paid, the subscriber is liable in event of the insolvency of the corporation, to be called upon for the amount necessary to make his stock full paid. In any case, if the certificates are marked "full paid" and are not in the hands of the original subscribers but of parties who have bought them in good faith, they carry no liability of any kind even though the stock they represent has in fact not been fully paid. $ 349. Advantages of Preferred Stock. The numerous possible variations of preferred stock make it available for many different purposes. The most important reason for creating preferred stock is perhaps to provide a corporate security which can be sold more readily than ordinary stock. For this purpose preferred stock may be made to offer greater safety both as to principal and dividends than does common stock. Its preferred dividend gives it the first claim on profits. A preference as to assets gives it a first claim on the assets of the company when the corporation is liquidated. Also if in addition to its preferential dividend the preferred stock participates with the common stock in any further dividends declared, the preferred stock offers the same speculative possibilities as does the common stock but with a much greater safety. Such stock is therefore more desirable than common stock and is much more readily sold. Preferred stock not only offers a corporate security which may be made more desirable and therefore more readily salable than common stock, but when properly adapted may be used to great advantage in meeting the many and various contingencies arising in the industrial world. Thus preferred stock is frequently issued to represent or pay for the actual property assets taken over by the new corporation, while common stock is issued to represent the goodwill and other intangible assets. Or when a partnership is incorporated, the excess investment of one partner is frequently represented by an issue of nonvoting preferred stock while the interest of a silent partner Or in a con is conveniently cared for by the same means. solidation the values or interests of the various properties combined are adjusted and represented by the help of preferred stock. When money is to be raised for corporate purposes, the relative merits of preferred stock and bonds frequently come into question. In this case the main point in favor of preferred stock is usually found in the conditional nature of its claims upon the corporation. It is not a debt of the corporation either as to dividends or principal. Unless the stock is redeemable, the principal is never due. The dividend is due if profits exist for its payment, but if it is not paid in any year it merely passes over to succeeding years if cumulative, or expires if non-cumulative. In any event, it is merely a claim against profits. Bonds, on the other hand, are an absolute obligation of the corporation both as to interest and principal. If the interest is not paid when due it may be collected by legal proceedings and frequently default in interest has the effect of maturing the bond and thereby rendering payment of both principal and interest imperative. The bond must, in any event, be paid at maturity under penalty of foreclosure, regardless of the condition of the corporate finances. On the other hand, preferred stock to be salable must. usually be given a larger preferential dividend than the interest that would attach to a bond salable under the same conditions. Hence it becomes a question as to which is preferable,—the absolute obligation of the bond with its lower interest, or the absolute freedom from liability of preferred stock with its higher dividends. If a company is established and prosperous, the bond issue is undoubtedly preferable. Under any other circumstances, the preferred stock is as undoubtedly the better choice. CHAPTER XXXII. BONDS. § 350. Nature of a Bond. When a corporation borrows money, its indebtedness may be evidenced either by notes or bonds. If the amount borrowed is small, or if it is borrowed in a single sum, or but from few persons, or for a short time, notes are usually given. If, however, the amount is large and obtained from a number of people and extends over a period of years, the corporate obligation is preferably and usually evidenced by bonds. The difference between a corporate note and a bond is not always clearly marked. Both are promises to pay money. The phrasing of the bond is usually more formal than that of the note. Also it must be executed under seal while the corporate note need not. Also payment of bonds is usually, though not invariably, secured as to both principal and interest by certain specified property held for the purpose under a formal deed of trust. A bond payable to order, or bearer, or holder is a negotiable instrument (See § 259) and this in spite of the fact that it is executed under seal (See § 267.) Hence if such a bond is in due form and is purchased for value and in good faith, the purchaser is protected against any defenses set up by the corporation and against any claims of previous owners. A bond issue consists of a number of bonds which, while they may vary as to denomination, and some may be registered and some unregistered, are all of like general tenor, and, if secured, are all secured and, unless otherwise expressly provided, equally secured under one deed of trust. Bonds are issued in varying denominations. $1,000 is the usual face value; $500 bonds are not infrequently issued; $100 bonds are occasionally seen, and bonds are sometimes issued for popular subscription of still smaller face value. Bonds of a face value of $5,000 and $10,000 are frequent, and larger denominations are not uncommon. Bonds are a direct corporate obligation and do not in any way partake of the nature of stock. They may, however, be given rights of participation in corporate profits if desired, and, in the absence of statutory prohibition, may be given voting rights as well. § 351. Authorization of Bond Issues. "The power of a corporation to borrow money is implied and exists without being expressly granted by charter or statutes."1 In the absence of restraining laws, a corporation may therefore issue corporate notes and bonds to any desired amount. Also, unless otherwise expressly provided by law, the power to incur corporate indebtedness lies with the directors and they may at their discretion issue the corporate notes and bonds without authorization from the stockholders. In most states, however, constitutional or statutory provisions are found directly limiting or otherwise affecting the common law right of corporations to borrow money or incur debt, particularly by the issue of bonds, and in many states statutes prohibit the directors from issuing bonds until authorized thereto by the stockholders. 1 Cook on Corps., § 760. § 352. Statutory Provisions. Constitutional provisions affecting the issue of bonds are found in many states but as a rule confine themselves to the requirement that bonds shall only be issued for value and that any fictitious increase of indebtedness is void. In a few states the constitution requires the authorization of bond issues by stockholders. Statutory provisions limiting the amount of corporate indebtedness are found in many states. Thus in Florida, Kentucky, Minnesota and some other states, the maximum corporate indebtedness that may be incurred must be stated in the charter. In Colorado, California, Idaho, Illinois and a number of other states the corporate indebtedness must not exceed the amount of the capital stock. In other states, as Nebraska and Vermont, the corporate indebtedness must not exceed two-thirds of the capital stock. In New Hampshire it may not exceed one-half the value of the corporate property. Provisions requiring the assent of a specified majority of the stockholders before bonds may be issued are also found in many states. Thus in California, Nevada, New York and other states, a bond issue must be authorized by a two-thirds vote of the stockholders. In Alabama,. Missouri, Pennsylvania and a number of other states, it may be authorized by a mere majority of the voting stock. In Ohio a three-fourths vote of the stockholders is required before convertible bonds may be issued. The statutory provisions also frequently specify the notice which must be given for stockholders' meetings to authorize bond issues. In some states specific provisions exist as to the selling price of bonds, as in North Carolina where the statutes provide that bonds may be sold below par and commissions may be paid upon the sales, or in Wisconsin where the true value of the money, labor or property received for bonds must be at least 75 per cent. of their par value. The Wisconsin provision, it must be added, is somewhat weakened by the further |