stock exchange. The mobility for capital afforded by the limited liability company would be meager and inadequate if the holder of its bonds and shares did not know that at any moment he could take them to the exchanges and sell them for a price. He cannot be misled as to this price, because every newspaper in the land, if the security is one of importance, gives him each morning the value which it possessed the day before in the markets of the world. The holder of it thus knows what the average judgment of hundreds of men is upon the value of that security. If it were not thus quoted he would have to rely upon the judgment of a few people, expressing their opinion privately, and perhaps interested in misleading him."

§ 32. The Sale Price of Stocks and Bonds with Reference to Time of Issue.

The features preferred stock has in common with bonds tend to give an impression that the dividends paid on such stock are really interest on the money which was paid for it. And especially is this true when the interest is made cumulative. As has been said, preferred stock paying cumulative dividends usually entitles the holder to a fixed annual income for a term of years, and repayment of his capital in full. If the corporation meets with reverses, he may still claim repayment of his capital in full, although the holders of the common stock get nothing. Also, like the bondholder, the holder of preferred stock has no voice in the general management of the corporation. But neither the credit of the company nor any part of the corporation property is pledged for the repayment of his dividends, nor of the capital he has invested. He is, after all, a mere stockholder, whose capital is risked in the business of the corporation, who can receive no dividends at all until there are earnings from which to pay them, and who cannot compel repayment of any part of his capital except upon distribution of the corporation property after all the debts of the company have been paid and its affairs wound up. It follows that his rights to annual, semi-annual, or quarterly payments on his

stock is measured by the rights and liabilities of a stockholder rather than a bondholder-in other words, that he receives dividends and not interest. Dividends are distinguished from interest in that they are distributive shares in a common fund that has accumulated from earnings, and are not in any sense compensation for the use of money during the time for which they are paid. The right to dividends arises out of ownership of a share in a common fund, some part of which is to be distributed; and it makes no difference in the owner's right whether he has owned that interest one month or ten years, nor whether the fund to be used in paying dividends was accumulated before he became a stockholder or afterward. When one views the matter from the standpoint that the unissued and treasury stocks are inert and do not earn dividends, there seems to be an apparent contradiction in the law. One might think that such stocks, under this theory, should share in the dividends only from the time when they became active in earning them. This contradiction is not real, since what the corporation is selling is an added interest in the corporation property as a whole. No part of the corporation property may be withheld from purchasers of these stocks, therefore, when any kind of a distribution is being made. If a corporation having 100 outstanding shares of stock, of the par value of $100 each, but owning $20,000 worth of property, were to sell and issue another 100 shares, and the next week declare a dividend to be paid from the $20,000 surplus that was in its treasury, every purchaser of a new share would be entitled to share equally in this dividend with the holders of the old shares. He would be entitled to it because his share carried with it the ownership of a two-hundredth part of all the corporation owned. Preferred stock, like common stock, may be either unissued or treasury stock, and, when sold, draws dividends, as has been said, and not interest; therefore the shareholders must share equally in any fund available for paying dividends, when a dividend is declared, without regard to the length of time the stock has been held. The rule as to bonds issued by such a corporation would be different. The interest paid to a bondholder would depend upon the length of time his

money had been loaned to the corporation, and purchasers of a new issue of bonds would not receive interest until all arrearages of interest on an old bond issue had been paid in full. It is apparent that such inequalities as might arise between purchasers of stock who had purchased at different times, would not arise between bond purchasers. Any inequalities resulting from difference in the purchase time of stocks must be adjusted, if at all, by varying the price at which subscriptions for stock are taken as the time for paying dividends approaches, or in proportion to the increase of surplus funds or additional values that belong to the earlier shareholders. To cover accrued values, then, a directorate should sell stock at such an advance over the original price as will not cause a loss to the original purchasers. For instance, if a corporation has increased in value 25 per cent., and the directors determine to sell additional unissued or treasury stock, 25 per cent. should be added to the original price in order that those who came in may contribute their share to the surplus value, and not, by their entrance into the corporation, impair the increased value of the corporate property.

