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A comparative study of the statutory provisions relating to selected phases of the net worth section of the corporate balance sheet

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A COMPARATIVE STUDY OP THE STATUTORY PROVISIONS
RELATING TO SELECTED PHASES OP THE
NET WORTH SECTION OP THE CORPORATE BALANCE SHEET
A D issertatio n
S ub m itted to th e
C o u n c il on G ra d u a te S tu d y a n d R e s e a r c h
In P a r t ia l F u lfillm e n t
o f th e R e q u ire m e n ts f o r th e D egree
D octor o f P h ilo so p h y
D e p a rtm e n t o f Econom ics
by
W ilb u r Ray G a r r e t t
J u n e 1 94 1
UMI Number: DP23223
All rights reserved
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P.O. Box 1346
Ann Arbor, Ml 48106 -1346
T h is dissertation, w ri tt en by
...... WILBUR RAY QABRETT..........
under the gu id an ce of h..%3Faculty C o m m i t t e e
on Studies, an d a p p r o v e d by all its me mbers, has
been pr ese nt ed to and a c c e p te d by the Council
on G ra du a te S t u d y a n d Rese arc h, in pa r ti al f u l н
fillment of requirements f o r the deg ree of
D O C T O R OF P H IL O S O P H Y
............
Dean
Secretary
D ate...
J.U M L -1 9 -4 1 .
Committee on Studies
Chairman
TABLE OP CONTENTS
CHAPTER
I.
PAGE
AN ' INTRODUCTION TO. THE STUDY . . . . . . . . . .
1
I n t r o d u c t i o n t o t h e s t u d y - ......................... . . . . . .
1
G en eral s ta te m e n t o f th e problem
8
D e lim ita tio n of the s tu d y
9
A n a l y s i s o f t h e p r o b l e m .........................................
10
R eview o f r e l a t e d s t u d i e s
13
...............................................
V a l i d a t i o n o f t h e s t u d y ..............................
23
Source of d a ta
26
....................................
M ethod o f p r o c e d u r e
II.
. . . . . . . . . .
......................................
. . . . .
26
O r g a n i z a t i o n o f t h e s t u d y ..............................................
28
THE STATUTORY CAPITAL OP A CORPORATION.....................
32!
Purpose o f th e c h a p te r
. .
.
....................................
V a r ia tio n in the p h rase u se d to d e fin e
32;
sta tu н
t o r y c a p i t a l .............................................................................
S ta te s u sing
d efin e
the term " c a p i t a l sto c k " to
s t a t u t o r y c a p i t a l .............................. .
S ta te s u sin g the
term " c a p i t a l "
sta tu to ry c ap ita l
S ta te s u sing
d esig n ate
33
.
.
.
the term " s t a t e d
.
,
.
35
in d e fin in g
.........................................
cap ital"
the s t a t u t o r y c a p i t a l
40
to
..........................
52
S t a t e s h a v i n g no p o s i t i v e d e f i n i t i o n o f
sta tu to r y c a p ita l
..........................
60
CHAPTER
II.
PAGE.
THE STATUTORY CAPITAL OF A CORPORATION ( c o n t i n u e d )
P ro v isio n concerning o rg a n iz a tio n expenses
. ;
62?
S u m m a r y ........................................
III.
65
THE CONSIDERATION FOR THE' ISSUANCE OF SHARES
.
72.
P u r p o s e o f t h e c h a p t e r ..............................................
S e c t i o n A.
Types o f A s s e t s and S e r v i c e s
to
be R e c e iv e d i n Payment o f S u b s c r i p t i o n s
C o n stitu tio n a l prov isio n s r e la tiv e
type o f a s s e t s
or serv ices
to
72
. .
the
to be r e c e iv e d .
i n p a y m e n t of- s u b s c r i p t i o n s .......................
S ta tu to ry prov isio n s r e la tiv e
assets
or serv ices
73
to th e type o f
to be r e c e iv e d in payн
ment of s u b s c r i p t io n s
S e c t i o n B.
73
.
.
.
.......................
76
V a l u a tio n o f A sse ts t o be R e ce iv e d
f o r S u b s c r i p t i o n s ......................................................
85
V a l u a t i o n o f c o n s i d e r a t i o n o t h e r t h a n m on ey
r e c e i v e d i n payment o f s u b s c r i p t i o n s
A d d itio n al r e s t r i c ti o n s
su b scrip tio n s
S e c t i o n G.
. . .
85
on th e payment o f
...................................................................
89
C o n s id e ra tio n to be R eceiv ed f o r
S h a r e s w i t h P a r Va'lue
Shares w ith p a r value
. . . .
- ......................... .
.
issu ed fo r co n sid era н
t i o n e q u a l t o p a r v a l u e ..................................
Shares w ith p ar value
tio n less
92
92
issu ed fo r a co n sid era н
t h a n p a r v a l u e ...................................... ..
96
V
CHAPTER
III.
PAGE
THE CONSIDERATION FOR THE ISSUANCE'OF SHARES ( c o n н
tinued)
Issuance o f shares b e fo re f u l l y p a id
S e c t i o n D.
.
.
.
C o n s id e r a tio n to be R eceived f o r
S h a re s w i t h o u t P ar V alue
..............................................
^C o n sid erstio n f o r sh a re s w ith o u t par v alu e
B oard o f d i r e c t o r s
determ in e
S h a reh o ld e rs d eterm in e
109
.
109
. . . .
110
the c o n s id e r a н
tio n fo r sh ares w ith o u t par v alu e
the c o n s i d e r a ti o n f o r
s h a r e s w i t h o u t p a r v a l u e ................................... .....
C h a rte r p r o v is io n s determ in e
IV.
. . . .
S u m m a r y ..............................
Summary
...................................................................
.
.
.
.
.
.
.
.
.
12 0
124
130
...............................
130
P u r p o s e o f t h e c h a p t e r .........................................................
131
S e c t i o n A.
.
116
124
CORPORATE LAW-AND THE PAYMENT OF CASH DIVIDENDS
In tro d u ctio n
.
the c o n s id e r a н
tio n f o r sh ares w ith o u t par v alu e
S e c t i o n E.
103
The C a p i t a l I m p a i r m e n t a n d / o r t h e
I n s o l v e n c y T e s t a n d C a s h D i v i d e n d s .....................
O u t l i n e o f common l i m i t a t i o n s
paym ents
on d iv id e n d
. . . . .
C a p i t a l i m p a i r m e n t a n d d i v i d e n d paym ents
D iv id e n d paym ents d e s p i t e
132
.
132
135
the Im pairm ent o f
c a p i t a l ..................................................................................
141
vl
CHAPTER
IV.
PAGE
CORPORATE LAW AND THE PAYMENT OF CASH DIVIDENDS
(continued)
I n s o l v e n c y and d i v i d e n d paym ents. . . . . .
In so lv e n c y and c a p i t a l
payment o f d iv id e n d s
144
Im p airm e n t and t h e
.
.
.
148
M odified ty p e s o f in s o lv e n c y t e s t and th e
payment o f d iv id e n d s
..........................
.
1 51
....................................
152
S t a te s h a v in g c a p i t a l im pairm ent a n d /o r I n н
so lv en cy t e s t as
th e o n ly l i m i t a t i o n on
th e payment of d iv id e n d s
S t a t e s h a v i n g no p r o v i s i o n r e g a r d i n g c a p i t a l
im p a irm e n t a n d / o r i n s o l v e n c y l i m i t a t i o n on
d i v i d e n d paym ents
S e c t i o n B.
Sources
. . . . . .
.......................
153
G eneral S tatem en t R egarding the
o f C a s h D i v i d e n d s .........................................
Sources o f cash d iv id e n d s
..........................
D iv id e n d s b a s e d on n e t p r o f i t
D iv id e n d s b a s e d on e x c e s s
orsurplus
.
or excess of
165
p aid -in
or a p p re c ia tio n surplus
No d i v i d e n d p r o v i s i o n ,
15 6
162
.......................................................................
D iv id e n d s b a s e d on n e t p r o f i t s ,
su rp lu s,
.
155
ofa s s e ts . . . .
D iv id e n d s b a s e d on n e t p r o f i t s
assets
155
.....................
or only in so lv en cy or
c a p i t a l im p a irm e n t t e s t ...........................
173
168
v ii
CHAPTER
IV.
PAGE
CORPORATE LAW-AND THE PAYMENT OP CASH DIVIDENDS
(continued)
S e c t i o n C.
Summary
.
........................................................
174
Summary o f c a p i t a l i m p a i r m e n t a n d / o r i n s o l н
vency t e s t
.................................... ..... '
. .
Summary o f s o u r c e o f c a s h d i v i d e n d s
V.
. . . .
176
CORPORATE LAW AND THE PAYMENT OR SHARE DIVIDENDS
Purpose o f the c h a p t e r
S tates
.
.
.........................................
180
180
t h a t p r o v i d e ' f o r d i v i d e n d s w i t h o u t namн
ing th e type and supplem ent t h i s
general
s ta tu te w ith a p ro v isio n s ta tin g
th a t share
d i v i d e n d s may a l s o b e i s s u e d ,
presum ably
u n d e r t h e same c o n d i t i o n s ................................
S tates
.174
181
t h a t provide f o r share d iv id e n d s by
having s e p a ra te
p ro v isio n s
and c o n d itio n s
f o r s h a r e d i v i d e n d s .........................................
190
S ta te s allo w in g share d iv id en d s u nder m is c e lн
lan eo u s
types
of s ta tu to r y p ro v isio n s
.. .
1 98
S t a t e s h a v i n g no p r o v i s i o n c o n c e r n i n g s h a r e
' d i v i d e n d s .........................................................................
203
Summary o f p r i n c i p a l s t a t u t o r y , p r o v i s i o n s d e a l н
i n g w i t h s h a r e d i v i d e n d s .....................................
V I.
204
STATUTORY PROVISIONS AND DIVIDEND PAYMENTS:
SPECIAL PROVISIONS ...................................................................
P u r p o s e o f t h e c h a p t e r ................................................
213
21 3
CHAPTER
V I.
PAGE
STATUTORY PROVISIONS AND DIVIDEND PAYMENTS:
SPECIAL PROVISIONS ( c o n t i n u e d )
S e c t i o n A.
U n realized A p p re ciatio n of A ssets
a n d D i v i d e n d p a y m e n t s ...................................
U nrealized a p p re c ia tio n of a s s e ts
dend paym ents
213
and d i v i н
....................................................
2 13
S t a t e s w i t h no p r o v i s i o n r e g a r d i n g u n r e a l i z н
ed a p p r e c i a t i o n
..............................................................
214
C l a s s i f i c a t i o n of s t a t e s h aving a p r o v is io n
regarding u n re a liz e d a p p re c ia tio n
. . . .
21 6
Cash a n d s h a r e d i v id e n d s p r o h i b i t e d from
u n rea liz ed a p p re c ia tio n ,
w ith c e r ta in
e x c e p t i o n s ........................................................................
Cash d i v i d e n d s p r o h i b i t e d ,
217
b u t share d i v i н
dends a llo w e d from u n r e a l i z e d a p p r e c i a н
tio n
..............................
218
Cash d i v i d e n d s p r o h i b i t e d , b u t by i m p l i c a н
tio n ,
share d iv id en d s
ized a p p re c ia tio n
a llo w e d from u n r e a l н
..............................
225
Cash and s h a r e d iv id e n d s a llo w e d from u n н
re a liz e d a p p reciatio n
S e c t i o n B.
m ents
.........................................
228
P a id - in S u rp lu s and D ividend Payн
.............................................................
229
Im p o rta n ce o f d e te r m i n in g th e u s e s t o w hich
p a i d - i n s u r p l u s may b e p u t ...............................
22 9
ix
CHAPTER
' VI.
PAGE
STATUTORY PROVISIONS AND DIVIDEND PAYMENTS;
SPECIAL PROVISIONS ( c o n t i n u e d )
S ta tu te s a llo w in g d iv id en d s
from p a i d - i n
s u r p l u s , i n some c a s e s w i t h r e s t r i c t i o n s
S tatu tes
th at,
by i n t e r p r e t a t i o n ,
230
p ro h ib it
o r a llo w d i v id e n d s from p a i d - i n s u r p l u s
A v a ila b ility of p a id -in su rp lu s
laneous
S e c t i o n C.
purposes
23 5
fo r m isce lн
.....................................................
D e p le tio n and D ividend
238
Paym ents
? 2 39
D eduction f o r d e p le tio n of w a stin g a s s e t s
and th e payment of d iv id e n d s
S tates re q u irin g
...............
239
c h arter p ro v isio n before
p e rm ittin g th e e x c lu s io n of the d e p le tio n
charge
in d eterm in in g the source a v a ila b le
f o r d i v i d e n d s ........................................................
S tates
not req u irin g
p erm ittin g
241
c h a r te r p r o v i s i o n ?b e fo re
the e x c lu s io n o f th e d e p le ti o n
c h a r g e ............................................................................
246
S t a t e s h a v i n g no p r o v i s i o n c o n c e r n i n g d e p l e н
tio n o f w asting a s s e ts
S e c t i o n D.
M iscellan eo u s
d e n d Paym ents
..........................................
252
P r o v i s i o n s ' and D iv iн
. . . . . . . . . . . . . . . .
252
A d d i t i o n a l l i m i t a t i o n on th e paym ent o f d i v i н
dends
.........................................................
. . . . . .
252
X
CHAPTER
V I.
PAGE
STATUTORY PROVISIONS AND DIVIDEND PAYMENTS:
SPECIAL PROVISIONS ( c o n t i n u e d )
P rov isions re g a rd in g re s e rv e s
..........................
P r o v is io n s r e g a r d i n g w orking c a p i t a l
S ta tu to ry p ro v isio n s
tio n ,
.
. . . .
253
256
concerning d e p re c ia н
o th er lo sse s,
and d e f e r r e d a s s e t s
.
259
M iscellan eo u s p ro v is io n s r e s t r i c t i n g d i v i н
dends
......................................................................
S e c t i o n E.
V II.
26
S u m m a r y ....................................................................
269
STATUTORY PROVISIONS RELATING TO A CORPORATION? S
RIGHT TO ACQUIRE ITS OWN S H A R E S ...............................
27 6
...............................................
276
Purpose o f th e
S tatu tes
its
chapter
t h a t .perm it a c o r p o r a t io n
own s h a r e s
if
p ro v is io n bein g
own s h a r e s
S tatu tes
277
th a t p erm it a c o rp o ra tio n to a c q u ire
pairm ent
its
th is
is necesн
so le p r o v is io n co n cern in g t r e a s u r y shares
S tatu tes
its
to a c q u i r e
such a c q u i s i ti o n
s a ry to p re v e n t l o s s ,
the
.
su b je c t on ly
t o c a p i t a l imн
...................................................................................
281
th a t perm it a c o rp o ra tio n to acq u ire
own s h a r e s
if
s p e c if ie d ty p es of su rp lu s
a r e a v a i l a b l e .......................... ............................................. ? 2 8 4
S tatu te s
its
th a t p e rm it a c o rp o r a tio n to a c q u ire
own s h a r e s
if
an e x c e ss o f n e t a s s e t s
is
a v a i l a b l e ..................................................................................
289
CHAPTER
V II.
PAGE
STATUTORY PROVISIONS RELATING TO A CORPORATION'S
RIGHT TO ACQUIRE I T S OWN SHARES ( c o n t i n u e d )
S ta tu tes
its
th a t perm it a c o rp o ra tio n to a cq u ire
own s h a r e s b y i n t e r p r e t a t i o n o f g e n e r a l .
powers
. .
...................................................
292
R e c a p i t u l a t i o n .........................
V III.
293
BOOKS OF ACCOUNT, FINANCIAL STATEMENTS, AND
R E P O R T S ........................................................... ' ................................
.
301
....................................
302
M i n u t e b o o k , .............................................................................
302
Scope of th e
S e c t i o n A.
Stock
chapter
...................................................
301
Books o f A c co u n t
r e g i s t e r ..............................................
Books o f a c c o u n t
.
3 03
.........................................................
306
S t a t e s h a v i n g no p r o v i s i o n c o n c e r n i n g t h e
b o o k s o f a c c o u n t ..............................
R elian ce
313
of th e board of d ir e c to r s
books of a c c o u n t
S e c tio n B . ? R eports
on the
.........................................................
to th e R e g u la tin g
................................................. ?......................
C om m ission .
Annual r e p o r t to
the r e g u l a ti n g
Annual r e p o r t to
in d ic a te on ly c a p i ta l
issu an ce
.
com m ission
. ?
in d icate c a p ita l
316
316
sto ck
..............................................
Annual r e p o r t to
314
317
stock
issu н
ance and m in or su p p le m e n ta ry f i n a n c i a l i n н
fo rm atio n
.
...................................................................
319
CHAPTER
V III.
PAGE
BOOKS OP ACCOUNT, FINANCIAL STATEMENTS, AND
REPORTS ( c o n t i n u e d )
Annual r e p o r t to i n d i c a t e
c a p i ta l sto ck
i s s u a n c e an d a f i n a n c i a l s t a t e m e n t whose
co n ten ts
Is not p rescrib ed
Annual r e p o r t to
in d ic ate
is s u a n c e and r e q u i r i n g
in d e t a i l
. .
.
321
c a p ita l sto ck
p rescrib ed d e ta il
?...............................
in the f i n a n c i a l s ta te m e n t
323
Annual r e p o r t r e q u i r i n g m is c e lla n e o u s p r o н
v isio n s
........................................................................
. .
