year of depression or loss the dividend
on preferred stock can be passed, and will cumulate, but in the
case of bonds, if the interest is not paid foreclosure may result.
Therefore preferred stock is better for the company than bonds,
although the holder of the bond may feel more secure on ac-
count of the annual payments of interest being obligatory.

Since preferred stockholders have rights superior to common
stockholders, in reference to dividends, it is essential that the


creation of preferred stock should be strictly in accordance with
the statutes of the state in which the company is organized. If
creation of ^ e stock is divided into the two classes before
Preferred being subscribed, every one subscribing to either

class of stock assents to the conditions, but in
case a company issues only common stock and afterwards
finds itself short of capital to conduct the business, it may then
issue preferred stock, as a means of raising funds. This can
only be done, however, after a unanimous vote of all the holders
of the common stock, properly certified to the Secretary of State
and his permission received. The holders of the common stock
thus agree to surrender the first earnings of the company to the
preferred shareholders with the hope that by means of the
additional capital and good management, there may be a profit-
able remainder left for them.

Many corporations reserve in the hands of the treasurer a
quantity of stock to be sold or given away at some future time,
SK occasion or policy may require, for the promotion of the
business. This is called treasury stock, and is the property of the
corporation. In case the stock is given away or sold at a dis-
count, however, should the company become in-
Treasury stock solvent, those holding such stock would be liable
to the creditors of the company for the difference
between the amount paid for the stock and its par value, and
this notwithstanding the stock should bear the words "paid up
stock" or "fully paid and non-assessable." Thus it will be seen
that any person who accepts stock as a gift from a corporation
for his "influence" or on account of his "standing" in the busi-
ness community assumes a liability not to the company if the
stock is marked "paid up stock," but to the creditors in case
the company fails.

Sometimes the stockholders of a corporation, after com-
plete organization and during its business life, donate by mutual
agreement a certain percentage of their stock to be held in the


treasury of the corporation and sold, and the proceeds used in
the corporate enterprise. This stock is also called "treasury
stock." This plan is often adopted by stockholders of an in-
solvent corporation or of one whose assets are impaired, and the
corporation is by that means made solvent. This plan is resorted
to in many instances instead of an increase of capital stock. An
increase of capital stock would not benefit the corporation unless
the stock were donated to it, and under the circumstances could
not be sold as readily as the treasury stock donated in the other

Watering stock consists in increasing the amount of stock
issued beyond the value of the assets of the corporation. It
is an art in which the present generation seems to have become
expert, and by means of its clever manipulation great "oper-
ations" have been financed, to the enrichment of the manipulat-
ors. Suppose a gas company has a franchise to supply the city
and public with gas, and charges what is believed to be a fair
price therefor. After the company is well "a-going," by means
of good management or through the invention of improved
processes of manufacture it finds that it is making a very large

profit and will be able to declare an exorbitant
Watered stock dividend. Knowing that if the public were aware

of its large profits there would be an immediate
clamor for a reduction in the price of gas, it sets about increas-
ing its capital stock to two or three times the original amount
and distributing it among the stockholders so that the rate of
dividend will be reduced to the normal income on capital.
Then again a corporation operating under a franchise for a town
or city, like a street railway, may have a stipulation in its fran-
chise that all net earnings over a certain percentage shall be
paid into the municipal treasury, as a compensation for the use
of the franchise. By watering its stock it manages to keep the
percentage of earnings below the limit and thus avoids payment
of the excess rightfully due to the municipality.


The stock of a corporation is sometimes watered by the
officers or a few large stockh6lders for their own benefit. They
represent that it is necessary to largely increase the capital stock
of the company in order to enlarge the plant, etc. After the
increase has been voted by the stockholders and authorized by
the Secretary of State, the few who are manipulating the deal
make a loan to the company and take the new stock in abundant
quantity as security. Of course there is a default in the payment
of the loan when due and the stock becomes the property of the
lenders. In the case of many corporations of a speculative char-
acter the stock consists largely of water from the first, the actual
assets bearing a small proportion to the capitalization of the
company. The officers and promoters sell the stock to outsiders
until they have secured sufficient money to conduct the enter-
prise, and retain the balance (usually a large portion) for them-
selves. This is termed "getting in on the ground floor." Of
inducements course watering stock is an illegal proceeding,
to stock usually engaged in for the purpose of deceiving

the public, and may be punished by the revocation
of the company's charter. But an increase of the capital stock
above the tangible assets to a. point which will include the value
of the franchise or "good will" is perfectly legitimate, for the
latter may be the most valuable asset of the company. Corpora-
tions are sometimes inclined to place a very large valuation upon
the "good will" or franchise, especially if they are earning large
dividends, owing to the prejudice in the public against larger
dividends than the usual rate of interest on loans. A firm may
earn 10 or 15 per cent, upon its capital and nothing is said or
thought of it, but if that firm should organize into a corporation
and earn the same profits, it would be severely condemned by
public opinion. Public sentiment is therefore a constant pres-
sure upon corporations to drive them to stock watering.