Public stock market practices are as follows: Stocks are ordinarily sold at a "flat" price; that is, at a given figure represent< ing the market value determined without reference to dividend paying time, including the accrued dividends. Bonds, excepting government bonds, which are quoted flat, are sold at a given price without accrued interest being taken into account in the quotation. The accrued interest is to be added to the quoted price and paid in addition. The dividend on stocks goes to the owner of the stock whose name appears on the books of the corporation. Stocks are sold "ex-dividend"; that is, without dividend, after the dividend has been declared and the transfer book of the corporation has been closed for the dividend payment. A stock sold ex-dividend does not, of course, carry with it to the buyer the dividend recently declared. On an advertised day, a given time before the day for dividend payment, the transfer book closes, and no more changes in stock ownership are recorded, the dividends being paid to the stockholders of record the day previous to the advertised day. The ex-dividend

quotation on a stock exchange is usually the price of the stock just before the closing of the transfer book of the corporation soon to pay the dividend, less the amount of the dividend. If the price of the stock is 150 (a "dividend on" price), for instance, and the corporation books close for a dividend of 3 per cent, the next quotation will be 147, if nothing has occurred besides the dividend payment to alter the price.

In the beginnings of a corporation, when the stock is first being placed, slight accrued values are frequently given little attention, all persons coming in within six months or even within almost a year sharing equally in the profits without having paid for the profits accrued. But this only occurs where there is more necessity of placing the stock than of being particular that the stock shall be placed equitably.

The articles of association of corporations sometimes provide that dividends on preferred stock shall be paid semi-annually from the date of issue. For bookkeeping convenience, a corporation about to place preferred stock will issue to a trustee a certain number of shares in a block, say 250 or 500 shares, which the trustee will transfer to purchasers in smaller blocks. Dividends are paid on this stock from the time it is issued and the trustee receives the selling price plus added value on account of accrued profits and dividends, the total receipts for the stock being turned over to the corporation treasury. Dividend paying on all this preferred stock then comes at the same time. If all this preferred stock is sold in the six months, or if it is contemplated that more will be absorbed by purchasers than is left over, another block may be issued to the trustee to cover the probable demand, if there is still more unissued preferred stock for sale.

§33. Changing a One-Man Business or Partnership to a Corporation.

In making a corporation out of a one-man business or a partnership, the general process is the same as when making a corMOD. BUS. CORP.-5

poration to build up a new business. Since a corporation must have a minimum number of directors, say three, each of whom must usually have a share of stock, the one-man business cannot be turned into a corporation and the one man be permitted to own all the business as before. But this is often practically accomplished by selecting two members of his family or two friends, to each of whom he gives a share of stock, in order to make the required number for organization, and who in turn assign the stock in blank and return it to the principal stockholder, who keeps it deposited in his safe, or elsewhere in his own possession. These persons are made stockholders of record and are then apparently qualified to act as directors. When the principal stockholder desires a change, he can take away the stock and disqualify either director by writing in the name of any person he chooses as assignee, and having a new certificate issued to that person and the transfer recorded on the stock book. The same plan may be followed where a partnership of two is changed into a corporation and a third director is necessary. The corporation counsel is frequently chosen as one of the "dummy" directors. But, often as this is done, it is not an entirely safe method of filling the directorate. The statutes of the state under which the corporation is organized should be carefully examined to find if it is necessary for directors to hold stock before anything of the kind is attempted. Directors should usually be bona fide holders of stock, and should have paid money, property, or proper services for it, which fact should be provable. If an individual owning all the stock should so fill his directorate with persons who had no real interest in the business, when the statutes say or imply that directors shall be shareholders, the courts would hold, on proper presentation of the facts, that no corporation existed and that the owner was liable for all debts incurred in carrying on the business. The addition of more capital to extend the business, the division of the business into parts on the corporate plan, or any other legitimate business purpose are proper motives for a corporate organization, but fraud may not be accomplished by so organizing. Business real estate, owned by the business persons organizing a corporation, which they in