326
p u r p o s e s ..................................................................................
326
S t a t e s h a v i n g no r e q u i r e m e n t c o n c e r n i n g
f i n a n c i a l s ta te m e n ts f o r o th e r th an ta x
S e c t i o n C.
R eports
to S hareholders
S h a re h o ld e r's r i g h t
.....................
to sta te m e n t o f a f f a i r s
S tatem ent su b m itte d upon r e q u e s t
.
.
..
.
S t a t e m e n t t o b e p u b l i s h e d ..........................................
S tatem en t
to be d i s t r i b u t e d
to
Summary
I X . SUMMARY AND CONCLUSION
. . . . .
327
332
334
t o Co m p ly w i t h
t h e L a w . ........................................................................................
S e c tio n E.
327
the s h a r e н
h o l d e r s a n n u a l l y ..............................................................
S e c t i o n D. - P e n a l t y f o r F a i l u r e
327
....................................
338
340
................................................................. 3 4 8
S c o p e o f th e . c h a p t e r ....................................
348
x iii
CHAPTER
PAGE
I X . SUMMARY AND CONCLUSION ( c o n t i n u e d )
S u m m a r y ................................................................. ?
!
I n t r o d u c t i o n ........................................................
349
S tatu to ry c a p ita l:
p ar v alu e
. . . . . . . .
352'
S tatu to ry c a p ita l:
sh a re s w ith o u t p ar v alu e
353
S e c t i o n A.
C o n s i d e r a t i o n f o r s h a r e s ...........................................
P r o v is io n s r e g a r d i n g c a sh divid en d sP ro v isio n s f o r share d iv id en d s
M iscellan eo u s
d iv id en d s
The p u r c h a s e
C o n clu sio n
363
369
concerning -
. . . . . . . . . .
o f a c o r p o r a t i o n ? s own s h a r e s
B oo k s a n d s t a t e m e n t s
S e c t i o n B.
. . . .
...................................
sp e c ia l p ro v ision s
..........................
360-
373
.
..................................
379
383
.......................................................
385
The l a c k o f u n i f o r m i t y i n c o r p o r a t e
law
. .
385
A study in c o n tra s ts
. . . . . . .
...................
388
N e ed f o r r e v i s i o n o f
c o r p o r a t e l a w ......................
393
R ecom m endation
BIBLIOGRAPHY
..............................................
394
........................................................................................... 3 9 7
CHAPTER I
AN INTRODUCTION TO THE STUDY
I n tr o d u c t io n to th e s t u d y .
The c o r p o r a t i o n - h a s u n d e н
n i a b l y become one o f t h e o u t s t a n d i n g
p o r a r y econom ic s o c i e t y .
in stitu tio n s
o f contem н
I t h a s become t h e f o c a l p o i n t o f
the, c o n f l i c t b e t w e e n c o n t r o l a n d o w n e r s h i p o f p r i v a t e
ty .
P rom t h e p u r e l y e c o n o m i c s t a n d p o i n t ,
sig n ific an t
ch aracteristics
of th is
properн
p ro b a b ly the m ost
ju ristic
e n tity
are the
d i f f e r e n t i a t i o n o r even the p a r t i a l d i s a s s o c i a t i o n o f the
e n tre p re n e u ria l, m an ag erial,
the d i v is io n o f the
In stead of a l l
th ere
fu n ctio n s,
e n t r e p r e n e u r ?s d u t i e s w hich i t
a ffa irs
is
i s f o u n d a b o d y o f s h a r e h o l d e r s who u l t i m a t e н
But th e a c t i v e d i r e c t i o n o f th e
the
tru e
c o rp o ra tio n 's
i n t h e h a n d s o f t h e b o a r d o f d i r e c t o r s who may
o r m ay n o t h a v e c a p i t a l i n v e s t e d i n
th e ir gen eral su p erv isio n is
conduct the o p e ra tio n s o f th e
the
and
and
IX
as in
p r o p r i e t o r s h i p o r p a r t n e r s h i p type o f
l y b e a r t h e r i s k a n d who s h o u l d j o i n t l y c o n s t i t u t e
e n trep ren eu r.
and
encourages.
th e se fu n c tio n s b ein g c lo s e ly u n ite d ,
th e case of a sin g le
b u sin ess,
and c a p i t a l i s t i c
the b u s in e s s .
Under
a s t a f f o f m a n a g e r s who
c om p a n y a s s a l a r i e d e m p l o y e e s .
" T h e re I s , " a c c o r d i n g t o A r t h u r V/inakor, "no l o n g e r
h a rd and s h a r p l i n e s o f c le a v a g e b etw een th e b o n d h o ld e r
sto c k h o ld e r."
A r t h u r H. h i n a k o r , " C r e d i t o r ? s P r o t e c t i o n
S to c k h o ld e r's R e s p o n s i b i li t y ."
The A c c o u n t i n g R e v i e w ,
(S eptem ber, 1934), p . 250.
I t fo llo w s
th a t the
the v a rio u s
classes
i n t e r e s t o f the s h a r e h o ld e r s ,
or ty p es
of shareh o ld ers,
as betw een
and a ls o as
b e t w e e n t h e m s e l v e s a n d t h e c r e d i t o r s , i$ay s u f f e r f r o m l a c k
o f know ledge and o f v o ic e i n th e d i r e c t i o n o f t h e a f f a i r s o f
p
'
th e company.
The n e c e s s a r y c o n c o m i t a n t o f t h i s d i v i s i o n
of fu n ctio n ,
from th e
need f o r the
im p o s it i o n o f c e r t a i n check s to c o n t r o l and
d irect
Itie s
s o c i a l and l e g a l p o in t o f view ,
is
the
the fo rc e s
a n d i n t h a t way r e d u c e t h e g r e a t p o t e n t i a l н
's
f o r h a r m t h a t may be s a i d t o e x i s t .
C l e a r ly the c o rp o r a te form o f o r g a n i z a t i o n ,
from th e
v ie w p o in t o f c a p a c i ty to produce th e goods n e c e s s a r y f o r
e x p a n d in g and dynam ic s o c i e t y ,
e sp ecially
an
s h o u ld be e n c o u ra g e d ,
In t h a t p a r t o f th e i n d u s t r i a l w o rld ,i n w hich
2
" I n fo rm t h e g o v e rn m e n t i s a r e p r e s e n t a t i v e democн
ra c y ; in su b stan ce i t is o fte n a s e l f - p e r p e t u a ti n g a u to c ra c y .
W i l l i a m H. K i e k h o f e r , E c o n o m i c P r i n c i p l e s , P r o b l e m s , a n d
P o l i c i e s (New Y o r k : D.. A p p l e t o n - C e n t u r y Co. 1 9 3 6 ) , p . - 9 1 .
A l s o s e e M a r q u i s E . E a t o n , ^ A c c o u n t a n t s a n d t h e New S o c i a l
O r d e r . ? The C e r t i f i e d P u b l i c A c c o u n t a n t . X I I I ( A u g u s t , 1 9 3 3 )
p p . 4 6 0 e t s e q q . . ?M o s t f u n d a m e n t a l o f a l l , t h e p o s i t i o n o f
o w n ersh ip~ h as changed from t h a t o f an a c t i v e to t h a t o f a
p a s s i v e a g e n t . ? A d o l p h A. B e r l e , J r . , a n d G a r d i n e r C. M e a n s ,
The M o d e r n C o r p o r a t i o n a n d P r i v a t e P r o p e r t y (New Y o r k : The
M a c m i l l a n Com pany, 1 9 3 3 ) p p . 6 6 , 1 5 9 .
A d o l p h A. B e r l e , J r . ,
S t u d i e s i n t h e Law o f C o r p o r a t i o n F i n a n c e ( C h i c a g o : C a l l a g h a n
a n d Com pany, 1 9 2 8 7 , p . ' 1 9 0 .
H a r o l d A. E p p s t o n , ^ A c c o u n t i n g
i n E v o l u t i o n . ? The J o u r n a l o f A c c o u n t a n c y , LXX ( A u g u s t , 1 9 4 0 )
p. 130.
C ontrol
^ C h e s t e r R o h r l i c h , Law a n d P r a c t i c e i n C o r p o r a t e
(New Y o r k : B a k e r , V o r r h i s a n d Company, 1 9 3 3 ) , p p .
8-9
3
larg e
sums o f c a p i t a l a r e n e c e s s a r y a n d i n w h i c h o p e r a t i o n s
m u s t b e c a r r i e d o n w i t h a maximum o f c o n t i n u i t y .
as an e s s e n t i a l consequence,
d e fin ite
resp o n sib ility
Very b r o a d l y s t a t e d ,
tow ards
However,
p r o v i s i o n s h o u l d b e made f o r
and a b e t t e r a d ju s tm e n t o f l i a b i l i t y .
the problem o f g o v e rn m e n ta l a t t i t u d e
t h e c o r p o r a t i o n s h o u l d b e one a im ed t o com bine p r e н
v e n tio n of abuses w ith p r o g r e s s iv e n e s s - - to
and s a f e t y w ith o u t h in d e r in g i n i t i a t i v e
secure
ju stic e
and re a so n a b le f l e x i н
b ility .
The c o r p o r a t i o n , a c c o r d i n g t o t h e b e s t known a n d
m o st fam ous d e f i n i t i o n f o r m u l a t e d b y C h ie f J u s t i c e M a r s h a l l ,
may b e d e s c r i b e d a s " a n a r t i f i c i a l b e i n g i n v i s i b l e ,
b le,
a n d e x i s t i n g o n ly i n c o n te m p l a ti o n o f law .
m ere c r e a t u r e
o f law I t
B eing the
p o s s e s s e s o n ly th o s e p r o p e r t i e s w hich
th e c h a r t e r c o n fe rs upon i t
e i t h e r e x p re s s ly or as
to
.
Its
very e x is te n c e .
very p o s itiv e ly
the
.
.
Idea of -an " a r t i f i c i a l
the c o r p o r a tio n
sta te
to be c r e a t e d .
co n stitu tio n ,
en tity "
whose
s o v e r e i g n power w h ic h
The c o r p o r a t i o n i s
g o v ern ed by f i v e d i s t i n c t groups o f r u l e s
in the
in cid en tal
T his d e f i n i t i o n e m p h a siz e s
pow ers a r e o n l y t h o s e g r a n t e d by t h e
perm its
In tan g iн
w hich a re found
i n th e c o r p o r a t i o n law s o f th e
^ T r u s t e e s o f D a r t m o u t h C o l l e g e v s . W oo d w ard , R e p o r t
o f D e c i s i o n s i n t h e Supreme C o u r t o f t h e U n i t e d S t a t e s , w i t h
n o t e s b y B. R. C u r t i s .
V ol. 2 - 5 .
4 W heaton 5 6 3 - 5 3 4 .
p . 489.
sta te ,
in the c o rp o ra te
m o tions
and r e s o l u t i o n s
h o l d e r s .
^
ch arter,
in the b y -law s,
and i n th e
adopted by the d i r e c t o r s
or stock--
These v a r i o u s
sets
p u r p o s e s . ' Some o f t h e r u l e s
w hole;
parts
of ru les
govern th e c o r p o r a tio n as a
o t h e r s a re a d o p te d to k eep i n a d ju s tm e n t th e w orking
o f the o rg a n iz a tio n .
The c o n s t i t u t i o n a n d c o r p o r a t i o n
sta tu tes
a re m ainly of th e form er ty p e;
law s a r e
l i k e l y to be of the
The c o n s t i t u t i o n
sio n s
e n tity
serve q u ite d i f f e r e n t
th e c h a r t e r and b y н
second ty p e .
o f a s t a t e .makes o n l y g e n e r a l p r o v i н
s a n c tio n in g the o rg a n iz a tio n of th e a r t i f i c i a l l e g a l
and r e s e r v in g , c e r t a i n r i g h t s
betw een th e s t a t e
t o amend t h e c o n t r a c t
and th e c o r p o r a t io n .
The s t a t u t e s
deal
i n g r e a t e r d e t a i l w i th m a-tters p e r t a i n i n g t o
the fo rm atio n
of co rp o ratio n s
u n d er the
and c o rp o r a te pow ers.
It
is
a u th o r ity o f the g e n e ra l c o rp o ra tio n s t a t u t e
of in co rp o ratio n ,
The s t a t u t e s ,
som etim es c a l l e d
w hich v a ry from s t a t e
c o n sid era b le d e t a i l
c h a r t e r and th e
the c h a r t e r ,
to s t a t e ,
a re draw n.
set fo rth
in
the p ro c e d u re n e c e s s a r y to o b t a i n a
powers t h a t an a s s o c i a t i o n o b t a i n i n g
a n i n s t r u m e n t m ay e x e r c i s e .
p r o v is io n s u s u a lly found:
cr
th at a r tic le s
The f o l l o w i n g a r e
who may i n c o r p o r a t e ;
such
some o f t h e
t h e number o f
T his stu d y e x c lu d e s c o rp o ra tio n s , c h a r t e r e d by th e
F e d e r a l Governm ent.
I t sh o u ld be rem em bered, o f c o u r s e ,
t h a t a c o r p o r a t i o n ?i s a l s o g o v e r n e d b y t h e S u p r e m e Law o f
t h e Land and F e d e r a l S t a t u t e s . a n d v a r i o u s a d m i n i s t r a t i v e
bo ards c re a te d by such s t a t u t e s .
In co rp o rato rs;
pow ers o f th e
the c la s s e s
the o b je c t of th e
of shares;
stock;
co rp o ratio n ;
the par v a lu e ,
s to c k h o ld e r's
o f e s ta b lis h in g by -law s;
fees,
to
T his
u ltra
v ires
act.
t r a c t w ith the
c o r p o r a t o r s w ith the
'In s tru m e n t is
Instrum ent Is
The c e r t i f i c a t e
sta te
and re c o rd s
t h e m ethod
o f any power
c o n tr a r y to
law ;
th e com pliance o f th e
in н
A lso t h i s
s h a r e h o l d e r s and th e
th em selv es.
w hile n o t e s s e n t i a l to c o rp o ra te
sto ck h o ld ers,
They a r e a l t e r a b l e
c o rp o ra tio n ,
e x istн
in te rn al
a t the
or o c c a s io n a lly the d i r e c t o r s .
The b y - l a w s a r e b i n d i n g u p o n t h e
th ey are n o t c o n tra ry to
an
a conн
sh areh o ld ers
m anagem ent o f th e c o r p o r a t i o n .
of the
I.e .,
of in co rp o ratio n is
are- t h e r u l e s u s u a l l y e n a c t e d t o g o v e r n t h e
p leasu re
the lim its
e i t h e r e x p re s s ly o r by
s ta tu to r y req u irem en ts.
c o r p o r a t i o n and b etw een th e
ence,
the
and th e p r o v i н
ex ercise
a c o n t r a c t betw een th e
The b y - l a w s ,
the d u r a tio n
in stru m en t d e lin e a te s
f o r w hich a u t h o r i t y c a n n o t be fo u n d ,
in th is
and t a x e s ;
in fo rm atio n ;
c o r p o r a t i o n ? s powers and t h e
Im p licatio n ,
lia b ility ;
th e m ethod of am ending t h e c h a r t e r ;
of sh areh o ld ers
sio n s f o r d is s o lu tio n .
of th e
and th e m ethods
t h e s t o c k h o l d e r ? s poxr er o f c o n н
th e c o rp o ra tio n r e p o r ts ,
the r i g h ts
i f any,
the p r i n c i p a l p la c e o f b u s in e s s ;
p r o v i s i o n s a s 'to d i r e c t o r s ;
tro l;
the g e n e ra l
c o r p o r a t i o n ??; t h e m in im um a u t h o r i z e d c a p i t a l ;
of tra n sfe rrin g
o f the
co rp o ratio n ;
the law ,
sh areh o ld ers
so l o n g a s
o r the c h a r t e r o f th e
o r c o n t r a r y to p u b lic p o l i c y .
6
The f i n a l r u l e s u n d e r w h i c h c o r p o r a t e a c t i v i t i e s
c a r r i e d on a re
the r e s o l u t i o n s
and m o tio n s by th e d i r e c t o r s
or sto c k h o ld e rs a t t h e i r r e s p e c tiv e m eetin g s fo r the
of d eterm in in g p o lic y or a c tio n
c ertain
problem s.
As l o n g a s
are
purpose
to be t a k e n c o n c e r n i n g
th ese m otions o r r e s o l u ti o n s
a re n o t in c o n tr a v e n tio n of th e p r e v io u s ly m entioned r u le s
th e y a r e b i n d i n g u p o n the c o r p o r a t i o n and i t s m em bers.
W ithin t h is
l e g a l fram ew ork th e c o r p o r a t i o n m ust
o p e r a te and c a r r y on i t s
a c tiv itie s,
and c r e d i t o r s m ust lo o k to
and th e
these r u le s
shareholders
and t h e i r a p p l i c a t i o n
t o p r o t e c t them fro m u n w a r r a n t e d and u n s o u n d p o l i c i e s .