Money earned by a corporation over and above its expenses
remains the property of the company until the directors declare


a dividend, when it becomes the property of the individual stock-
holders. The company may then distribute the entire net earn-
ings as dividends or it may reserve part of the earnings of a
prosperous year to make up for possible lack of profits in future
years, or it may invest a portion of its net earnings in improve-
ments of the plant and distribute the remainder as dividends.

Again it may, by vote of the stockholders, declare
Dividends a stock dividend, that is, a dividend payable in

stock instead of cash. This is equivalent to an
increase of the capital stocl of the company and must be certi-
fied to the Secretary of State. A stock dividend is perfectly
legitimate and proper when the entire net earnings of the busi-
ness are needed to improve the plant, thereby increasing its value
to correspond with the increase of the capital stock.* When
stock is sold the dividend goes to the buyer, unless otherwise
agreed, and unless the dividend has been declared. If the divi-
dend has been declared it becomes in a sense separated from
the stock and is the personal property of the one who owned the
stock at the time it was declared.

Fictitious dividends are those which are supposed to be earned
by the company, but are really paid out of the capital or from
borrowed money. The object is to deceive stockholders into
believing that the company is prosperous when it is not, thereby

inducing them to purchase more stock or persuade
Dividends ^ir friends to do so. When stockholders become

suspicious false statements are made as to the earn-
ings, expenses, value of the franchise, etc., and thus they
are quieted, while the manipulators of the company's affairs

*The issuance of a stock dividend, although in many respects analogous
to stock watering, is not open to the same objection, since the issuance of
the additional stock does not involve a marking up of the book value of the
company's assets beyond their actual value. Some of the best managed
companies pursue the policy of paying very small cash dividends and capi-
talizing their surplus accumulations in this way from time to time, thus
keeping most of the earnings in the business while giving the stockholders
what amounts to a fair return on their investment.


perhaps are selling out or "unloading" their stock quietly, at a
good price, leaving the corporation wrecked. In rare instances,
however, fictitious dividends may be justifiable. Thus when
a succession of prosperous years is followed by one of disaster and
loss, after which the business promises good returns again, it
may be proper to continue the same dividends through the bad
year, rather than destroy the regularity of them to stockholders.
An illustration of this policy is the Chicago, Burlington &
Quincy Eailroad Company. In 1888 the company suffered se-
verely on account of a strike among its locomotive engineers.
Though frankly admitting that no dividends were earned that
year, the company paid the usual dividend rather than disturb
the value of its stock and disappoint shareholders. Under the
circumstances this was justifiable.

Corporations are not permitted in law to declare and pay
dividends upon stock when their assets, at a fair valuation, are
not sufficient to pay their outstanding indebtedness to creditors in
full, and if directors and officers of a corporation knowingly
declare and pay dividends under such circumstances, they are
generally held individually liable for all of the existing debts
and obligations of the corporation and those subsequently con-
tracted. The payment of such dividends is considered a fraud
and has in instances been indulged in to procure to the stock-
holders assets of the corporation which should
Dividends nave & one * the payment of corporate indebted-

ness. As long as the corporation is solvent and
has ample assets with which to discharge its existing indebted-
ness, there is usually no restraint upon paying dividends, though
unearned. This is a dangerous proceeding, at all events, and
the creditors, whose obligations have accrued subsequent to
the payment of such dividends, are, under some circumstances,
permitted to recover from the stockholders the dividends so paid,
when subsequent insolvency demonstrates that the capital was
impaired by such payment of dividends, and suspension of busi-
ness and failure followed.


The surplus fund, reserve fund, or sinking fund is the ac-
cumulation of a portion of the net profits of the corporation
set aside each year as a contingent fund to liquidate a debt, meet
reverses or enable the company to declare a uniform rate of
dividend whether the earnings are uniform or not. For the
purpose of marketing the stock and avoiding the fluctuations in

value which would be caused by a fluctuating divi-
Surpius dend, the surplus fund is created, and if the net

earnings should fall below the usual minimum
dividend limit, the surplus is then drawn on for the deficiency.
This enables the company to declare a uniform dividend, gives
better satisfaction to the stockholders, who know about what
dividends to expect, and makes the stock much more salable and
desirable to investors.

A sinking fund may be created to meet an outstanding obliga-
tion falling due at some future date. If it is a bond issue, the
deed of trust given as security for the bonds usually provides
that a certain sum shall be set apart out of the net profits and
paid to the trustee. The trustee then invests these sums in the
company's bonds of the issue to be retired, or any other issue of
the company, according to the provisions of the trust deed, and
these are held in trust until the final settlement, when the ma-
tured bonds are canceled and returned to the corporation. The
trust deed may provide that the trustee is to invest the sinking
fund in bonds of other companies or it may be left to his dis-

© Art Branch Inc. | English Dictionary