The Hawaiian gazette. [volume] (Honolulu [Oahu, Hawaii]) 1865-1918, 1916-06-13

III
not exceed its capital stock. The pro-
ceeds Of these bonds, to-wit, $250,O00
may then be invested 7, in the road,
whereupon, the respondent says, the
cost now being $4,000, the capital
stock Of the corporatiou may be in
creased to $450,000 plus twenty Ave per
cent Sor 1865, 500 and that II can pay
dividends up TO eight per cent on this
amount Additional bonds may now
be issued to the amount Of $312,500,
which, being spent upon the road, bring
the cost Of the road, according to re-
spondent, up to $762, 500 and under the
same twenty-five per cent rule the
stock may now be Increased 20 1863, 125
| whereupOn the road may now issue an
additional s39O,625 worth Of bonds,
and having done 80 and spent the
money on the road, the road has now
cost 81, 1872 and stock may now be
increased up to $l,441,4 O6. = This pro-
cess could be continued indefinitely
without any further payments by stock.
holders.
Review OF Transaction 81. n..sr
When this transaction is reviewed,
the situation results in this: Stock
holders have contributed only $200, 600.
Bonds have been issued to the amount
Of 1888, 1875. Total cost $1,153, 1875
against which there stands Sl,44l.4 06
of stock and $953,l25 bonds on which
stock, according to the respondent q
contention, dividends not to exceed
eight per cent per annum may be paid.
In other words, on every 800 con-
tributed, each stakeholder As receiving
eight per cent. dividends on over 400
or over ffty-six per cent. -|...
iHThat is respondent claims that
stockholders who only put in 5000, 900
can get eight per cent. per apnum- on
81 ,44l ,406 and at the end of the char.
ter period get cash to that amount by
means of its sinking fund and have all
| property of the road besides, and that
the bondholders can get i've, six, seven
/ or eight per cent or as much more as
the corporation cares to pay for inter
est and get back their principal at the
end of the bond period.
"In other words respondents
claim that for every dollar put in.
to the road from the sale Of bonds
they can issue one dollar bonds
and one dollar and twenty-five
cents stock, pay interest on the
bonds, pay eight per cent on the
stock, redeem them both at par at
the end OF the franchise period and
have all the property that was
bought with this dollar in the
| bargain" 80,
! This transaction can be continued
indefinitely up to the two million dol
lar limit set forth in the charter of in
corporation. When that limit is reach
ed; the respondent, of course, contends
that q further increase in the author
lied capital may be obtained under the
general law dealing with the increase
of the capital stock Of corporation. /"
Capitalizing Surplus -.
Discussing the matter of investing
surplus, the brief says that the respond
ents claim that they have the right to
expend any or, all of the gross earn
ings in extensions regardless of wheth-
er or not the extensions are properly
or necessarily connected with the main
| tenance and operation of the system If
this contention Is correct, says the ter
ritOry's brief, "all that is necessary to
prevent the territory from sharing the
| income over eight per cent will be to
spend this money on the road, capital.
ize that amount plus twenty-five per
cent, pay dividends on such stock I'M
til the expiration of the franchise and
| then receive the par value of such stock
out of the sinking fund. ........
According to the contention of the
| respondent the section that says the
excess of income shall be divided equal
ly between the Government of the Re-
public of Hawaii and the stockholders
of said corporation means nothing"
Stock Dividends Question
The brief contains lengthy tables
showing Rapid Transit receipts bonds
| issued, capitalization and surplus, and
| in comment on the tables it says:
"This shows that by the end of 1902
the total amount of money that could
have gone into the road is $3.50, $50
(cash from stock to date) plus $685.,
ga (receipts from bonds to date) plus
500 ,894.46 (the entire net income for
1901 and 1909 total of 1862, 1886.
Counting the $2O9, 900 bonds or
rather $l9S,550 (the amount actually
realized by the Company from the sale
Of these bonds) as being payment
from sale of stock would make the
total amount of cash from sale Of
stock plus total net earnings only
$685., O94.46. 1t is apparent that there
was a surplus in 1902 that should have
been divided with the Territory. What
principle of corporation law justified
the increase of capital stock to 81 ,OO0,.
000f
1.-THE Rapid Transit s method of de-
claring stock dividends is first to de-
clare the stock dividends Con liabili,
ties not assets) and then let the assets
accumulate at the expense of the Ter
ritory to the amount of the stock div
idend
fThis method would, at the time be
illegal under any principle of corpora
tion law. II there were no provision
in the franchise for sharing income
with the Territory the illegality might
be said to be cured by accommodating
assets TO cover liabilities. But in the
case of the respondent 3 franchise, part
of the money SO accumulated is the
Territory's share Of the excess ncome;
one element of illegality of this meth
cd is that the respondent retired some
OF these bonds, against which the stock
dividends were issued, with excess in
come which should have gone to the
Territory; and in addition further re-
duced excess income by paying divi
dends on this watered stock.
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