W ith in th e p a s t few y e a r s t h e r e
h a s b e e n much q u e s н
tio n in g of the e f f ic a c y of th e se v a rio u s r u l e s ,
th e
corp o rate
sta tu te s,
ble
and s o c i a l l y
in se c u rin g and m a in ta in in g an e q u i t a н
s a t i s f a c t o r y r e l a t i o n betw een th e v a rio u s
g ro u p s h a v in g an i n t e r e s t
c red ito rs
(trad e
h o ld ers),
and t h e
p articu larly
in the c o r p o r a t io n - - t h e
c re d ito rs),
of v ary in g c la ss e s
the
p ro p rieto rsh ip
s h o rt term
lo n g term c r e d i t o r s
in te rest
and p r i o r i t i e s ) . о
(the
(bond
shareholders
P a rtic u la rly
t h e c a s e when e v e n a c u r s o r y e x a m i n a t i o n i n d i c a t e s
is
th is
t h a t the
g
A d o l p h A. B e r l e , J r . , a n d G a r d i n e r G. M e a n s , o p . c i t .
p . 1 e t p a s s i m ; W i l l i a m S . R i p l e y , M a i n S t r e e t a n d Wa 1 ]L
S t r e e t ( B o s t o n : L i t t l e , B r o w n , a n d C om p an y , 1 9 2 7 ) , p . 1 3 1 ;
Hugo J . Grimm, ? The F o r g o t t e n S t o c k h o l d e r . ? M i s s o u r i B a r
J o u r n a 1 , ( O c t o b e r , 1 9 3 4 ) , p p . 1 8 1 e_t s e q q .
law s o f t h e
to
sta te s
th e f in a n c ia l a f f a i r s 'o f
fa c t th a t th ere
ly
v a ry w id ely in t h e i r p ro v is io n s
the c o r p o r a t i o n s .7
The m e r e
i s no u n i f o r m i t y i s n o t o f i t s e l f n e c e s s a r i н
s u f f i c i e n t p ro o f to w a rran t the d e d u c tio n t h a t
a r e n o t p e r f o r m i n g t h e i r f u n c t i o n , b u t when t h i s
v a ria tio n
larg e
in p ro v isio n s
co rp o ratio n s are
those s t a te s
rela tin g
is
extrem e
c o u p l e d w i t h t h e f a c t t h a t man y
in co rp o rated
on a n a l y s i s
t h e law s
i n a few s t a t e s о
and
seem t o a l l o w t h e m an ag em en t g r o u p ,
as d i s t i n g u i s h e d from th e e n t r e p e n u r i a l o r c r e d i t o r group,
g r e a t powers o f s e l f - d e t e r m i n a t i o n o f p o l i c y ,
to v/arrant an e x am in a tio n of the
i t w o u l d se em
c o r p o r a t i o n law s f o r
the
purpose of d e te rm in in g the s i t u a t i o n .
The i m p o r t a n c e o f t h e p r o p e r c o n t r o l o f c o r p o r a t e
a c tiv itie s
by the
sta te
is
i n d i c a t e d b y A r t h u r K u h n who
q u o t e s B. B u r g e s s a s f o l l o w s :
I f g o v e r n m e n t d o e s n o t e x e r c i s e s u c h p o w e rs [the regн
u l a t i o n o f th e i n t e r n a l a f f a i r s o f the c o r p o r a tio n ^ and
d i s c h a r g e s u c h ' d u t i e s , i t i s e a s y t o s e e how t h r o u g h t h e
d e v i c e o f t h e c o r p o r a t e o r g a n i z a t i o n , t h e f e w may, d e s p o i l
t h e many, and t h e n w eaken t h e b a s i s o f p o p u l a r g o v e rn m e n t,
7
George S. H i l l s , ''A c c o u n t i n g i n C o r p o r a t i o n Law ."
W i s c o n s i n Law R e v i e w , X I I ( J u n e , 1 9 3 7 ) , p . -494.
p
D e la w a re , I l l i n o i s , M aine, M a ry la n d , M a s s a c h u s s e t t s ,
Hew J e r s e y , New Y o r k , P e n n s y l v a n i a , C f . T w e n t i e t h C e n t u r y
F u n d I n c . , The S e c u r i t y M a r k e t . A l f r e d L . B e r n h i e m , D i r e c t o r
o f t h e S u r v e y (New Y o r k : T w e n t i e t h F u n d , I n c . , 1 9 3 5 ) ,
pp. 199-200.
8
if
not a ll
A l s o Mr.
h is
form s o f governm ent.о
J u s tic e B randeis has
sum m arized the c o n d i t i o n i n
d is s e n tin g o p in io n in a re c e n t c ase.
Through s i z e , c o r p o r a t i o n s , once m e r e ly a n e f f i c i e n t
t o o l em ployed by i n d i v i d u a l s i n th e c o n d u c t o f p r i v a t e
b u s i n e s s , h a v e become a n i n s t i t u t i o n - - a n i n s t i t u t i o n
w h ic h h as b r o u g h t su c h c o n c e n t r a t i o n o f econom ic power ?
t h a t s o - c a l l e d p r i v a t e c o r p o r a t i o n s a r e som etim es a b le
t o dom in ate the S t a t e .
The t y p i c a l b u s i n e s s c o r p o r a t i o n
o f t h e l a s t c e n t u r y , owned b y a s m a l l g r o u p o f i n d i v i d u н
a l s , m a n a g e d .by t h e i r o w n e r s , a n d l i m i t e d i n s i z e b y
t h e i r p e r s o n a l w e a l t h , i s b e in g s u p p l a n t e d by huge
c o n c e rn s i n w hich th e l i v e s o f te n s o r h u n d re d s o f
thousands o f in v e s to r s are s u b je c te d , th ro u g h the co rp o н
r a t e m ech an ism , to th e c o n t r o l o f a few men.
O w nership
has b e e n s e p a r a t e d from c o n t r o l ; and t h i s s e p a r a t i o n
h a s r e m o v e d m an y o f t h e c h e c k s w h i c h f o r m e r l y o p e r a t e d
t o c u rb th e m isu se o f w e a lth and pow er.
And a s o w n e r н
s h i p o f t h e s h a r e s i s b e co m in g c o n t i n u a l l y more d i s p e r s e d ,
th e power w h ich f o r m e r l y a cc o m p an ied o w n e rs h ip i s becomн
in g i n c r e a s i n g l y c o n c e n t r a t e d i n t h e h a n d s o f a few .^о
G eneral state m e n t of th e
of th is
research p ro ject
c o rp o ratio n s ta tu te s
D istrict
problem .
It
is
th e purpose
t o m ake a c o m p a r a t i v e s t u d y o f t h e
of the f o r ty - e ig h t
o f Colum bia r e l a t i n g
s t a t e s and t h e
to s e le c te d phases o f th e n e t
о B . B u r g e s s , ?? The P r i v a t e C o r p o r a t i o n f r o m t h e V i e w н
p o in t o f P o l i t i c a l S c i e n c e .? P o l i t i c a l S cience Q u a r te r l y .
X I I I ( J u n e , 1 8 9 8 ) , p . 205 c i t e d b y A r t h u r K. K uhn, A Com paraн
t i v e S t u d y o f t h e Law o f C o r p o r a t i o n s w i t h P a r t i c u l a r R e f e r н
ence to th e P r o t e c t i o n o f C r e d ito r s and S h a r e h o ld e r s .
S t u d i e s i n H i s t o r y , E c o n o m i c s , a n d P u b l i c Law.
V o l . XLIX,
No. 2 , (New Y o r k : C o l u m b i a U n i v e r s i t y , 1 9 1 2 ) , p p . 2 0 1 - 2 0 2 .
D i s s e n t i n g o p i n i o n o f L o u i s C. L i g g e t t ejt a_l. v s .
J . M. L e e , U n i t e d S t a t e s S u p r e m e C o u r t R e p o r t s , L a w y e r ? s
E d i t i o n V ol. 77 , p . 9 5 3 . (288 U .S . 5 1 7 ) .
9
w orth s e c t i o n o f th e
w ill confine
itse lf
c o rp o ra te balan ce
to
d e a lin g w ith c e r ta in
ple
in d eterm in in g
the
sh eet.
su b stan tiv e
p r o v i s i o n s o f th e law
se lected fe a tu re s.
the a s p e c ts
.im p o rtan ce o f th e v a rio u s
T his s tu d y
The g u i d i n g p r i n c i н
t o be c o n s i d e r e d w i l l be t h e
sectio n s
in term s o f th e f i n a n c i a l
procedure.
D e l i m i t a t i o n o f the s t u d y ?
size
it
is
an aly sis
o b v io u sly im possible
of a ll
ou t of the
p o ssib le
to p re p a re a d e f i n i t i v e
phases of a f i n a n c ia l n a tu re
c o rp o ratio n s ta tu te s .
be l i m i t e d t o
In a m onograph o f t h i s
T his
ex clu d in g
i z a t i o n and c o rp o r a tio n s t h a t
the c o o p e r a tiv e
f o r a c h a r t e r m ust r e c e iv e
the
su ch as p u b lic u t i l i t i e s ,
In a d d itio n ,
th is
the c o rp o ra te a c t i v i t i e s
b u sin ess,
of a l l
c o rp o ratio n
type of o rg a n н
o r where a p p l i c a t i o n s
approval of a s p e c ia l a u th o rн
banks,
in s u r a n c e com panies,
in v estig atio n w ill lim it
Itse lf
su ch problem s as v o l u n t a r y s a l e ,
or su b sta n tia lly a ll
tu re,
and f r a n c h i s e s ,
the
to
en countered in the u s u a l course of
lease,
or exchange
o f th e p r o p e r t y and a s s e t s ,
problem o f r e o r g a n i z a t i o n upon f o r c e d s a l e o f c o r p o r a te
erty
w ill
a r e r e q u i r e d to be o r g a n i z e d
under s p e c ia l c o rp o ra tio n p ro v isio n s
e tc .
th erefo re,
the f i n a n c i a l problem s o f a b u s i n e s s
organ ized fo r p r o f i t ,
ity ,
stu d y ,
a risin g
the
propн
problem o f ch an g in g c a p i t a l s t r u c н
c o n v e r s i o n and r e d e m p ti o n ,
the
problem o f m erger a n d /o r
c o n s o l i d a t i o n and th e a t t e n d a n t problem of the d i s s e n t i n g
10
m in o rity sto ck h o ld ers,
ru p tcy ,
ered.
and the
p ro b lem .o f in so lv e n c y ,
bankн
r e c e i v e r s h i p a n d /o r d i s s o l u t i o n w i l l n o t be c o n s i d н
The p r o b l e m s a r i s i n g
excluded not because
from t h e s e
th ey are n o t o f v i t a l
r a th e r b e ca u se.th e m a te ria l is
com plem entary s tu d y .
confine
itse lf
sta tu tes
situ atio n s
are
im portance,
s u f f i c i e n t to c o n s titu te
but
a
The r e p o r t o f t h i s r e s e a r c h w i l l
to a f a c tu a l a n a ly sis
th ro u g h the l e g i s l a t i v e
A n a ly sis of the
problem .
o f the c o rp o ra tio n
sessio n s
of 1940-
The c e n t r a l t h e m e o f t h i s
s tu d y w i l l be f o c u s e d upon th e f o l lo w in g q u e s t i o n s :
1 . What p h r a s e s a r e u s e d t o d e n o t e
the
sta tu to ry
c a p i t a l o f a c o rp o ra tio n in the v a rio u s
ju risн
d ictio n s?
2.
What s t a t e s
fu rn ish a d e fin itio n of s ta tu to ry
c ap ita l?
3 . How i s s t a t u t o r y c a p i t a l d e f i n e d w h e n t h e c o r p o н
r a t i o n has o u ts ta n d in g :
(a)
S h a r e s w i t h p a r. v a l u e ;
(b)
Shares w ith o u t p a r v a lu e ;
(c)
Shares w ith par v alu e a n d .s h a re s w ith o u t
par v alu e?
4 . What t y p e o f a s s e t s may b e r e c e i v e d b y a c o r p o н
ratio n
i n payment o f s t o c k s u b s c r i p t i o n a c c o r d н
ing to
c o n s titu tio n a l p ro v isio n s
and a c c o rd in g
to
sta tu to ry
5 . . How I s
the
law ?
c o n s i d e r a t i o n o t h e r t h a n money t o be
v alu ed ?
6 . When p a r v a l u e
v a lu e o f the
shares are
i s s u e d what m ust be th e
c o n sid e ra tio n received?
7 . May p a r s t o c k b e i s s u e d b e f o r e b e i n g f u l l y
8 . What c o n s i d e r a t i o n may b e r e c e i v e d f o r
paid?'~
shares
w ith o u t p ar v alu e?
9 . Who d e t e r m i n e s
for
10.
th e c o n s i d e r a t i o n to be r e c e i v e d
sh ares w ith o u t p ar v alu e?.
How m a n y s t a t e s
have a c a p i t a l im pairm ent a n d /o r
i n s o l v e n c y t e s t a s a l i m i t a t i o n on th e paym ent
o f d iv id en d s?
1 1 . What a r e
the p r o v i s i o n s
as
to
the so u rc e of c a sh
d iv id en d s?
12. U n d e r w h at c o n d i t i o n s a n d fro m w hat s o u r c e s may a
c o r p o r a tio n pay d iv id e n d s
13.
What do' t h e
ju risd ic tio n s
r a tio n of d iv id en d s,
from s u r p lu s
of a sse ts
in shares?
p ro v id e as to
the
d eclaн
cash or share d iv id en d s,
c r e a t e d from u n r e a l i z e d a p p r e c i a t i o n
or p a id -in su rp lu s?
1 4 . May a d e d u c t i o n f o r d e p l e t i o n o f w a s t i n g a s s e t s ,
o r a s s e t s h av in g a lim i te d l i f e ,
d e te rm in in g the
1 5 . What p r o v i s i o n s ,
be e x clu d ed
in
funds a v a ila b le f o r a d iv id e n d ?
i f any,
are
provided re g a rd in g
12
reserves?
1 6 . What l i m i t a t i o n s
a r e -im posed c o n c e r n i n g w o rk in g
c a p i t a l and t h e payment o f d iv id e n d s ?
17. U nder what c o n d i t i o n s
c o rp o ra tio n purchase
1 8 . What s p e c i a l b o o k s
a c c o u n t s m ust be
iz e d in the
19.
a n d f r o m w h a t s o u r c e s may a
its
own s h a r e s ?
o f r e c o r d and w hat books o f
k ep t by a c o rp o ra tio n o rg an н
various
ju risd ic tio n s?
I n what d e t a i l m ust a n n u a l r e p o r t s
c o n d i t i o n be s u b m i tt e d t o
20.
In w hich s t a t e s
is the
subm it r e p o r t s
sta te
of fin an c ia l
o fficials?
c o rp o ra tio n re q u ire d to
of fin an c ia l
c o n d i t i o n to
s h a r e h o l d e r and what i s t h e
form th e s e
the
sta te н
m ents m ust ta k e ?
"An a n s w e r t o e a c h o f t h e s e
w i l l do m u c h t o
provide
tray al
ex ten t of le g a l
of the
an ad eq u ate
The i m p o r t a n c e
approach is
to
the
is
b eliev ed ,
and co m p reh ensive p o r н
in the v a rio u s
ju risd ic н
acco u n tan t o f th e le g a l
in d ic a te d by the f a c t
conform to l e g a l d i c t a t e s
it
in cid en ce upon f in a n c ia l
p roblem s and a c c o u n tin g te c h n iq u e
tio n s.
q u estio n s,
th at
a c c o u n tin g has had
in m ethodology,
form s even though o c c a s i o n a l l y t h e r e
is
to-
te r m in o lo g y , and
a c o n f l i c t b etw een
l e g a l re q u ire m e n ts and what a re c o n s id e r e d a c c e p te d a c c o u n tн
ing c o n v e n t i o n s G e o r g e
D. B a i l e y c o n f i r m e d t h i s
statem en t
-*-1 R o b e r t E . P a y n e ? " T h e E f f e c t o f R e c e n t Laws o n
A c c o u n t a n c y . " ' The A c c o u n t i n g R e v i e w , X ( M a r c h , 1 9 3 5 ) , p p . 84
e t seqq.
13
whe n h e s a i d ,
corp o rate
" T h e r e was r e c o g n i t i o n o f t h e f a c t
p rac tic es
good a c c o u n tin g .'*
th is
12
p e r m i t t e d by law w ere n o t n e c e s s a r i l y
However,
George S. H i l l s
field
stu d ies.
is found p r i n c i p a l l y
The l i t e r a t u r e
in p e rio d ic a ls
a few g e n e r a l t e x t u a l t r e a t m e n t s
in
th is
alth o u g h th e re are
o f the problem .
A Comparaн
S t u d y o f t h e haw o f C o r p o r a t i o n s w i t h P a r t i c u l a r R e f e r -
ence to th e
P ro te c tio n of C red ito rs
A r t h u r K. Kuhn
14
is
one o f th e f i r s t
s t u d y d e v o t e s much s p a c e
of th e
c o rp o ra tio n .
to
c o n s i d e r e d and th e a n a l y s i s
the
c red ito rs
and s h a r e h o l d e r s
and S h a re h o ld e rs by
stu d ies
i n the
field .
the h i s t o r i c a l d ev elo p m e n t
The s t a t u t e s
are
is
law s a i d ,
t h e law m u st p r e v a i l . "
R eview o f r e l a t e d
T his
w hen d i s c u s s i n g
c o n f l i c t b e tw ee n a c c o u n tin g t e c h n iq u e and the
"in a d ire c t c o n flic t
tiv e
tba t some
o f o n l y a few j u r i s d i c t i o n s
o f the p r o t e c ti o n o f f e r e d
is
ra th e r g en eral.
The s t u d y
im p o rta n t -p rim a rily as an i n d i c a t i o n o f th e r a p i d l y changн
in g b a c k g ro u n d a g a i n s t w hich c o r p o r a t i o n p r a c t i c e s
and
1^ G e o r g e . D. B a i l e y , "T h e R e s e a r c h Work o f t h e
A m erican I n s t i t u t e o f A c c o u n ta n ts ."
