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years. The claim of non-cumulative preferred stock is one which accrues to the fixed amount of the preferred dividend each year but which, if not satisfied in that year, fails absolutely and is lost.

It is obvious that a non-cumulative preferred stock offers a temptation to directors to pass dividends. If profits exist for their payment but the directors refuse to declare dividends until the following year, the dividend for the preceding year is lost entirely to the preferred stockholders and the amount thereby saved to the corporation inures principally to the benefit of the common stockholders. This feature is discussed at some length in a preceding portion of the present volume. (See § 254.)

S343. Rights to Assets.

Stockholders of a corporation have no individual rights in its property save when profits are distributed as dividends or when on the dissolution of the corporation its assets, after payment of all debts, are distributed among the stockholders. Preferred stock has exactly the same rights in any such distribution of the assets as has the common stock unless otherwise expressly provided.

In order to add to the safety and attractiveness of preferred stock, it is usual to give it preference in any final distribution of assets. In a few states the statutes provide for such preference. If, when such preference exists, the corporation is liquidated at any time, the debts of the corporation. must first be paid. Next the preferred stock must receive its full face value. The common stock will then receive its full face value, and both preferred and common stock will participate equally in any assets which may still remain. Any of these features as between the preferred and common stock may be modified by express provision, as for instance, the preferred stock might be denied any further participation in assets after its full face value is once received.

§ 344. Voting Rights.

Preferred stock has all the usual voting rights of stock unless these are expressly denied it in whole or in part. In some few states, as already noted (See § 339), the voting right of preferred stock is prescribed or restricted by statute. In other states it depends entirely upon the conditions under which the stock is issued. Very frequently the voting right is taken from it absolutely and it then has no voice in the general management of the corporation. At other times the voting right is not denied absolutely, as where it is provided that the preferred stock shall not vote as long as its preferred dividend is paid in each year, but if this fails in any year it shall be entitled to vote.

There are but few states in which statutory restrictions exist as to these variations of the voting right of preferred stock, and, speaking generally, the matter is one entirely within the discretion of the stockholders.

§ 345. Redemption Rights.

Not uncommonly the provisions creating preferred stock provide that it may be redeemed at some specified period and price. Thus a preferred stock will be issued with a redemption clause providing that at the end of five years the corporation may redeem it at par or at some percentage above this par value. Usually the redemption price is in excess of the par value, ranging between par and 110.

In some states the statutes require that preferred stock shall be made redeemable at a fixed time and at a price not less than par. (See $ 339.) In most of the other states proper redemption provisions are allowable, and in some are expressly permitted by the statutes. A redemption provision would not, however, be possible in a state where corporations are prohibited from acquiring their own stock. Usually also the redemption must be made from profits.

For obvious reasons redemption clauses are usually made

permissive rather than mandatory, stating that the stock may be redeemed at the specified price at any time after the prescribed date, or within a specified period. Then the corporation may exercise its discretion as to whether the stock shall be redeemed or allowed to stand.

The redemption right is at times of material advantage to a corporation. The dividend rates on preferred stock are usually higher than the interest rates on borrowed money, and if the corporation is prosperous and accumulates a surplus which can be used for the retirement of the preferred stock, or if it can legally borrow money for the purpose, the privilege of retirement may be highly advantageous.

Thus a corporation can ordinarily borrow money at from four to six per cent. Dividends on preferred stock usually range from six to eight per cent. If, then, a corporation retires its preferred stock with money either taken from its surplus or secured from the sale of bonds-if such redemption is permitted by the state laws-which bear a rate of interest less than the rate of the preferred dividend, there is each year a direct and usually material saving.

If the redemption period for preferred stock is short, this feature may detract from the desirability of the investment and affect the sale of the stock injuriously. To counterbalance this the redemption price is usually placed above par. Then an early redemption involves a substantial profit to the holder of the stock and presumably compensates him for the disturbance of his investment.

When preferred stock is to be redeemed, the payment of any cumulative dividends is a prerequisite. The redemption clause is usually phrased in recognition of this fact, providing that the stock shall be redeemed at the specified price plus any accrued dividends.

Preferred stock when redeemed, so long as it remains in the hands of the company, is no longer a claim against the dividends or assets of the company nor does it enjoy any voting rights. It cannot, however, be cancelled so as to reduce the

corporate capitalization unless this is expressly permitted by the statutes of the state, but remains a part of the corporate capitalization and might with the consent of the stockholders be reissued.8

§ 346. Convertible Stock.

Preferred stock is sometimes issued which gives the holder the privilege of exchanging it for common stock either at some specified time or within a specified period, the terms of exchange being prescribed.

When preferred stock is non-participating, i. e., does not participate in dividends beyond its preferred dividend, the convertible privilege adds materially to its attractiveness Its preference as to dividends and as to assets, if this also belongs to it, gives it a safety and an assurance of annual returns that is not characteristic of common stock. The convertible feature gives in addition an opportunity for an advantageous exchange for common stock, if the corporation so prospers as to make this exchange desirable. In other words, the safety of preferred stock is combined with the speculative possibilities of common stock.

Sometimes a convertible feature is created between preferred stock and bonds, as in the case of the United States Steel Corporation's seven per cent. preferred stock and its five per cent. bonds. The exchange in this case was made under the provision of a special enactment of the New Jersey legislature, and a large amount of preferred stock was replaced by the bonds, the exchange converting a seven per cent. cumulative dividend into a five per cent. interest obligation. As the cumulative dividends on the preferred stock of the United States Steel Corporation have always been regularly paid, the advantages of the exchange are obvious.

In the absence of express statutory provision, any such

8 Berger v. U. S. Steel Corp., 53 Atl. Rep. 68 (1902); Hackett v. Northern Pac. R. R. Co., 36 N. Y. Misc. Rep. 583 (1901); City Bank of Columbus v. Bruce & Fox, 17 N. Y. 507 (1858).

exchange of stock for bonds or agreement for such exchange would usually be illegal. The procedure is in effect borrowing money to retire the stock of the corporation.

$347. Guaranteed Stock.

The term "guaranteed stock," as applied to preferred stock, merely means a cumulative preferred stock. The expression usually designates preferred stock in which the dividends are "guaranteed" by the terms of the creating provision. There is no special virtue in the expression or in the stock, as ordinarily it is held to be merely a cumulative preferred stock. In spite of the statement of the creating provision that the dividend is guaranteed, such dividend can only be paid out of profits, and if no profits exist, it is in no way a debt of the corporation. The unpaid dividend merely passes over and cumulates as does any other cumulative .dividend until such time as profits exist and are declared as dividends for its payment.

The usual and better application of the term "guaranteed stock" is to stock on which the dividend or principal has been actually guaranteed by some person, concern or corporation. other than the issuing corporation. Such stock is frequently created when a railroad takes over a subsidiary line and guarantees either dividends or principal, or both dividends and principal of the stock of the absorbed road. The dividend on the guaranteed stock then becomes an actual obligation of the guaranteeing road which must be met when due as is any other interest or obligation.

§ 348. Liabilities of Preferred Stock.

Special exemptions from liability have been given preferred stockholders in some few states (See § 339) but in most states of the Union the liabilities of preferred stock are the same in every respect as those of common stock. If the stock is full paid, it carries no liabilities. If it is but partly

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