PART V.-CORPORATE SECURITIES.

CHAPTER XXX.

CAPITAL STOCK.

$327. Capitalization.

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In corporate matters the term capitalization" ordinarily means the total authorized capital stock of a corporation. This covers both common and preferred stock, whether issued or unissued, but does not include bonds or any other corporate obligations.

In the economic discussions of finance and in financial adjustments and calculations, the term is frequently given a broader signification, including then not only the authorized capital stock of the corporation but also any bonds and other similar corporate obligations which may have been issued by the particular corporation.

§ 328. Capital Stock.

The capital stock of a corporation is its nominal or share capital as distinguished from its actual or property capital. The two are absolutely distinct. They may be and at times are the same in amount, but are never the same in nature.

The amount of a corporation's capital stock is fixed primarily by its incorporators and is included as one of the details in their application to the state for a charter. If this application is allowed by the state authorities, the capital stock tentatively determined by the incorporators is thereby con

firmed and made positive. Those in control of the corporation are then authorized to issue stock for value up to any desired amount not exceeding that fixed by the charter. (See § 334) Usually the statutes require that some minimum amount of capital stock must be issued or subscribed for (See § 185 (d)), but between this minimum and the maximum authorized by the charter, the directors have full discretion and may issue as much or as little as they see fit. They cannot, however, exceed the authorized amount unless they first secure the right by an amendment of their charter.

If no provision is made to the contrary, all the capital stock authorized by the charter is common stock. (See S 337.). If a portion of the stock is to be preferred stock, it must usually be so designated in the charter, the respective amounts of common and preferred stock then together making up the total of the authorized capital stock.

§ 329. Capital.

The capital of a corporation as in any other business concern, is the net value of its assets. It is manifest that this capital will vary directly with the vicissitudes of the corporate business. If the corporation is prosperous, its capital will increase; if otherwise, its capital will diminish.

The capital of a corporation is usually derived in the first place from the sale of its capital stock. In most states of the Union this capital stock may be issued for cash, property or labor, but the statutes usually provide that the values received must be at least equal to the nominal value of the issued stock.

Thus if a corporation with an authorized capital stock of $100,000 issues this entire stock for property, it is supposed that the property received is of the actual value of $100,000. If this is the case, the capital stock of the corporation and its capital are at this point exactly equal in amount. The capital stock, however, remains a fixed quantity thereafter, whereas the capital, as stated, may change with every variation of the

corporate business. It is but rarely that the two remain the same in amount for any length of time.

In fixing the amount of capital stock, the incorporators are usually governed by the requirements of the particular corporation. The statutes of most of the states require a certain minimum capital stock and in a few states a maximum is fixed which cannot be exceeded, but within these limits the incorporators may exercise their discretion. In a conservative corporation there will usually be some approximation or relation between the capital stock and the amount of capital expected or arranged for, though even here the capital stock is frequently fixed at a figure materially exceeding the property assets of the corporation. This is done perhaps to cover the good-will or dividend-paying abilities of the business taken over, or to provide a reserve of stock to be sold later for additional capital, or to meet some other requirement of the particular business.

$ 330. Shares and Their Par Value.

The capital stock of a corporation is always divided into equal parts called shares. Usually this is a matter of statutory requirement but it is also a matter of custom and convenience. These shares have a nominal value, expressing their relation to the capital stock. Thus if the capital stock of a corporation is $5,000 and there are fifty shares, each share constitutes onefiftieth of the entire capital stock and has a nominal value of $100. This nominal value of the share is called its face or par value as opposed to its real or market value. The real value expresses with more or less accuracy the relation-or supposed relation-of the share to the actual capital of the corporation. An inspection of the daily stock quotations will show how widely the par value and the real value of stock vary. It is but seldom that the two are the same.

Usually shares may be made of any face or par value

desired, though in some states certain limits are fixed, as for instance in New York where the shares may not be less than $5 nor more than $100. The face value of these shares is determined by the incorporators at the time they fix the capital stock and is confirmed, as in the case of capital stock, by the granting of the charter application. The usual par value is $100, save in the more speculative corporations such as mining companies, where $1 is a favorite par value. Ten dollar shares are not uncommon, fifty dollar shares are issued by some very prominent corporations, as for instance the Pennsylvania Railroad, and occasionally shares of the par value of $500 are encountered. The one hundred dollar share is usually to be preferred on account of its general use and convenience.

As the shares of stock bear a direct relation to the total capital stock of a corporation, it follows that the number of these shares held by any individual represents his proportionate interest in the corporate undertaking.

Thus in a corporation with a capital stock of $5,000 divided into fifty shares, all of which is common stock, the man who holds five shares has a one-tenth interest in the corporate undertaking and participates on this basis in its management, its profits and in any division of assets. If an election is held, he is ordinarily entitled to cast one-tenth of the total number of votes. If dividends are declared, one-tenth of them belong to him. If the corporation is liquidated, he is entitled to one-tenth part of all assets distributed to the stockholders.

As shares of stock in the hands of a stockholder merely represent his interest in the corporate business, these shares are personal property even though the entire capital of the corporation should be invested in land.

They are not part, nor do

they represent part of the corporate property, but merely evidence the holder's interest in the corporate undertaking as a whole.

§ 331. Nature and Functions of Capital Stock.

The most important function of capital stock is the convenient representation of the stockholders' interest in the corporate business. Its division into shares enables the interest of each stockholder to be represented with much accuracy, and also enables the transfer of these interests with an ease and lack of formality that is not found under any other system of business organization.

The capital stock also serves on those rare occasions when the capital stock and the capital of a corporation are the same, to indicate the actual value of the corporate property and business. As, however, this actual value is a variable quantity and is almost always either in excess of the par value of the capital stock or below it, the utility of the capital stock for this purpose is but slight.

From the standpoint of the bookkeeper the capital stock represents an indebtedness of the corporation and is entered on the corporate books and in all general statements of the corporate affairs as a liability. This same point of view obtains in economic discussions and in some of the calculations and adjustments of commerce, in which capital stock is included under the general head of capitalization with bonds, short term notes and other obligations of the corporation as a liability. (See § 164.)

There is, however, a very sharp and clear distinction between actual corporate obligations, such as notes and bonds, and the technical liability of capital stock. Capital stock carries no interest, is never due, cannot therefore be collected by legal procedure, and, in short, is not legally a corporate liability.

From the legal standpoint the capital stock of a corporation, or more properly the assets obtained from its salecapital stock and capital not always being clearly distinguished -is regarded as a trust fund pledged for the payment of the