The J o u r n a l o f A c c o u n t н
a n c y , LXX ( J u l y , 1 9 4 0 ) , . p . 5 2 .
G eorge S. ' H i l l s , " S t a t e d C a p i t a l and T r e a s u r y
S h a r e s . " The J o u r n a l o f A c c o u n t a n c y , L V I I ( M a r c h , 1 9 3 4 ) ,
? p . 2 0 5 . C f . A. A. B e r l e , J r . a n d F r e d e r i c k S . F i s h e r , J r . ,
" E l e m e n t s o f t h e Law o f B u s i n e s s A c c o u n t i n g . " C o l u m b i a Law
R e v i e w , XXXII ( A p r i l , 1 9 3 2 ) , p . 5 7 8 .
14 A r t h u r K. K u h n , A C o m p a r a t i v e S t u d y o f t h e Law o f
C o r p o r a t io n s w it h P a r t i c u l a r R e fe re n c e to t h e P r o t e c t i o n o f
C r e d i t o r s and S h a r e h o ld e r s
S t u d ie s i n H i s t o r y , E conom ics,
a n d P u b l i c Law, V o l . XLIX, No. 2 (New Y o r k : C o l u m b i a U n i v e r н
s i t y , 1 9 1 2 ) , 172 p p .
14
p ro c e d u re s have d e v e lo p e d d u rin g th e p a s t tw e n ty - f iv e
A n o th e r p i o n e e r work i n t h e f i e l d
is
t h e Law b y P r o s p e r R e i t e r . T h i s
who i s
a ls o an a c c o u n ta n t,
a c c o u n tin g view points.
P r o f i t s , D iv id e n d s . and
book, w r i t t e n by a law yer
com bines b o t h th e
l e g a l and
The a u t h o r c o n s i d e r s o n e o f t h e m o s t
fu n d a m e n ta l problem s w ith w hich th e a c c o u n ta n t i s
--th e
also
d i f f e r e n t i a t i o n o f c a p i t a l and e a rn in g s .
co n sid ers
the fo llo w in g problem s:
c a p i t a l im pairm ent,
and a m o r tiz a tio n .
years.
p r o f i t and l o s s ,
The a n s w e r s t o
i n th e c a s e s and s t a t u t e s
ju d ic ia l p reced en ts are o u tlin e d
su rp lu s,
to
The b o o k
d i v i d e n d paym ent,
th ese
p ertin en t
concerned
d ep reciatio n ,
problem s a re
the
sought
q u estio n s.
in the f i r s t
E n g lish
e ig h t ch ap ters
and th e rem a in in g c h a p te r s a re d e v o ted to a d i s c u s s i o n of
A m erican c a s e s
and s t a t u t o r y law .
l y o n t h e common l a w .
The e m p h a s i s i s
The a u t h o r h a s p e r f o r m e d h i s
so u n d ju d g m e n t a l t h o u g h h i s d i s c u s s i o n on c e r t a i n
c o n c e p t s m i g h t be s e r i o u s l y q u e s t i o n e d
ren t p rac tic e;
p rin cip alн
f o r exam ple, he f a v o r s
ta sk w ith
acco u n tin g
in the l i g h t
of curн
carry in g tre a su ry
sto ck as an a s s e t .
I n 1 9 3 0 , D a v i d L. D o d d , a n I n s t r u c t o r i n f i n a n c e a t
C o l u m b i a U n i v e r s i t y , m ade a s t u d y l о o f t h e
ju d ic ia l v alu a tio n
IS'
? - 'P r o s p e r R e i t e r , P r o f i t , D i v i d e n d s . and th e
(New Y o r k : The R o n a l d P r e s s , 1 9 2 6 ) , 2 4 9 p p .
-1-о D a v i d L. D o d d ,
P r e s s , 1 9 3 0 ) , 333 pp .
S tock W atering
(New Y o r k :
Law
Colum bia
15
of p ro p erty f o r
sto ck issu e
p u rp o se s as r e v e a l e d by th e
A m erican c a s e law and a l i m i t e d p o r t i o n o f f o r e i g n c a s e
He h a s r e v i e w e d w i t h c o n s i d e r a b l e
ap p ella te
d ecisio n s
Illin o is,
New J e r s e y ,
care
in C a lifo rn ia ,
o th e r lea d in g c a se s.
New Y o r k ,
T his
the
sta tu te s
law .
and
C o l o r a d o , - D e la - w a r e ,
and W ashington as w e ll as
trea tise
stan d s
sq u arely a t
the
p o i n t where a c c o u n t i n g v a l u a t i o n and l e g a l v a l u a t i o n m eet i n
actu al p rac tic e.
A f t e r a m inute c o n s i d e r a t i o n o f the
t h e a u t h o r comes t o
the c o n c lu s io n t h a t
and a p p a r e n t l y c a n n o t so lv e
th at c ertain
th e 'c o u r ts have n o t
the d i f f i c u l t y .
c h a n g e s b e m ade I n t h e
He s u g g e s t s
sta tu tes
p u b l i c i t y r e g a r d i n g t h e m ethod o f d e t e r m i n i n g
of p ro p erty receiv ed fo r
shares and a ls o
v a l u a t i o n be a p p ro v e d by a s t a t e
w ould have m ore a d e q u a t e
t o a s s u r e m ore
the v a l u a t i o n
suggests
th at
agency; fu rth erm o re,
statem en ts
cases,
p r e s e n te d to
such
he
the s to c k н
h o ld ers .
A d o l p h A. B e r l e ,
Jr.
e a r l y f o c u s e d a t t e n t i o n on th e
r e v o l u t i o n a r y ch an g es w hich a re
po rate
p rac tic e,
ta k in g place
e s p e c i a l l y those
t h a t re v o lv e about the
f i n a n c i a l r e l a t i o n s h i p betw een th e v a r i o u s
the e n t e r p r i s e .
S tudies
r e p o r t s o n some o f t h e
p r e t e d from th e
17
ate
'
in the
and th e
p a rticip a n ts
Law o f C o r p o r a t e
l e g a l phases
sta tu tes
i n m odern c o r н
in
F in an ce^
o f the problem as i n t e r н
ju d ic ia l rep o rts.
The same
- A d o l p h A. B e r l e , J r . , S t u d i e s i n t h e Law o f C o r p o r н
F i n a n c e ( C h i c a g o : C a l l a g h a n a n d C om pany, 1 9 2 8 ) , ' 1 9 9 p p .
a u th o r jo in e d w ith G a rd in e r.0.
e n title d ,
The M o d e r n C o r p o r a t i o n a n d P r i v a t e
T h is book,
the
Me ans i n p r e p a r i n g a b o o k
em bodying a s
problem o f th e
it
P ro p erty .
does a q u a n t i t a t i v e
im portance and s i g n i f ic a n c e
a p p ro a c h to
o f th e
corн
p o rate
fo rm o f o r g a n i z a t i o n i n t h e econom ic o r d e r a s w e l l
as th e
l e g a l ap pro ach c o n ce rn in g the g ra d u a l lo s s
by the
sh areh o ld ers,
tim e i t
a ttra c te d n atio n al a tte n tio n at
was p u b l i s h e d .
le g a l view p o in t,
in te reste d
of c o n tro l
The t h e s i s
is. t h a t t h e
o f th e w ork, from th e
sh iftin g rela tio n s
in a c o rp o ra tio n r a is e
the
among t h o s e
v a r i o u s p ro b lem s w hich
m ust be f a c e d and s o l v e d b y l e g a l a c t i o n .
Raymond P. M a r p l e , a c e r t i f i e d
p u b lic
a c c o u n ta n t and
Head o f th e R e s e a r c h D e p a rtm e n t o f t h e R a t i o n a l A s s o c i a t i o n
o f C ost A cco u n tan ts, has p rep a red a w e ll w r itte n and w e ll,
c o n sid e re d study e n t i t l e d ,
Wo r t h .
portance
Capital
given to
s u r p l u s h a s becom e- a p r o b l e m o f m a j o r imн
in c o rp o ra te
w ithout par v alu e,
C a p i t a l S u r p l u s and C o r p o r a te N et
a c c o u n tin g w ith the
and,
th erefo re,
i t by D r. M arp le.
sources of c a p ita l su rp lu s
sions and c o u rt d e c isio n s
it
w arrants
He d i s c u s s e s
and t h e
the
the n a tu r e
p ertin en t
in C a lifo rn ia ,
A d o l p h A. B e r l e , J r . ,
Modern C o r p o r a t i o n and P r i v a t e
m i l l a n C o m pany, 1 9 3 3 ) , 3 96 p p .
advent of shares
stu d y
and
leg al p ro v iн
D elav/are,
Illin o is,
a n d G a r d i n e r C. M e a n s , The
P r o p e r t y (New Y o r k : The Macн
-*?9 R a y m on d P . M a r p l e , C a p i t a l S u r p l u s a n d C o r p o r a t e
N e t W o r t h (New Y o r k : The R o n a l d P r e s s , 1 9 3 6 ) , 2 0 1 p p .
17
M innesota,
New Y o r k ,
W ashington.
O hio,
F in a lly ,
P en n sy lv an ia,
w ith t h is
V irg in ia,
in fo rm a tio n as a background
he p r o p o s e s c e r t a i n a c c o u n t i n g t e c h n i q u e s .
n otew orthy because
p les
it
p resen ts
and
T his book is
an o rg a n iz e d body o f p r i n c i н
and b e ca u se th o s e p r i n c i p l e s
are
l o g ic a l ded u ctio n s
from a b ro a d g e n e r a l i z a t i o n r e g a r d i n g th e fu n d a m e n ta l n a t u r e
of c a p ita l su rp lu s.
of th e
The p e r i o d i c a l l i t e r a t u r e ,
on c e r t a i n
problem ,
jo u rn als
ing m agazines
in b o th the
i s volum inous
im possible e i t h e r
N evertheless,
leg al
and r e l e v a n t .
s p e c ia l phases
and th e a c c o u n tн
How ever,
it
is
to rev ie w o r m en tio n a l l o f th e a r t i c l e s .
c e rta in w riters
sh o u ld b e 'm e n tio n e d because, o f
t h e i r notew orthy c o n tr ib u tio n s
to th e f i e l d .
Professor
L. L. B r i g g s o f .t h e U n i v e r s i t y . o f Vermont h a s b e e n a m o st
p ro lific
w r i t e r on t h e
problem s
in v o lv ed in
The f o l l o w i n g t i t l e s
su b ject of
t h e a c c o u n t i n g and l e g a l
the c o rp o r a te
in d icate
the
type o f o rg a n iz a tio n .
scope o f h i s
work:
^ 'L . L. B r i g g s , ?A p p r e c i a t i o n and D i v i d e n d s . ?
The
J o u r n a l o f A c c o u n t a n c y . LIV ( J u l y , 1 9 3 3 ) , p p . 2 9 - 3 7 .
. . . . , ??A s s e t V a l u a t i o n i n D i v i d e n d D e c i s i o n s . ?
The A c c o u n t i n g R e v i e w . IX ( S e p t e m b e r , 1 9 3 4 ) , p p . 2 2 0 - 2 3 6 .
. . . . , ??D i v i d e n d s a n d t h e G e n e r a l C o r p o r a t i o n
S t a t u t e s . ? The A c c o u n t i n g R e v i e w , V I I I ( J u n e , 1 9 3 3 ) ,
pp. 130-144.
. . . . , ??D i v i d e n d s f r o m S t o c k P r e m i u m s . ? The
J o u r n a l o f A c c o u n t a n c y , L I I I (May, 1 9 3 2 ) , p p . 3 4 6 - 3 5 3 .
. . . . , ??D i v i d e n d s o n N o n - C u m u l a t i v e P r e f e r r e d
S t o c k . ? The A c c o u n t i n g R e v i e w , V I I I ( S e p t e m b e r , 1 9 3 3 ) ,
pp. 224-238.
18
" A p p r e c i a t i o n a n d D i v i d e n d s ?*
?* A s s e t V a l u a t i o n i n D i v i d e n d D e c i s i o n s ?*
??D i v i d e n d s a n d t h e
G e n e r a l C o r p o r a t i o n S t a t u t e s ?*
??D i v i d e n d s f r o m S t o c k P r e m i u m s ?*
??D i v i d e n d s o n N o n - C u m u l a t i v e P r e f e r r e d S t o c k ?
?? J u d i c i a l D e t e r m i n a t i o n o f D i v i d e n d S u r p l u s ?
?' P r o p e r t y D i v i d e n d s a n d t h e Law?
"R e cissio n of D iv id en d s?
??S c r i p D i v i d e n d s
and th e
Law?
??Some L e g a l A s p e c t s o f S t o c k R i g h t s ?
?? S t o c k h o l d e r ' s
L i a b i l i t y f o r U nlaw ful D iv id e n d s ?
??T r e a s u r y S t o c k a n d G e n e r a l C o r p o r a t i o n S t a t u t e s ?
??T r e a s u r y S t o c k a n d t h e
C o u rts.?
The a r t i c l e s m a n i f e s t a v e r y s c h o l a r l y a n d t h o r o u g h
approach.
The m a j o r i t y o f t h e m d e a l w i t h a d j u d i c a t e d c a s e s ,
f r e q u e n t l y E n g l i s h a s w e l l a s American c a s e s .
. . . ., ? J u d i c i a l D e te rm in a tio n of D ividend S u r p l u s .?
The C e r t i f i e d P u b l i c A c c o u n t a n t , X I I I ( J u n e , 1 9 3 3 ) , p p . 3 2 9 - 3 3 3 .
. . . . , ?? P r o p e r t y D i v i d e n d s a n d t h e L a w . ? The
A c c o u n tin g R eview . V II (S e p te m b e r, 1 9 3 2 ), pp . 1 6 9 -1 7 4 .
. . . . , " R e c i s s i o n o f D i v i d e n d s . ? The A c c o u n t i n g
R eview , V II , (D ecem ber, 1 9 3 2 ), pp. 2 3 3 -2 4 1 .
. . . . , " S c r i p D i v i d e n d s a n d t h e L a w . ? The C e r t i f i e d
P u b lic A c c o u n t a n t , X I I I ( J a n u a r y , 1 9 3 3 ) , pp. 30-34."
. . . .,
"Some L e g a l A s p e c t s o f S t o c k R i g h t s . ? The A c н
c o u n tin g R eview . V II (Ju n e , 1 9 32), pp. 122-136.
. . . .,
? S t o c k h o l d e r s ? L i a b i l i t y .f o r U n l a w f u l D i v i н
d e n d s . ? T e m p l e Law Q u a r t e r l y . V I I I ( J a n u a r y , 1 9 3 4 ) , p p . 1 4 5 - 1 8 4 .
. . . . , " T r e a s u r y S to c k and G e n e ra l C o r p o r a tio n S t a t н
u t e s . ? The J o u r n a l o f A c c o u n t a n c y , LV ( M a y , 1 9 3 3 ) , p p . 3 2 9 - 3 3 9 .
. . . . , ??T r e a s u r y S t o c k a n d t h e C o u r t s . ?
The
J o u r n a l o f A c c o u n t a n c y , LVI ( S e p t e m b e r , 1 9 3 3 ) , p p . 1 7 1 - 1 7 9 .
19
U n d oubtedly th e a r t i c l e
en title d ,
"'D iv id en d s an d t h e G e n e r a l
C o rporation S ta tu te s "
is
study;
is a condensed p r e s e n t a ti o n ;
the d i s c u s s i o n
d ig e s t of th e
th e m ost a p p o s ite
to
the p r e s e n t
i.e .,
law s w i t h o u t e l a b o r a t i o n a n d t h e r e f o r e
a
lack in g
c e r t a i n o f th e m inor p o i n t s .
A.
C. L i t t l e t o n ,
P ro 'fe ss o r o f A c c o u n tin g a t
th e U niн
v e rs ity of I llin o is ,
h a s a l s o m ade a w o r t h w h i l e a n d t h o u g h t
p
provoking c o n tr i b u tio n in s ix a r t i c l e s :
" C a p ita l'a n d Surн
p lu s,"
"C ap ital F le x ib ility ,"
" C r e d ito r 's
"The D i v i d e n d B a s e , " . " D i v i d e n d s
" S o c ia liz e d A cco u n ts."
in these
articles
Is
Presupposes
co n trast
to
over l i a b i l i t i e s
su rp lu s
and
and t h a t a co m prehensive re e x a m in a н
a p r o f i t approach to
the
P ro fits,"
p r a c tic e s have been
t i o n o f a c c o u n tin g and l e g a l problem s i s
w rite r favors
i n Su rp lu s? /
The g e n e r a l t e n o r o f t h e d i s c u s s i o n
th a t co rpo rate
under q u estio n of la te
In terest
approach;
and c a p i t a l
w arranted.
T his
the d iv id e n d problem in
i.e .,
sto ck .
the e x c e s s o f a s s e t s
T his
stan d
is
taken
-A. C. L i t t l e t o n , " C a p i t a l a n d S u r p l u s . " .The A c c o u n t н
in g R e v ie w . V II (D ecem ber, 1 9 3 2 ), p p . 2 9 0 -2 9 3 .
. . . . , " C a p i t a l F l e x i b i l i t y . " The J o u r n a l o f Acн
c o u n t a n c y . LVI ( A u g u s t , 1 9 3 3 ) , p p . 1 0 2 - 1 0 8 .
.
. . ., " C re d ito rs ' I n t e r e s t in S u rp lu s."
