The Washington herald., 1910-01-17
CUTTING A BIG MELON.
The Right to Capitalize Corporate
Surplus Upheld.

This large amount Of new
stock will not be paid for by the re-
in money or property or services
1t will not represent the receipt by the
Harvester Company of any new cash
or the acquisition by 1t of any new prop
erty.
It Is interesting 20 note that contem-
with this important step OF
the Harvester Company, an administra-
ton measure has been introduced by
Representative Townsend undertaking TO
deal with this same general subject.
and hearings upon this bin are to soon
begin. = measure contains a highly
impoFtxzsA and very comprehensive clause
covering the issue Of shares of capital
stock by corporations. which reads sub
stantially as follows:
No coronation shall hereafter issue for any
purpose connected with its business any capital stock
without previous or simultaneous payment 70 " OF
not less than the par value Of such SOCK ana 30
property. services. other thing than money snail
he taken IN payment % the corporation OF ne lar
value Of such stock except az the fair value Of such
uroreTtv services or other thing than money 10 he
ascerained by the Interstate Commerce Commission
ANY officer director or stakeholder who assents to
or conolrs in any issue Of securities forbidden by
this act may he punished by Imprisonment IN the
Penitentiary for three years.
1T is clear" said a Western lawyer,
that if in the progress OF the administra-
ton bill this provision is applicable TO
companies OF this class. as it may well
become. then not only would the officers
and directors Of the Harvester Company,
but every stakeholder who gave his as
sent By accepting the certificate offered
to him would likewise be liable 10 con-
finement in the penitentiary for three
years
'It is Of the greatest Importance TO all
persons engaged in business in this coun-
try and to every stakeholder in a corpora
ton clearly to understand the moral
ground upon which such issues OF stock
as those about TO be made by the Har-
vester Company are 10 be hereafter for
hidden under extreme penalties II they
are morally wrong and indefensIble, then
no just minded stockholder will accept
the certificate. whether the proposed new
administration act technically applied TO
his company or not.
what principle OF law or morals. there
fore. is violated by the proposed issue by
the Harvester Company Of s90O00O00 OF
new stock, aud its distribution among the
existing stockholders?
The explanation made by the president
Of that company is that the S20,0000o0 is
a surplus which, during the past seven
years. the directors have invested in the
business it is also called 'back-dividend
money This is only another way Of
stating that all the profits have not been
divided from year 10 year, but that the
accumulation Of these surplus profits is
being divided this year. not in cash, but
in shares Of stock.
If this surplus consisted Of cash de-
posted in the bank. who would It right
fully belong TO? Manifestlv, 20 the own
ers Of the property-the stockholders and
each could morally and lawfully accept
a dividend Of $50 in money upon each
share Of his stock But IL IS not in cash,
It has been Invested in coal lands in Ken
lucky, and forest lands. and in iron ore IN
Wisconsin and other property. TIE stock
holders. by refraining from dividends 10
which they were justly entitled. have
approved OF the investment Of their
money. their profits. their surplus in
these properties How is any moral or
business principle violated by issuing
shares Of stock 10 them TO represent the
actual value Of the investment they have
thus made?
They are simply retaining. in the form
Of shares, the property interest which be-
longs to them.
1t is a universal practice among all
corporations. and its absolute prohibition.
as contemplated by the provisions OF the
Townsend law. would make a great
change in the corporations Of this coun-
try.
As introduced, the act only applies TO
property invested IN railroads. but ad-
vanced social scientists like Prof. Henry
| c. Adams. have for years maintained that
such surplus profits in all corporations
/ belong to the public. or that the state
| is at least a partner in their ownership.
/ In the case OF mining companies, the uni
versal practice has always been 10 anti
cipate the profits constituting the surplus
applicable 10 dividends. by issuing stock
" ftNCLIl illtiit mat H. bF 5fitlAlE lL4E
stock below par. The hope Of future
profit thus expressed in stock issues is
the basis Of practically all mining com
Ipauies If that is TO be forbidden. il will
seriously affect the mining industry and
1.-THE formation Of corporations 10 establish
/ or to conduct any business in which there
| is an important element Of risk.
| Morally and economically, no distinc-
| ton can be drawn between a railroad
companys profits or surplus and those OF
a Harvester Company Both derive their
profits from the patronage Of the public.
| The railroad involves more risk. there is
more uncertainty whether profits can be
made In the case Of most railroads than
| there has ever been I'm the case Of this
| Harvester Company. which has been q
virtual monopoly from the beginning.
| Beyond question, serious business and
! economic results will follow the enact
ment Of the extreme provisions Of the
Townsend law. II IS only a question Of
time when similar restrictions will be
proposed upon the issue Of stock in any
corporation to represent its surplus.
Most of the States have laws forbid
ding the issue Of fictitious stock. The
stock proposed TO be issued by the Harv-
/ ester Company is not fictitious but with
penalty of three years I'm the penitenti-
| airy before their eyes, who Will take the
risk of even such an innocent stock trans
action as the issue in question appears
/ TO be?''
! BROTHERS Emulate WriChtS,