The
C e r t i f i e d P u b lic A ccountant X II (A p ril, 1933), pp. 199-202.
.
. . . , " T h e D i v i d e n d B a s e . " The A c c o u n t i n g R e v i e w ,
IX ( J u n e , 1 9 3 4 ) , p p . 1 4 0 - 1 4 8 .
.
. . .^ " D i v i d e n d s P r e s u p p o s e s P r o f i t s . " The A c н
c o u n t i n g R eview
IX ( D e c e m b e r , 1 9 3 4 ) , p p . 3 0 4 - 3 1 1 .
.
. . . , " S o c i a l i z e d A c c o u n t s . " The A c c o u n t i n g R e н
v i e w , V I I I (D ecem ber, 1 9 3 3 ) , pp. 2 6 7 -2 7 1 .
20
because by u sin g
i t much o f t h e c u r r e n t p r o b l e m s
p aid -in
su rp lu s,
u n realized a p p re c ia tio n ,
m ized.
O nly a few o f t h e c o r p o r a t e
V i n c e n t W. W e s t r u p h a s
e tc .,
New J e r s e y ,
takes
as h is
D elew are,
field
w ritte n ,
as a th e s is
of o rg an izers,
tio n ,
is
e tc .,
an a u t h o r i t a t i v e
lim ite d
a n d New Y o r k . ?
phases of
the
su b ject,
o rg a n iz a tio n m eetin g s,
as w e ll as
pp
in the
su b ject
S ta te s
of
The a u t h o r
su c h a s number
pow ers o f th e c o r p o r a н
the f i n a n c i a l p r o v is io n s .
The s t u d y
and t h o u g h tf u l p r e s e n t a t i o n , b u t o n ly a
p o r t i o n i s germ ane t o
H e n r y W. B a l l a n t i n e
kno w n l e g a l w r i t e r s ,
on th e
C o r p o r a t i o n Laws o f t h e
M aryland,
a ll
w i l l be m in iн
law s a r e c o n s i d e r e d .
G r a d u a t e S c h o o l o f Law, New Y o r k U n i v e r s i t y ,
?A C om parative Study o f th e
in v o lv in g
the p r e s e n t stu d y .
and George S. H i l l s ,
have c o lla b o r a te d
two \ y e l l
in p rep a rin g a le g a l
e s s a y on " C o rp o ra te C a p i t a l and R e s t r i c t i o n s upon D iv id e n d s
u n d e r Modern C o r p o r a t i o n
L
a w
s .
? 23 j n t h i s
article
the p r e v a i li n g ty p e s o f s t a t u t o r y r e s t r i c t i o n s
case
is
law upon d iv id e n d d e c l a r a t i o n
is
c lu sio n s
are
t h a t no s a t i s f a c t o r y
as w ell as
p resen ted .
one o f th e m o st c o m p re h e n siv e a v a i l a b l e .
su b stitu te
a survey of
the
The e s s a y
The g e n e r a l c o n н
has y et been
2 2 V i n c e n t W. W e s t r u p , "A C o m p a r a t i v e S t u d y o f t h e C o r н
p o r a t i o n Laws; o f t h e S t a t e s o f New J e r s e y , D e l e w a r e , M a r y l a n d ,
a n d New Y o r k . ? New Y o r k U n i v e r s i t y Law Q u a r t e r l y R e v i e w . X I
(M arch, 1 9 3 4 ) ,pp. 3 4 9 -6 9 .
^ 23 jje n r y yj' B a l l a n t i n e a n d G e o r g e S . H i l l s , " C o r p o r a t e
C a p i t a l an d R e s t r i c t i o n s upon D iv id e n d s u n d e r Modern C o r p o r a н
t i o n T a w s . ? C a l i f o r n i a Law R e v i e w , X X I I I (M arc h, 1 9 3 5 ) , p p . 2 2 9 263.
' '
21
d ev ised to re p la c e
the
su rp lu s and p r o f i t
p aym ent, b u t t h a t in th e f u t u r e
centage r e l a t i o n
a fter
o f the f a i r v alu e o f the' a s s e t s
th e payment of d iv id e n d s to l i a b i l i t i e s
th e .d o c trin e
fin an c ia l
statu s
lia n ce
s o l e l y upon th e e x is te n c e
The sa m e d o c t r i n e
It
of reaso n ab le care
to th e
suggested
and prudence be a p p lie d
to
to p la c e r e н
a n d /o r s u rp lu s .
the r e s p o n s i b i l i t y
t o a s s u r e a r e a s o n a b l e mimimum o f
f i n a n c i a l c o n s e rv a tis m and prudence f o r
the b e n e f i t o f c r e d н
a n d s h a r e h o l d e r s . 24
One o f
the above m entioned a u th o r s ,
h a s expanded the
articles;
tio n
is also
of a p ro fit
sh ould be a p p lie d
rem ain in g
o f the c o rp o ra н
in g en eral r a th e r than
o f th e management i n o r d e r
ito rs
f o r d iv id en d
some t e s t b a s e d o n t h e p e r н
t i o n m ig h t c o n c e iv a b ly be d e v is e d .
th at
test
25
George S. H i l l s ,
scope o f the d is c u s s io n by w a itin g
" A c c o u n tin g i n C o r p o r a t i o n L aw ,"
th ree '
"Model C o r p o r a н
L aw ," a n d " S t a t e d C a p i t a l a n d T r e a s u r y S h a r e s . "
article s
have as t h e i r
purpose
the
c o n s id e ra tio n of the r e н
latio n
o f a c c o u n tin g to
tio n .
The m o s t s i g n i f i c a n t e s s a y i s
the l e g a l problem s o f the c o r p o r a н
th e model c o r p o r a t i o n law .
24 I b i d . ,
These
In i t
t h e one d e a l i n g w i t h
the a u th o r i n d ic a te s
th at
p. 263.
2 о--George S . H i l l s , " A c c o u n t i n g i n C o r p o r a t i o n L a w . "
W i s c o n s i n Law R e v i e w . X I I ( J u n e , 1 9 3 7 ) , p p . 4 9 3 - 5 1 1 .
. . .
" M o d e l C o r p o r a t i o n L a w . " H a r v a r d Law R e н
v ie w , X LV III ( J u n e , 1 9 3 5 ), p p . 1 3 3 4 -1 3 8 0 .
. . . . , " S t a t e d C a p i t a l a n d T r e a s u r y S h a r e s . " The
J o u r n a l o f A c c o u n t a n c y . L I T I , (M arch, 1 9 3 4 ) , p p . 2 0 2 -2 1 4 .
22
the o ld e r s t a t u t e s
situ atio n s
of a le g a l-a c c o u n tin g n atu re
p re se n t' types
ness,
a r e no l o n g e r s a t i s f a c t o r y
of share
issu es.
f o r the
com plex
t h a t a r i s e u n d er the
In o rd er to
solve
th e a u th o r has p re p a re d what he b e l i e v e s
th is
weakн
to be a s a t i s н
f a c t o r y c o r p o r a t io n law .
An e x c e l l e n t r e v i e w o f l e g a l e s s a y s ,
th e h i s t o r i c a l ap p ro ach and d e a lin g w ith
blem s
in v o lv ed in d e term in in g c o rp o ra te
h a s b e e n w r i t t e n b y J o s e p h L. W e i n e r . .
" T h e o r y o f A n g l o - A m e r i c a n D i v i d e n d Law:
developed through
the u n d e rly in g p ro н
s u rp lu s and p r o f i t ,
The f i r s t
tw o a r t i c l e s ,
th e E n g lis h Cases"
a n d " T h e o r y o f A n g l o - A m e r i c a n D i v i d e n d Law: A m e r i c a n S t a : t u t e s
a n d C ases'*,
O гг
co n sid ers
tended a n a ly s is
the
su b ject,
d ecisio n .
th e w hole p ro b le m an d p r e s e n t s a n e x н
o f t h e b r o a d l e g a l a n d econom ic a s p e c t s
s p e c i a l r e l i a n c e b e i n g p l a c e d on th e
of
ju d ic ia l
The same a u t h o r h a s w r i t t e n a n a r t i c l e 2 ^ d e a l i n g
s p e c i f i c a l l y w ith the
the c o rp o r a tio n has
la b o ra te d w ith J.
su rp lu s a v a ila b le
f o r d i v i d e n d s w hen
issu ed no-par sh a re s,
a n d i n 1930 he c o l н
C. B o n b r i g h t i n w r i t i n g a n a r t i c l e
en title d ,
" T h e o r y o f A n g l o - A m e r i c a n D i v i d e n d Law: S u r p l u s a n d
2 6 J . L . W e i n e r , " T h e o r y of. A n g l o - A m e r i c a n D i v i d e n d
Law: t h e E n g l i s h C a s e s . "
C o l u m b i a Law R e v i e w , X X V I I I
(D ecem ber, 1 9 2 8 ), p p . 104 6 -1 0 6 0 .
. . . . , " T h e o r y o f A n g l o - A m e r i c a n D i v i d e n d Law:
A m erican S t a t u t e s and C a s e s ."
C o l u m b i a Law R e v i e w , XXIX
(A p ril, 1929), pp. 461-482.
. . . . , " A m o u n t s A v a i l a b l e f o r D i v i d e n d s W here JioP a r S h a r e s Have B e e n I s s u e d . "
C o l u m b i a Law R e v i e w . XXIX
(Uovembdr, 1 9 2 9 ) , p p . 9 0 6 - 9 1 7 .
23
pQ
P r o f i t s . ' 11
fo rth
T his a r t i c l e
review s th e background as s e t
in the p re v io u s e ssa y s
and c o n s i d e r s
some new p h a s e s
o f th e problem .
S u f f i c i e n t has been s a i d to
b e en w r i t t e n on c o r p o r a te
a n d 'f i n a n c i a l problem s.
w h ic h c o n s i d e r a b l e work r e m a in s
s p e c ia liz e d asp ects
title s
o f the
V a lid a tio n of th e
T. H.
S anders,
t h a t much h a s
law and th e a t t e n d a n t a c c o u n ti n g
The f i e l d
ra p h y w i l l be found th e
in d ic ate
is
a w ide one an d one i n
to be done.
I n the b i b l i o g н
of o th er stu d ies
p r o b l e m . 29
stu d y .
As r e c e n t l y a s M a r c h 1 9 4 0 ,
P ro fe s s o r o f A ccounting a t
H arvard U n i v e r s ity
and D i r e c t o r o f R esearch* A m erican I n s t i t u t e
in d isc u ssin g th e f i e l d
th a t,
of In te re st
law s an d s t i l l m ore t h e
law s a r e
to th e a c c o u n ta n t.
c o n tin u es by saying t h a t th e re
catio n of d ecisio n s
to
of A cco u n tan ts,
f o r r e s e a r c h in acco u n tin g
" F e d e r a l and S t a t e
s io n s by w hich th e s e
on v a r i o u s
In terp reted ,
.
.
.
. f╗30
court d e ciн
are n e c e s s a rily
However, he
is a q u e stio n as to
situ atio n s
in d icates
o th e r th an those
the a p p l i н
in w hich
J . L. W e i n e r a n d J . C. B o n b r i g h t , " T h e o r y o f
A n g l o - A m e r i c a n D i v i d e n d Law: S u r p l u s a n d P r o f i t s . " C o l u m b i a
Law R e v i e w XXX ( M a r c h , 1 9 3 0 ) , p p . 3 3 0 - 3 5 8 a n d XXX ( N o v e m b e r ,
1930), pp. 954-985.
The f a i l u r e t o i n c l u d e t h e s e t i t l e s I n t h i s
s e c t i o n s h o u ld n o t be t a k e n t o Im ply t h a t t h e y a r e w i t h o u t
m e r it, b u t r a t b e r . t h a t th e l i m i t a t i o n o f space does n o t
perm it; a n e x t e n d e d t r e a t m e n t o f a l l t h e a r t i c l e s .
^ ?л?
and M ethods.
S a n d e rs, "A ccounting R esearch : O b je c tiv e s
The A c c o u n t i n g R e v i e w . XV T M a r c h , 1 9 4 0 ) , p . 8 4 .
24
th ey o r i g i n a l l y a ro s e .
e s s e n t i a l according
A know ledge o f t h e
t o R o b e rt E. Payne
to s e r v e
and p r o t e c t th e
m ore,
is
it
in te re st
im p ortan t th a t
lav/ i n o r d e r t o
One a u t h o r i t y ,
g reatest
th eir
of h is
the a c c o u n ta n t is
c lie n ts.F u rth e rн
th e s t o c k h o l d e r a n d c r e d i t o r be
co g n izan t o f th e p o t e n t i a l i t i e s
co rp o rate
if
s t a t u t o r y law s i s
o f t h e many v a r i a n t s
in'
ad eq u a te ly p r o te c t th em selv es.
F l e t c h e r L ew is,
says
th at,
"Some o f t h e
f r a u d s w hich c o r p o r a t i o n s have p r a c t i c e d upon b o t h
own s t o c k h o l d e r s
and the g e n e r a l p u b lic
in re c e n t
y e a r s have b een e f f e c t e d by th e d e c l a r a t i o n o f d iv id e n d s
under corp o rate
acts
w hich f a i l
The i m p o r t a n c e o f t h i s
H.
W. B a l l a n t i n e
to
problem i s
im pose p r o p e r l im i ta t io n s ." о ^
concurred
and G eorge S. H i l l s
t h a t no p a r t o f t h e
who a r e
in by
of th e
o p in io n
c o r p o r a t e m e c h a n is m i s more c o m p l i c a t e d
and m ore p p o r l y d e s i g n e d and com prehended t h a n th e c a p i t a l
r e q u i r e m e n t and t h e a tt e m p t e d s a f e g u a r d s
d istrib u tio n s
to th e
a g a in s t unsafe
shareh o ld ers.о о
N o tw ith stan d in g the
apparent s t a ti c
c h a ra c te r given
R ob ert E. P a y n e , "A cco u n tin g as A f f e c t e d b y the
New I l l i n o i s a n d P e n n s y l v a n i a C o r p o r a t i o n A c t s . "
The C e r t i н
f i e d P u b l i c A c c o u n t a n t , X I I I (November, 1 9 3 3 ) , p . 6 6 9 .
о^ F l e t c h e r L e w i s , "Some L e g a l a n d A c c o u n t i n g Q u e s t i o n s
P r e s e n te d by the M ichigan G e n e ra l C o r p o r a tio n A c t."
The
A c c o u n ti n g R e v ie w , "VIII ( J u n e , 1 9 3 3 ) , p. 1 4 9 .
3 5 H e n r y W. B a l l a n t i n e a n d G e o r g e S . H i l l s , " C o r p o r a t e
C a p i t a l a n d R e s t r i c t i o n s u p o n D i v i d e n d s u n d e r Modern C o rp o н
r a t i o n L a w s . ? C a l i f o r n i a Law R e v i e w , X X I I I ( M a r c h , 1 9 3 5 ) ,
p. 229.
25
to
corpo rate
law by i t s
achieved a p o s itio n
s ta tu to r y n atu re
of r e s t.
law in t h i s f i e l d
is
p a s t tw elv e y e a rs
the
i t has n o t in f a c t
The d y n a m i c c h a r a c t e r o f t h e
in d ic a te d by the f a c t t h a t d u rin g th e
sta tu te s
o f m an y j u r i s d i c t i o n s h a v e
b e e n r e w r i t t e n o r s u b s t a n t i a l l y amended;
cases
the
h ensive
may b e
am endatory p r o v is io n s a re
as to
c o n stitu te
included
in t h i s group a re A rkansas
C olorado
Illin o is
Indiana
(1933),
vania
(1933),
(1939),
L o u isian a
M ississip p i
(1933),
so e x t e n s i v e
v i r t u a l l y new a c t s .
(1S31 a n d 1 9 3 3 ) ,
Kansas
Tennessee
(1929),
Idaho
Ohio
(1929),
and W ashington
C o n seq u en tly ,
(1933).
th ere
in
The i n c i d e n c e
co rp o rate
sectio n s
is need
problem s o f
serio u s
certain
w hich w ere p r e v i o u s l y d e t e r н
T h is te n d e n c y i n d i c a t e s
a re b e g in n in g to r e a l i z e
l a t i o n s h i p w hich e x i s t s
In
s i n c e many o f th e
The r e c e n t l a w s t e n d t o r e n d e r s p e c i f i c
and r e s t r i c t i o n s
(1938),
P ennsylн
have changed m a t e r i a l l y c e r t a i n
m in ab le o n ly th ro u g h c o u r t a c t i o n .
p les.
C alifo rn ia
(1 9 3 1 ), M innesota
w hich th e o l d e r law s l e f t
the l e g i s l a t u r e s
th at
G eorgia
law s have a t t e m p t e d to d e a l w i t h c e r t a i n
pow ers, d u tie s ,
th at
(1931),
(1931 and 1 9 3 9 ) ,
f o r a rev ie w o f the c o rp o r a tio n s t a t u t e s
d o u b ts.
some
and com preн
S tates
(1929),
(1 9 2 8 ), M ichigan
of th e f in a n c ia l p ro v isio n s.
a f in a n c ia l n atu re
in
( 1 9 3 1 ) , . Dela>ware ( 1 9 2 7 a n d 1 9 2 9 ) ,
(1928),
a d d i t i o n m any s t a t e s
rev ised
in f a c t,
the c lo s e
reн
betw een a c c o u n tin g and l e g a l p r i n c i н
of acco u n tin g
th e o ry and te c h n iq u e upon
lav/ c a n n o t b e u n d e r e s t i m a t e d ,
and lik e w is e as a
26
co ro llary ,
the
law h as had a m arked a f f e c t upon t h e d e v e l o p н
m ent o f a c c o u n t i n g t h e o r y and m ethodology..
Source o f d a t a .
em ploys th e
The d a t a
fo r th is
lib r a r y re s e a rc h tech n iq u e,
s tu d y , w hich
were c o m p ile d from
th e c o r p o r a t i o n law s as p u b lis h e d by th e v a r i o u s s t a t e s ,
from th e
the
com piled s t a t u t e s ,
s t a t u t e s , an d from th e
the
acts
c u m u lativ e su p p lem en ts
to
and r e s o l u ti o n s
leg isн
la tu re s .^
in a d d itio n
au th o ritie s
such as g e n e r a l w orks,
o d ical lite r a tu r e
p l a c e d on the
were c o n s u l t e d .
M em orial L i b r a r y ,
were used :.
secondary
t e x t b o o k s , and th e
p eriн
P r i n c i p a l d e p e n d e n c e was
prim ary r e f e r e n c e s .
fo llo w in g l ib r a r ie s
of th e
to th e s e p rim a ry d a t a ,
of th e
The f a c i l i t i e s
o f the
E dw ard L. D o h e n y , J r .
U n iv e rs ity of S outhern C a lif o r n ia ;
L ib rary
S c h o o l o f Law, U n i v e r s i t y o f S o u t h e r n C a l i f o r n i a ;
Los A n g e l e s
County L i b r a r y ;
M ethod o f p r o c e d u r e .
co n ceiv ed I t h is c h ie f
In
th is
of co rp o rate
a n d i n so d o i n g ,
a t i o n was m ade o f t h e
s tu d y th e w riter-
task to present
q u ate acc o u n t of th e f a c t s
fin an c ia l a ffa irs ,
Los A n g e l e s P u b l i c L i b r a r y .
p ro v isio n s
an a c c u r a t e a n d a d e н
law i n r e l a t i o n
a q u a litativ e
of th e
to
d iffere n tiн
in d iv id u a l s ta te s
3 4 The s t a t e m e n t s o f l a w a p p e a r i n g h e r e i n h a v e b e e n
c o m p ile d fro m r e l i a b l e s o u r c e s ; h o w ev er, th e y s h o u ld n o t be
t a k e n a s a m a n u a l o f p r o c e d u r e , f o r i n t h i s f i e l d new
amendments a r e c o n s t a n t l y a p p e a r i n g .
27
on th e
p o in ts under c o n sid e ra tio n .
u n d erstan d in g of th e
e sta b lish c e rta in
sim ila rities
p r o v i s i o n s , s n a t t e m p t was m ade t o
c la ssific a tio n s
and d if f e r e n c e s
the v a r i a t i o n
and groups b a s e d upon th e
on e a c h m a jo r p o i n t .
d iffic u lt
c atio n ;
th at
cases.
The d a t a b y i t s
is,
to o b ta in a m u tu a lly e x c lu s iv e
th e av oidance
to an a n a ly s is
of o v erlap p in g of
type because
th a t are fre q u e n tly en countered.
o b tain a
the
eq u ally
im p o rta n t c o n ce p t o f the
cance of v a r i a b i l i t y
in the m in or f e a t u r e s
The d i s c o v e r y o f t h e
predom inant c h a r a c t e r i s t i c s
sta tu tes
a p ictu re
was i m p o r t a n t , v i t a l l y
of the t y p i c a l f e a tu r e s
econom ic c a u s e s .
item s from ty p e
However,
it
so,
of th e
as
sig n ifiн
p ro v isio n s.
of the
c o n stitu tin g
was t h e v a r i a b i l i t y
t h a t was o f p r i m a r y i m p o r t a n c e
The t e c h n i q u e ,
the d a t a ,
d e te rm in e d by v a rio u s
t h e dynam ic an d e v o l u t i o n a r y c h a r a c t e r o f t h e
c o n ce p ts.
in d iv id u a l
c l a s s i f i c a t i o n u n d e r w hich to o r g a n iz e
ex isted
various
c la ssifiн
o f t h e many e x c e p н
As a n e s s e n t i a l c o n c o m i t a n t o f t h e a t t e m p t t o
th ere
sectio n s
v e r y n a t u r e were n o t r e a d i l y a d a p t н
of th is
tio n s and m o d ific a tio n s
d isju n ctiv e
However,
and -co m p lex itie s e n c o u n te re d in th e
made i t
ab le
I n o r d e r t o o b t a i n some
th erefo re,
of given
in in d ic a tin g
le g a listic
was e s s e n t i a l l y a
sta tistic a l
on e e v e n t h o u g h q u a n t i t a t i v e
im p o ssib le,
f o r th e
sta tu tes
were a n a l y z e d t o d e t e r m i n e
c e n tra l ten d en cies,
and th e n
in
tie s
from th ese
c en tral
m e a s u r e m e n t was
the
the r e a lm o f th e v a r i a b i l i н
t e n d e n c i e s was f o u n d c e r t a i n
28
sig n ific a n t featu res
i n d i c a t i n g n o n -c o n fo rm ity w ith th e modal
ten d en cies.
In th is
sta tu tes
s t u d y e x t e n d e d r e f e r e n c e s w i l l b e m ade t o t h e
sin ce d iffe re n c e s
i n w ording and in p h r a s e o lo g y a r e
trem en d o u sly s i g n i f i c a n t .
O r g a n iz a tio n o f the s t u d y ?
The a r r a n g e m e n t t o b e
fo llo w ed p ro v id es fo r a d i v is io n of th e r e p o r t
ch ap ters,
in to
each c h a p te r d e a lin g w ith a p a r t i c u l a r
nine
leg al
r e la tio n -o r clo sely re la te d re la tio n s .
C h ap ter I p r e s e n ts th e g e n e r a l background o f th e
s tu d y by in d ic a t i n g
ing th e
problem ,
its
im p o rtan c e , by s t a t i n g
and by i n d i c a t i n g
the
source of m a te r ia l.
C hapter I I d e a ls w ith th e d e f i n i t i o n o f
to r y c a p i t a l of the
p rin cip le
to
req u ire
o f the
c o rp o ratio n .
leg islatu re
and d e l i m i t н
I n A m erica
i n the v a r i o u s
the s t a t u н
the .fu n d am e n ta l
sta te s
has been
t h a t a c e r t a i n m in im u m a m o u n t o f t h e c o r p o r a t e
a sse ts receiv ed
in exchange f o r
its
s h a r e s be p r e s e r v e d t o
s e r v e a s a b u f f e r f o r the
b e n efits
d e fin itio n
of the c a p i t a l
of a co rp o ratio n v a rie s
from s t a t e
to s t a t e
and I t
m ethods o f d e te r m in in g
th is
is
of th e c r e d ito r s .
of v ita l
The
w id ely
Im portance t h a t
the
amount be p r e c i s e l y e s t a b l i s h e d .
The d e t e r m i n a t i o n o f t h e a m o u n t o f s t a t e d
c a p ita l
n e c e s s a r il y p resu p p o sses as a c o r o lla r y an a c c u ra te d e te rm iн
n a t i o n of th e ty p e and v a lu e o f t h e
the
shares
of v arious
p rio ritie s
c o n s i d e r a t i o n f o r w hich
and r i g h t s
have b e e n is s u e d .
29
It
is n e c e ss a ry th a t the
assets
eq u iv alen t
c o rp o r a tio n be a s s u re d o f r e c e iv in g
to th e v a lu e o f th e
sto ck
issued
to p re v e n t o v e r v a lu a tio n a n d /o r th e d i l u t i o n
sh areh o ld ers'
in te re st.
To t h e s e
problem s
in order
of e x istin g
C h ap ter I I I
is
d ev o ted .
C h a p t e r IV i n v e s t i g a t e s
and-or p r o f its
the b u s in e s s
and as
a v aila b ility
fo r d iv id en d p u rp o ses.
an i n v e s t m e n t o f f-.nds
the b u sin e ss
lik e lih o o d ,
th e
At t h e
o f su rp lu s
in c e p tio n of-
i s made i n t h e
grows an d p r o s p e r s
th ere
bu sin ess
a rises,
in a l l
a n a d d i t i o n a l e q u i t y w h i c h may b e d i s t r i b u t e d
the s h a re h o ld e rs .
A p o rtio n of the o r ig in a l c o n trib u tio n ,
the
h a v in g b e e n c r y s t a l l i z e d as a n amount
leg al c a p ita l,
w hich rem a in s
shares
constant except fo r
the
sale
of a d d itio n al,
or as a r e s u lt of p rescrib ed le g a l a c tio n ,
a v aila b le
fo r d iv id en d p u rp o ses.
W ith t h i s
ru le,
sta tu tes
sta te s
the
ing r u le s
In the v a rio u s
d e c la rin g a d iv id e n d .
sta tu to ry
pro v isio n s
p ro b lem --th e
the
then,
general
le g a l e x isten ce
co n sid ers
co n cern in g the so u rces
o f a n o t h e r p h a se of
problem o f sh a re d iv id e n d s .
o f d e c la r in g a d iv id e n d payable
in the
s t o c k w a r r a n t s so m e c o n s i d e r a t i o n ,
means u n if o r m .
the
a nd w h ic h m u s t be a d h e r e d t o when
T his c h a p t e r ,
C hapter V t r e a t s
as
c a n n o t be
p r e s c r i b e many v a r y н
and r e q u i r e m e n ts w hich d e te rm in e
of a su rp lu s or p r o f i t ,
to
the
of cash d iv id en d s.
the d iv id e n d
The c u r r e n t p r a c t i c e
c o r p o r a t i o n . ' s own
f o r the
l a w s a r e b y no
30
The n e x t c h a p t e r ,
C h a p te r V I,
c o n tin u e s the
problem
o f d iv id e n d payment by e n u m e ra tin g a v a r i e t y o f e x c e p tio n s
and a d d i t i o n s
in
the g e n e r a l s ta te m e n t of so u rc e s
t h e two p r e v i o u s
a v a ila b ility
purposes,
th e
to
ch ap ters.
Among t h e s e
the
d e d u c tio n f o r d e p le tio n of w astin g a s s e t s ,
p ro b lem o f w orking c a p i t a l ,
co rp o ratio n fin an c e,
own s h a r e s ,
problem i s
e tc .
is
r e p o r t e d upon i n C h apter V II.
to th e
of the
co rp o ratio n
to
in flu en ce
th e book v a lu e o f the
th e m arket v a lu e ,
im pair c a p i t a l .
Hence,
the
of t h i s
leg al statu s
and,
th ere
in v o lv es a d i s t r i b u н
the s e l l i n g
The p u r c h a s e b y a c o r p o r a t i o n o f i t s
in flu en ce
T his
problem o f s t a t e d c a p i t a l
s in c e any such p u rch ase
tio n of assets
in th e realm of
the r i g h t of a c o rp o r a tio n to a c q u ire
clo sely re la te d
and d iv id e n d s
to
in clu d ed the
of u n r e a liz e d a p p re c ia tio n f o r d iv id en d
One o f t h e m o s t d e b a t e d q u e s t i o n s
its
are
a s named
sh areh o ld ers.
own s h a r e s w i l l t e n d
rem ain in g
shares
a n d m ay
carried
too f a r ,
w ould
if
arises
th e need to c o n sid e r
corp o rate r i g h t.
C h a p te r V I I I d e a l s w i t h t h e p r i n c i p a l means by w hich
thо s t a t e
o fficials
and the s h a re h o ld e rs
fin an c ia l
in fo rm a tio n co n cern in g th e c o rp o ra tio n .
t h e books o f a c c o u n ts and th e
it
is
p o ssib le
ap p raise
f o r persons
In terested
the f i n a n c i a l s t a t u s
w hich su ch in f o r m a ti o n
v ario u s
of th e
o b tain v ita l
rep o rts
in
the
is
and s ta te m e n ts ,
c o rp o ra tio n to
company.
I s made a v a i l a b l e
Through
The d e g r e e
o u tlin ed
in
to
the
ch ap ter.
And f i n a l l y ,
rec ap itu latio n
C h a p te r IX,
concludes w ith a g e n e ra l
of th e p r in c ip a l p o in ts
and a statem en t of
some I n f e r e n c e s t h a t m i g h t b e m ad e f r o m t h e f a c t s
p resen ted .
CHAPTER I I
THE STATUTORY CAPITAL OF A CORPORATION
Purpose o f th e c h a p t e r .
shares
w ith o u t p ar v alu e
not v ita lly
P r i o r to th e
issuance
of
t h e a c c o u n t a n t and th e la w y e r were
co n ce rn e d o v e r the problem o f a s t a t u t o r y d e f i r -
hitiori f o r t h e d e t e r m i n a t i o n o f l e g a l c a p i t a l .
In f a c t,
r e a l need f o r such a d e f i n i t i o n e x is te d fo r i t
was g e n e r a l н
l y assum ed t h a t
the c a p i t a l
no
o f a c o r p o r a t i o n was t o b e
m easured by th e p a r v a lu e o f the
issued sh ares.
However,
w it h th e v/ide d e v e lo p m e n t and u s e o f s h a r e s w i t h o u t p a r
v alu e
it
was o b v i o u s l y n e c e s s a r y ,
In f a c t ,
im perativ e,
th at
some m e t h o d - s o m e d e f i n i t i o n ? b e f o r m u l a t e d t o d e t e r m i n e
w h a t t h e c a p i t a l o f a c o n c e r n m i g h t b e when s h a r e s w i t h o u t
p a r v a l u e were i s s u e d .
T h is problem I s ,
of course,
in ex triн
c a b ly bound up w ith th e problem o f d iv id e n d d e c l a r a t i o n ,
f o r I n many o f t h e
sta te s
d i v i d e n d s 1 c a n n o t be p a id
c a p i t a l o f the c o rp o r a tio n Is
lim ita tio n
is
expressed
p aid la w fu lly u n le s s
ment Is e q u a l to
its
c a p ita l."
im paired or
in th e s e w ords:
the a s s e t s
the a g g re g a te
When t h e
i n some c a s e s
the
the
"No d i v i d e n d s may b e
rem ain in g a f t e r
of its
If
such a payн
lia b ilitie s
source o f d iv id e n d s
Inclu din g
is expressed as
^ See C h a p t e r I I I f o r t h e p r o v i s i o n s r e g a r d i n g d i v i н
dend paym ents.
33
th e
su rp lu s
of assets
ab so lu te ly e s s e n tia l
the so u rc e
i-ts^╗
over l i a b i l i t i e s
th at
of d iv id en d s
is
statu to ry
and c a p i t a l ,
the p r o f i t s
d ica te
the
In th is
ch ap ter
If
o r accum ulated p r o f -
it
is
is n o t of such
p ro p o se d to
le g a l d e f i n i t i o n of c a p i t a l as s e t f o r t h
sta tu tes.
is
c a p i t a l be d e fin e d .
the d e te r m in a tio n of s t a t u t o r y c a p i t a l
param ount im p o rta n c e .
it
The d i s c u s s i o n w i l l e l a b o r a t e
in н
in the
the f o llo w in g o u t н
lin e :
I.
V ariatio n
in the p h rase u sed to d e fin e
sta tu to ry
c a p ita l.
II.
S ta te s u sin g th e
term " c a p i t a l sto c k "
to d e fin e
sta tu to ry c a p ita l.
III.
S ta te s usin g
the te rm " c a p i t a l "
in d e fin in g
sta tu to ry c a p ita l.
IV. S t a t e s u s i n g
n ate
V. S t a t e s
the
term " s t a t e d c a p i t a l "
to d e sig н
sta tu to ry c a p ita l.
h a v i n g no p o s i t i v e
d e fin itio n
of sta tu to ry
c ap ita l,
VI.
V II.
P ro v isio n s
S um m ary.
V ariatio n
c a p ita l.
to
concerning o rg a n iz a tio n expenses.
in the
The s t a t e s
in d ic ate
p h ra se u se d to d e f in e
b y no m eans h a v e c h o s e n a u n i f o r m p h r a s e
the co n cep t of s t a t u t o r y c a p ita l.2
2 A ll of the
sta tu to ry
sta te s,
The U n i f o r m
w hile n o t d e f i n in g s t a t u t o r y
34
B usiness
Idaho,
tal
C o r p o r a t i o n Act and t h e
Iow a, L o u i s i a n a ,
s to c k " to denote th e
D elaw are,
Nevada,
m ont,
F lo rid a,
New J e r s e y ,
V irg in ia,
n o is,
leg al c a p ita l;
G eo rg ia,
cap ita l,
In d ian a,
A rkansas,
K ansas,
em ploy t h e
is u sed by the s t a t e s
%
the phrase
New Y o r k , R h o d e I s l a n d ,
M innesota, M iss o u ri,
and South D akota.
o f C o n n ecticu t,
and W ashington u se
and W isco n sin ,
"S tated c a p ita l"
sta te s
C olorado,
M aine, M ic h ig a n ,
Tennessee,
V erн
term " c a p i t a l . "
of C alifo rn ia,
New M e x i c o , O h i o ,
Illiн
P en n sy lv an ia,
The l a w o f N o r t h D a k o t a m e n t i o n s f i x e d
b u t g i v e s no d e f i n i t i o n o f t h e
term .
word o r w ords u s e d t o d e n o te t h e l e g a l c a p i t a l
of v ita l
"cap iн
im p o rtan c e as lo n g as th e r e
is
The e x a c t
is
n o t p e r se
no c o n f u s i o n i n t h e
m ind:
o f anyone c o n c e rn in g th e e x a c t c o n ce p t in v o lv e d .
ever,
th e u s e o f s u c h w ords as
"ca p ita l
Howн
sto c k " and " c a p i ta l "
( f o o t n o t e No. 2 c o n t i n u e d )
c a p i t a l , s e t a c e r t a i n m in im u m ( i n d o l l a r s , o r i n some o t h e r
?/ay) w h i c h m u s t b e p a i d i n t o t h e c o r p o r a t i o n b e f o r e i t b e н
gin s b u s in e s s .
The m in i m u m i n G e o r g i a i s $ 2 0 0 ; i n A r k a n s a s
t h e m in im um i s $ 3 0 0 ; i n F l o r i d a , I n d i a n a , O h i o , P e n n s y l v a n i a ,
S o u t h D a k o t a , V e r m o n t , a n d W a s h i n g t o n t h e m in im um i s $ 5 0 0 ;
i n A labam a, C o n n e c t i c u t , D e la w a re , K a n s a s , L o u i s i a n a , M ic h iн
g a n , M i n n e s o t a , New M e x i c o , O r e g o n , a n d W e s t V i r g i n i a t h e
m in im um i s $ 1 , 0 0 0 ; i n A r i z o n a , C a l i f o r n i a , C o l o r a d o , I d a h o ,
I o w a , M a i n e , M a r y l a n d , M o n t a n a , N e b r a s k a , N e v a d a , New Hampн
s h i r e , New J e r s e y , New Y o r k , N o r t h D a k o t a , O k l a h o m a , R h o d e
I s l a n d , V i r g i n i a a n d Wyoming t h e r e a r e n o s p e c i f i c p r o v i s i o n s ;
I l l i n o i s , M a ss a c h u se tts, M i s s i s s i p p i , N orth C aro lin a r e q u ir e
th e amount to be p a id i n as p r o v id e d b y th e c h a r t e r ; th e r e н
m a i n i n g s t a t e s and t h e D i s t r i c t o f Colum bia h a v e v a r i o u s p r o н
v i s i o n s b a s e d on a c e r t a i n p e r c e n t o f t h e c a p i t a l s t o c k .
R e f e r e n c e s t o th e v a r i o u s law s j u s t i f y i n g
: f i ;. c a t i o n w i l l b e f o u n d i n s u c c e e d i n g p a g e s .
th is
c la ssi-
35
are
lik e ly
to le a d to
b e e n u s e d .in th e
v alue
tal
sto ck .
th ese
A lso
in the
sa m e s t a t u t e s
the
s t o c k ?* a n d ??c a p i t a l ? f r e q u e n t l y a p p e a r ,
C o rp o ra tio n Act and a ls o
Kansas s t a t u t e s .
sta te d
It
c ap ita l,
w ould l e n d
itse lf
seems t o
the w r i t e r
leg al c a p ita l,
to a p r e c i s e
tory c a p ita l.
n itio n .
o f the
term s
There i s
e .g .,
the
t h a t some t e r m s u c h
and a v o id c o n fu sio n .
s to c k ? to d e fin e
in
C onsider f i r s t
the f o llo w in g
the
sta tu н
in the d e f i н
the s t a t u t e s
Bixsiness C o r p o r a t i o n A ct w hich e s t a b l i s h e s
in
see
In d ia n a and
j u s t a s w ide a v a r i a t i o n
the c o n c e p t.
c a p ita l of a co rp o ratio n
?c a p i-
the
d e fin itio n
sta tu to ry c ap ita l
to denote
two t e r m s
or sta tu to ry c a p ita l.
S t a t e s u s i n g t h e t e r m ??c a p i t a l
are
term s h a v e .lo n g
s t a t u t e s and have been connected w ith par
U niform B u s in e s s
? as
am b ig u ity f o r
as th e re
th e U niform
sta tu to ry
term s:
(X) The ??c a p i t a l s t o c k ? o f a c o r p o r a t i o n a t a n y t i m e i s
(a) th e a g g re g a te -a m o u n t o f th e p a r v a lu e o f a l l
a l l o t t e d sh a res h av in g a par v a lu e , in c lu d in g such sh ares
a l l o t t e d as s to c k d iv id e n d s , and
(b) t h e a g g r e g a t e o f th e c a s h a n d t h e v a l u e o f
any c o n s id e ra tio n o th e r th an c a sh , d eterm in ed as p ro v id н
ed i n t h i s a c t , a g re e d to be g iv e n o r r e n d e r e d as p ay н
m e n t f o r a l l a l l o t t e d s h a r e s h a v i n g no p a r v a l u e , p l u s
s u c h a m o u n ts a s may h a v e b e e n t r a n s f e r r e d fro m s u r p l u s
upon the a llo tm e n t o f s to c k d iv id e n d s in s h a re s h av in g
no p a r v a l u e . ^
T h is fo rm u la f o r th e
seems
e stab lish m en t
to be c l e a r and u n e q u iv o c a l.
4
o f the
sta tu to ry c a p ita l
How ever, a t t e n t i o n
U niform B u sin e ss C o r p o r a tio n A ct.
Sec.
1 (X).
36
s h o u l d b e f o c u s e d o n some o f t h e
cep tio n s
to
the g e n e r a l i t y of
a llo tm e n t is
sto ck
reads
the a p p o rtio n in g of a
of a
a d e c la ra tio n of a sto ck
A l l o f the c o n s i d e r a t i o n r e c e i v e d from s h a r e s w ith н
o u t p a r v a lu e need n o t be
a la te r
so r e c e i v e d
The t e r m
to a s u b s c r i b e r on th e b a s i s
s u b s c r i p tio n o r p u rsu a n t to
d iv id en d .
sin ce
th e above s ta te m e n t.
d e fin e d elsew h ere as
c e r t a i n number o f s h a r e s
t e r m s a n d some o f t h e e x н
in clu d ed in the
sta tu to ry c a p ita l
s e c tio n allo w s a p o r tio n of th e
to be c l a s s e d
as p a id - in
s u r p lu s .
c o n sid eratio n
5
The s e c t i o n
as fo llo w s :
I f , u p o n t h e a l l o t m e n t o f s h a r e s h a v i n g no p a r v a l u e ,
any p a r t o f the c o n s id e r a tio n re c e iv e d by the c o rp o ra н
t i o n is to be t r e a t e d as p a id - i n s u rp lu s r a t h e r th an as
payment upon such s h a r e s , th e i n c o r p o r a t o r s , s h a r e h o ld e rs ,
o r d i r e c t o r s , a s t h e c a s e m ay b e , who f i x t h e a m o u n t o f
c a s h o r d e te r m in e th e v a lu e o f o t h e r c o n s i d e r a t i o n so r e н
c e i v e d , s h a l l a t t h a t tim e s p e c i f y th e p r o p o r t i o n o f su c h
v a lu e t h a t is to be c o n s id e re d as s u rp lu s and th e p ro p o rн
t i o n t h e r e o f t h a t i s to be c o n s i d e r e d paym ent f o r th e
s h a r e s .6
T h e s e tw o s e c t i o n s
i n c o m b in a tio n a c t u a l l y w ould r e s u l t
the
sta tu to ry
c a p ita l b ein g
a ll
sh a re s h av in g p ar v a lu e
the a g g re g a te of th e
p lus
c o n s id e r a tio n a ll o c a t e d by the
sh ares w ithout par v a lu e ,
the a g g re g ate
in
par v alu e of
of a l l
the
p ro p e r group to c a p i t a l f o r
p l u s am ounts t r a n s f e r r e d
from ?
о P a i d - i n s u r p l u s may b e d e f i n e d a s t h a t p a r t o f t h e
c o n s i d e r a t i o n r e c e i v e d b y a b u s i n e s s c o r p o r a t i o n f o r o r on
a c c o u n t o f s h a r e s i s s u e d w hich does n o t c o n s t i t u t e s t a t u t o r y
c ap ita l.
о U niform B u sin e ss
C o rp o ratio n A ct.
S e c . 23
(I).
37
s u rp lu s upon the d e c l a r a t i o n o f sh a re d iv id e n d s .
a lso d efin es
assets
,rc a p i t a l ' r a s
the p o r tio n of a c o r p o r a t i o n 's
a c q u ire d as c o n s id e ra tio n f o r
shares
th a t p o rtio n of i t s
assets
for
as sto c k d iv id e n d s .7
shares a llo tte d
T his a c t
a llo tte d
i s f o llo w e d by the
sta te s
o f Idahoо and
clo sely
e x c e p t f o r one s i g n i f i c a n t p r o v i s i o n
tio n of c a p ita l.
in a d d itio n to
ap p re cia tio n
In d e fin in g c a p i ta l t h is
th e ' item s a b o v e,
in
and
w hich h a s b e e n t r e a t e d as payment
W a s h in g to n .о Louisiana-*-8 a d h e r e s r a t h e r
sta tu te
T his a c t
in
sta te
to
t h e sam e
the d e f i n i н
in clu d es,
any amount r e s u l t i n g
the v a lu e o f f ix e d a s s e t s
from an
re v a lu e d and tr a n s
ferred
to c a p i t a l by a v o te of the m a jo r ity o f a l l a l l o t t e d
shares
of th e
c o r p o r a tio n to a p p ly a g a i n s t any d e f ic ie n c y
in c a p i ta l stock.
Two s t a t e s ,
Connecticut-*--*- a n d I o w a ; ?*-8 h a v e a c t s
7' I b i d . , Sec.
1 (X II).
8 I d a h o C o d e , 1 9 3 2 . T i t . 2 9 , Ch. 1 , S e c . 2 9 - 1 0 1 ( 1 0 )
(12) and S e c . 2 9 -1 2 8 .
9
Laws C o n c e r n i n g P r i v a t e C o r p o r a t i o n s . S e c . 3 8 0 3 - 1
(10) a n d ( 1 2 ) , and S e c . 3 8 0 3 -2 3 .
and
1938.
^ G e n e r a l C o r p o r a t i o n Laws o f t h e
S e c . 1 (X) a n d ( X I ) , a n d S e c . 2 5 .
S t a be o f L o u i s i a n a ,
-*??*? - C o r p o r a t i o n Laws o f t h e S t a t e o f C o n n e c t i c u t . R e н
v i s e d , 1 9 3 7 . Ch. 1 9 1 , P t . I F 3 , S e c . 87 a n d P t . I I , S e c . 118.
1 2 -Code o f I o w a ,
8 419C 3 .
1935.
T it.
XIX,
Ch. 3 8 5 ,
Sec.
38
w hich a re
tal
som ewhat s i m i l a r ,
s to c k to r e p r e s e n t
of th ese
acts
in clu siv e
C o rp o ra tio n A ct,
t h e d e f i n i t i o n was a d d e d t o
as
is
the
the
term c a p i н
The s e c t i o n s
se c tio n of
the
d isc u sse d above, because
these, s t a t u t e s
w ere amended i n o r d e r t o p e r m i t
out par v alu e.
th ey use
the s t a t u t o r y c a p i t a l .
a re n o t as
U niform B u s in e s s
in th a t
the
a t the
issuance
tim e th e y
of shares w ith н
The C o n n e c t i c u t s e c t i o n f o l l o w s : -
F o r th e p u rp o se o f any r u l e ? o f 'la w o r o f any s t a t u н
t o r y p r o v i s i o n r e l a t i n g to th e amount o f c a p i t a l s t o c k
i s s u e d and r e p r e s e n t e d b y s h a r e s o f s t o c k w ith o u t p a r
v a l u e e x c e p t a s p r o v i d e d i n s e c t i o n 83 t o 9 4 , i n c l u s i v e ,
and f o r th e p u rp o se o f com plying w ith any p r o v i s i o n in
a s p e c ia l c h a r t e r l im i ti n g the a u th o r iz e d c a p i t a l or d e н
s i g n a t i n g th e p r o p o r t i o n w hich s h a l l e x i s t b etw een the
-am ount o f o u t s t a n d i n g s t o c k and th e am ount o f b o n d s , s u c h
amount o f c a p i t a l s t o c k s h a l l be t a k e n to be th e amount
o f money o r t h e a c t u a l v a l u e o f th e c o n s i d e r a t i o n as f i x н
ed by the b o a rd o f d i r e c t o r s o r o th e rw is e in accordance
w i t h l a w , a s t h e c a s e may b e , f o r w h i c h s u c h s h a r e s o f
s to c k s h a l l have b een is s u e d .
In any c a se in w hich s to c k
h a v in g a p a r v a lu e s h a l l have b e e n i s s u e d w ith s to c k
w ith o u t p ar v alu e f o r a s p e c if ie d c o n s id e r a tio n , in d e t e r н
m in in g th e amount o f c a p i t a l s t o c k I s s u e d and r e p r e s e n t н
ed by sh a re s o f s to c k w ith o u t p a r v a lu e , th e p a r v alu e
o f such sto c k h av in g a p ar v a lu e s h a l l f i r s t be d ed u cted
fr o m t h e am ount o f t h e money o r t h e a c t u a l v a l u e o f t h e
c o n s i d e r a t i o n d e te rm in e d as a f o r e s a i d , and th e e x c e s s ,
t h e r e o f , i f a n y , s h a l l be t a k e n to be th e amount o f c a p i н
t a l s to c k r e p r e s e n t e d b y th e s h a r e s w ith o u t p a r v a lu e so
i s s u e d . 13
N othing is
sa id d i r e c tl y reg ard in g
sto ck
In d e p e n d e n tly of an is s u e
It
q u ite
Is
evidenct, h o w e v er,
of
th at
the
Issuance
o f p a r v alu e
shares w ith o u t par v alu e.
the
issuance
o f such
13
? C o r p o r a t i o n Laws o f t h e S t a t e o f C o n n e c t i c u t ,
v is e d 1937.
Ch. 1 9 1 ,
P t. IP 3 ,
Sec. 87.
Reн
39
shares
Is
to r e s u l t
in s ta tu to ry
ag g reg ate
p a r v alu e
o f the s h a re s
c a p i ta l e q u iv a le n t to the
so i s s u e d .
In co n n ectio n
w ith the d e te r m in a tio n o f the f r a n c h i s e
tax
allo w s
to f i x
the
less
the c o r p o r a tio n o r i t s
d irec to rs
c a p ita l sto ck re p re se n tin g
than the
a c tu a l v alu e
th is
sta te
th e amount o f
sh ares w ith o u t p ar v alu e a t
of th e
c o n sid era tio n
th ereof,
the
e x c e s s b e i n g c o n s i d e r e d s u r p l u s . 1"1
The l a w o f Iow a f o l l o w s
e x c e p ti o n s b o t h o f w hich a r e
w ith o u t par v alu e
are
the
Im p o rtan t.
the
shares
the e x c e ss,
tal
ed.
if
is
the
same a s t h a t
14 I b i d . ,
to be
th e amount o f c a p i н
sh a re s w ith o u t p a r v alu e
Ch.
191,
so i s s u н
the d i v e r s i o n
c o n sid e ra tio n receiv ed fo r
to a s u r p l u s
The w o r d i n g f o r
the
is
th en a g g re g a te book v a lu e o f th e
Iowa h a s n o s e c t i o n a u t h o r i z i n g
o f any p o rtio n of the
m ately
th e amount o f c a p i t a l
to be c o n s i d e r e d
sto ck re p re s e n tin g th e
o u t p ar v alu e
shares fo r a
is s u e d fro m th e a g re e d c o n s i d e r a t i o n and
any,
S eco n d ly ,
when s h a r e s
sh a res w ith o u t p ar v alu e
d e te rm in e d by d e d u c tin g the
p ar v alu e
F irst,
is s u e d w ith p a r v alu e
com bined s p e c i f i e d c o n s i d e r a t i o n ,
sto ck re p re se n tin g
C o n n e c t i c u t l a w w i t h two
shares w ithн
a cco u n t.
sta te
o f M a r y l a n d 15 i s a p p r o x i н
o f C o n n e c tic u t w ith the e x c e p tio n
P t.
II,
Sec.
118.
4 5 -haws ░ f M a r y l a n d R e l a t i n g t o B u s I n e s s C o r p o r a t i o n s ,
A n n o t a t e d , T w e l f t h E d i t i o n , 1 9 3 7 . A r t . 2 3 , S e c . 3 9 , (2)
and ( 3) .
40
th at
the
term u sed Is n o t c a p i t a l
s t o c k i s s u e d . ?*18
T his
sta te
sto ck b u t
a lso
,ra r a o u n t o f s u c h
allo w s a p o r tio n of the
c o n s i d e r s t i o n r e c e i v e d from s h a r e s w i t h o u t p a r v a lu e
c la s s e d as p a id - in
S tates u sin g
c a p ita l.
fin e
the
su rp lu s.
t h e t e r m ??c a p i t a l ? i n d e f i n i n g
Among t h e s t a t e s
u sin g
the
sta tu to ry c a p ita l
th ere
is
b u t c e r t a i n m ajor c la s s e s
sta tu to ry
t e r m ??c a p i t a l ' 1 t o d e н
a r i o t of in d iv id u alism ,
as w ell as
some s t a t e s
d i v i d u a l p r o v i s i o n s m ay b e d i s t i n g u i s h e d .
Is
to be
w ith i n н
The f i r s t
class
t h a t c o m p o s e d o f A r k a n s a s , 1 *7 D e l a w a r e , 1 8 K a n s a s , 19 M i c h i н
g a n , 20 a n d N e v a d a .81 i n d e f i n i n g c a p i t a l
the
sta tu te
of
Nevada u s e s -the f o l l o w i n g w o r d s :
Any c o r p o r a t i o n m ay b y r e s o l u t i o n o f i t s b o a r d o f
d i r e c t o r s d e te rm in e th a t o n ly a p a r t o f the c o n s id e r a н
t i o n w hich s h a l l be r e c e i v e d by th e c o r p o r a t i o n f o r any
o f th e s h a r e s o f i t s c a p i t a l s to c k w hich i t s h a l l Is s u e
' W h i l e i t m a y se em i l l o g i c a l t o I n c l u d e t h i s s t a t e
a t t h i s p o i n t , s in c e i t does n o t u se th e w ord c a p i t a l s t o e k ,
i t i s f e l t t h a t in a s m u c h as th e w o rd in g o f t h e a c t i s so
s i m i l a r no u s e f u l p u r p o s e w o u ld b e s e r v e d b y m a k i n g a s e p a н
ra te su b d iv isio n .
Ch.
^ f P o n e 1s D i g e s t o f t h e S t a t u t e s o f A r k a n s a s , 1 9 3 7 .
3 7 , A r t . IV , S e c . 2180 and S e c . 21 7 9 .
1 Q
- G e n e ra l P r o v i s i o n s R e s p e c tin g D om estic and F o re ig n
C o r p o r a t i o n s c o n t a i n e d i n t h e C e n e r a l C o r p o r a t i o n Laws o f
t h e S t a t e o f D e l a w a r e л a s amended to 1 9 3 7 .
Ch. 6 5 , A r t . 1 ,
Sec. 14.
19 ' S t a t e
20
' "S tate
Laws,
of K ansas,
S e s s io n Laws. 1939.
o f M ich ig an ,
Ch. 1 5 2 ,
S e c . 43.
G e n e r a l C o r p o r a t i o n L aw . 1 9 3 8 . S e c .2).
81 S t a t e o f N e v a d a , D o m e s t i c
a s amended to 19 3 7 . S ec. 2 4 .
and F o r e i g n C o r p o r a t i o n
41
fro m tim e to tim e s h a l l be c a p i t a l ; p r o v i d e d , h o w e v e r,
t h a t in case any o f the s h a re s is s u e d s h a l l be sh a res
h a v i n g a par. v a l u e , t h e amount o f t h e p a r t o f s u c h c o n н
s i d e r a t i o n so d e t e r m i n e d t o b e c a p i t a l s h a l l b e i n e x н
cess of th e ag g reg ate par v alu e o f the sh a res issu e d f o r
such c o n s i d e r a t i o n h av in g p a r v a lu e , u n le s s a l l the
s h a r e s i s s u e d s h a l l be s h a r e s h a v in g a p a r v a l u e , in
w h ic h c a s e t h e amount o f th e p a r t o f such c o n s i d e r a t i o n
so d e t e r m i n e d t o b e c a p i t a l n e e d b e o n l y e q u a l t o th e
a g g re g a te p ar v alu e o f such s h a r e s . - I n each such case
th e b o a rd o f d i r e c t o r s s h a l l s p e c i f y in d o l l a r s the p a r t
o f su c h c o n s i d e r a t i o n w hich s h a l l be c a p i t a l .
I f the
b o a r d o f d i r e c t o r s s h a l l n o t have d e te r m in e d (a) a t t h e
tim e o f i s s u e o f an y s h a r e s o f c a p i t a l s t o c k o f t h e c o r н
p o r a t i o n i s s u e d f o r c a s h , o r (b) w i t h i n s i x t y days a f t e r
th e is s u a n c e o f any sh a re s o f c a p i t a l sto c k o f th e c o r н
p o r a tio n is s u e d f o r p r o p e r ty o th e r th an c a sh , what p a r t
o f th e c o n s id e r a tio n f o r such sh a re s s h a ll be c a p ita l,,
the c a p i t a l o f th e c o rp o r a tio n in r e s p e c t o f such sh a re s
s h a l l be an amount e q u a l to th e a g g r e g a t e p a r v a lu e o f
su c h s h a r e s h a v in g a p a r v a l u e , p l u s th e amount o f th e
c o n s id e ra tio n fo r such sh ares w ithout par v a lu e .
The
c a p i t a l o f th e c o r p o r a t i o n may b e i n c r e a s e d f r o m t im e t o
tim e b y r e s o l u t i o n o f th e b o a r d o f d i r e c t o r s d i r e c t i n g
t h a t a p o r t i o n o f t h e n e t a s s e t s i n e x c e ss o f th e amount
so d e t e r m i n e d t o b e c a p i t a l b e t r a n s f e r r e d t o t h e c a p i н
t a l a c c o u n t . 22
The p h r a s e o l o g y i n
d iffic u lt
to
th is
sectio n
i s u n n e c e s s a r i l y vague and
c o m p re h e n d ; f o r e x a m p le , when t h e law s p e a k s o f
Is s u in g p ar v alu e
sto ck i t
req u ires
t h a t the p a r t o f th e conн
s i d e r a t i o n so d e te r m in e d to be c a p i t a l
th e
a g g re g a te p ar v alu e
era tio n .
T h is on th e
sh ares are
law to
of th e
surface
a l l par shares
solve
shares
is
and i f
th e dilem m a p r o v i d e s
s h a l l be in
issued fo r
^
hoc. c i t .
the c o n sid н
an i m p o s s i b i li t y
if
th e
t h e y were s o l d f o r p a r .
The
t h a t o n ly the a g g re g a te
p a r v a lu e need be c o n s id e re d c a p i t a l - i f a l l
e d f o r a g i v e n c o n s i d e r a t i o n are-'
excess of
the
shares
issu н
sh ares w ith par v a lu e .
The
42
sum a n d s u b s t a n c e
of
th is
i f b o th par v alu e
shares
r a th e r con fu sin g s e c tio n
th a n the a g g re g a te
clu d ed
in the
v alu e.
ed f o r
th at
and s h a re s w ith o u t p a r v a lu e
i s s u e d f o r a common c o n s i d e r a t i o n ,
co n sid ered s ta tu to r y
is
c ap ita l
th e amount t h a t
are
is
to be
s h a l l b e some a m o u n t g r e a t e r
par v alu e;
i.e.,
sta tu to ry c a p ita l fo r
some a m o u n t m u s t b e
the
shares
in н
w ith o u t par
C o n c e rn in g th e e x a c t amount o f c o n s i d e r a t i o n r e c e i v - '
sh a res w ith o u t par v alu e
cap ita l,
the
sta tu te s
of A rkansas,
N e v a d a h a v e no d e f i n i t e
how ever,
p rovides
per cent of th e
par v alu e
p ar v alu e
at
the
It
is a lso
in a f u rth e r
shares
sta te
p ro v iso
before
or a t th e
w ith in
s ix ty days
th at
in
w ould be d e te r m in e d
th is
th e y m ust d e te rm in e
th e
if
the
shares are
is
not in d ic ate d .
group o f s t a t e s
any p a r t o f th e
tim e o f i s s u e
if
fifty
sh ares w ithout
a common c o n s i d e r a t i o n
to a l l o c a t e
o th er than c a p ita l,
o f M ichigan,
th at a t le a st
jjow t h i s
and
and s h a r e s w i t h o u t p a r v a lu e w ere i s s u e d
sig n ific an t
are
th e
c o n sid era tio n receiv ed fo r
same t i m e f o r
d irecto rs
D elaw are, K ansas,
statem en t;
s h a l l b e C a p i t a l . 23
if
t h a t m u st become s t a t u t o r y
c o n sid eratio n
th e
sale
if
the
to
amount, t h e r e o f
is
f o r c a sh and
so ld fo r p ro p erty .
As a s u p p l e m e n t a r y p r o v i s i o n t h e
law s o f D elaw are*^
23 S t a t e o f M i c h i g a n , G e n e r a l C o r p o r a t i o n L a w , 1 9 3 8 .
Sec. 20.
24 G e n e r a l P r o v i s i o n s R e s p e d t i n g Domes t i c a n d F o r e i g n
C o r p o r a t i o n s C o n t a i n e d i n t h e G e n e r a l C o r p o r a t i o n Law o f t h e
S t a t e o f D e l a w a r e , a s am ended t o 1 9 3 7 . Ch. 6 5 , A r t . 1 , S e c .
14.
43
an d K a n s a s 28 p r o v i d e
th at
th at
t h e b o a r d o f d i r e c t o r s m ay d i r e c t
the p o r tio n of any ex cess o f n e t a s s e ts
c a p i t a l m ay b e
ed c l a s s
trea te d
of shares.
as c a p ita l
tran sferred
to
in r e s p e c t o f any d e s i g n a t н
M i c h i g a n 28 p r o v i d e s
th at
the c a p i ta l r e н
p r e s e n t e d b y s h a r e s w i t h o u t p a r v a l u e may b e d e c r e a s e d b y
r e s o l u ti o n of the board of d ir e c to r s
A nother g ro u p o f s t a t e s
- b y t h e t e r m tfc a p i t a l ,? b u t t h e
d ifferen tly
s e e ^
and a re
d efin es
aggregate
p rovided,
tio n receiv ed fo r
to
su rp lu s.
sectio n s
easier
pa
Sec.
^
20.
plu s
to
in te rp re t.
Tennesн
sum o f t h e
fo r shares
s u c h a m o u n t s a s may b e t r a n s f e r r e d
how ever,
t h a t any p a r t o f th e
to
co n sid eraн
s h a r e s w i t h o u t p a r v a l u e m ay b e a l l o c a t e d
V i r g i n i a 2 '8 p r o v i d e s
th at
the
c a p i t a l s h a l l be
c o r p o r a tio n f o r the
A s .f a r a s c o u ld be d e te rm in e d V ir g in ia
S tate
o f K ansas,
S ta te
o f M ich ig an ,
^?D o m estic
1936. Ch. 5, A r t.
June 21,
a r e w o rd ed somewhat
o f a l l sh a re s hav in g p a r v alu e a n d /o r
th e c o n s id e r a tio n r e c e iv e d by th e
issu ed .
sta tu to ry c a p ita l
amount o f c o n s i d e r a t i o n r e c e i v e d
w ith o u t par v alu e
c a p ita l;
in d ic ate s
th e c a p i t a l of a c o rp o r a tio n as th e
a g g re g a te p a r v alu e
the
therefore
w ith c e r ta in l im i ta tio n s .
shares
does n o t
S e s s i o n L a w s , 19 3 9. Ch. 152, S e c . 4 3 .
G e n e r a l C o r p o r a t i o n Law,
-------------------
1938.
a n d F o r e i g n C o r p o r a t i o n Laws o f T e n n e s s e e ,
I , Sec. 3735.
V i r g i n i a C o r p o r a t i o n Law , w i t h a l l a m e n d m e n t s t o
1 9 3 8 . Ch. 1 4 7 , S e c . 3 8 4 0 .
44
provide
is
sp e cifica lly fo r
In tere stin g
to
note
the
th at
c o n s id e ra tio n received- f o r
. ta l,
sale
th is
o f p ar sto ck a t p a r.
law e s t a b l i s h e s
a ll
sh ares w ith o u t p ar v alu e
b u t a l l o w s b y s u b s c r i p t i o n a g r e e m e n t f o r ' the
a sum i n a d d i t i o n
w h i c h sum i s
to
p u r c h a s e r on n o t i c e
payment o f
as
to
the u l t i m a t e
shares,
su rp lu s.
v i s i o n r e g a r d in g s u b s c r i p t i o n agreem ent p la c e s
the
as c a p i-
the c o n s id e r a tio n p a id f o r th e
to be c o n s i d e r e d c o n t r i b u t e d
It
the
d isp o sitio n
T his p r o н
share
of his
c o n trib u tio n .
Rhode I s l a n d
in d e te rm in in g the
in e s ta b lis h in g
c a p i ta l p rovides
the
th at
c o r p o r a t i o n s h a l l be an amount o f a s s e t s
criteria
to be u s e d
the c a p i t a l
of a
equal to;
1. the a g g re g a te p a r v a lu e o f i t s o u ts ta n d in g s h a r e s ,
i n c l u d i n g t r e a s u r y s h a r e s , having, p a r v a l u e , e x c e p t
sh a re s Issu ed u nder the p ro v is io n s o f s e c tio n t h i r t y
h ereo f, p lu s.
2 . th e a g g r e g a t e amount o f c o n s i d e r a t i o n r e c e i v e d by
i t f o r such o f i t s o u ts ta n d in g s h a r e s , In c lu d in g tr e a s u r y
s h a r e s , as w ere i s s u e d u n d e r th e p r o v i s i o n s o f s e c t i o n
t h i r t y h e re o f , p lus
3 . th e a g g r e g a t e amount o f c o n s i d e r a t i o n r e c e i v e d by
i t fo r i t s o u tsta n d in g sh a re s, in clu d in g tr e a s u r y sh ares,
w i t h o u t -par v a l u e , e x c e p t s u c h p o r t i o n o f s u c h c o n s i d e r н
a t i o n as s h a l l have b e en e x p re ss ly , r e c e i v e d and a p p li e d
by the c o r p o r a tio n as p a id - i n s u r p l u s , . . . . , p lu s
4 . s u c h am ounts as s h a l l h a v e b e e n t r a n s f e r r e d fro m
s u r p lu s to c a p i t a l upon the d e c l a r a t i o n o f a sh a re d i v i н
dend p ay ab le in sh a re s w ith o u t p ar v a lu e , plus
5. in the c ase o f a c o r p o r a tio n h a v in g s h a re s is s u e d
u nder the p ro v isio n s o f s e c tio n t h i r t y h e re o f o r sh a res
w i t h o u t p a r v a l u e , s u c h am ount a s may h a v e b e e n t r a n s f e r н
r e d from s u r p l u s to c a p i t a l , l e s s th e amount b y w hich th e
c a p i t a l r e p r e s e n te d by sh a re s is s u e d u n d er the p ro v is io n s
o f s e c tio n t h i r t y h e re o f or by sh a res w ith o u t par v alue
s h a l l have b e e n r e d u c e d I n a c c o r d a n c e w i t h the p r o v i s i o n s
of th is
sectio n .
The s a l i e n t f e a t u r e
sectio n
sto ck ,
of th is
law i s
the
in sisten ce
in each
t h a t n o t o n ly the c o n s i d e r a ti o n f o r o u ts ta n d in g
but also
the
sa m e a i m , h o w e v e r ,
sta tu tes
by the
sid e ratio n fo r
tre a s u ry stock
s h a l l be
is accom plished
i n many o f th e
statem en t th a t c a p ita l
sh all
i s s u e d s t o c k w h ich w ould be
d i s t i n c t i o n betw een
th is
the
in clu siv e
if
conн
the
w ere made.
issued under se c tio n
sta te
T his
o th er
in clu d e
i s s u e d and o u t s t a n d i n g s h a r e s
The e x c e p t i o n r e g a r d i n g s t o c k
s ig n if ic a n t because
in clu d ed .
th irty
allo w s a c o r p o r a t io n
to
is
issu e
p ar v alu e sh a res f o r le s s th an par v alu e under c e r t a i n con'zn
d i t i o n s . w The a b o v e s e c t i o n r e q u i r e s t h a t o n l y t h e c o n s i d н
e ra tio n receiv ed fo r par
shares
c lu d e d in
the company; p r o v id e d
the
c a p ita l
of such sh ares,
su rp lu s
of
t h e am ounts
so ld a t le s s
tran sferred
to
than par be
th at
in case
c a p i t a l from the
s h a ll be c o n sid e re d c a p i ta l .
The n e x t g r o u p o f s t a t e s
wc a p i t a l tf b u t
'th e
d e fin itio n
problem o f a l l o c a t i n g a
is
is
th at,
concerned s o le ly w ith
p a rt of th e
su rp lu s.
w h i c h employs t h e w o r d
to
G eo rg ia^ l p ro v id es
о G eneral
a s a me n d e d 1 9 3 2 .
C o r p o r a t i o n haw o f t h e S t a t e o f R h o d e
Ch. 2 4 8 , K * t . I I , S e c . "53". ?
fK) F o r d e t a i l s r e g a r d i n g t h e
co n d itio n s
see C h ap ter
the
c o n s i d e r a t i o n from sh a re s
w ith o u t p ar v alu e
these
in н
Issuance
th at
the
Isla n d ,
of shares under
III.
^
A cts and R e s o l u t i o n s o f th e G e n e ra l A ssem bly o f th e
S t a t e o f G eorgia
1 9 3 7 -1 9 3 8 . P t . I , T i t . I , S e c . 12 ,amendн
i n g S e c . 2 2 - 3 0 8 o f t h e Code o f G e o r g i a , 1 9 3 5 .
46
board of d i r e c to r s ,
v o te
if
of sto ck h o ld ers,
e r a t i o n from th e
surp lu s
acco u n t.
so empow ered b y t h e
m ay a l l o c a t e
sale
a p o r tio n o f the
o f sh ares w ith o u t p a r v alu e
M aine^? p r o v i d e s f o r e s s e n t i a l l y
power w i t h th e s t i p u l a t i o n
by the
c h a r te r o r by
sto ck h o ld ers,
th at
to
the
the
same
th e power s h a l l b e e x e r c i s e d
o r th e board of d i r e c to r s
general or sp ecial a u th o rity .
co n sid н
New J e r s e y ^ о
actin g under
lik ew ise
allo w s
s u c h c o n s i d e r a t i o n t o be d i v i d e d b e tw e e n c a p i t a l an d s u r p l u s
by r e s o lu tio n of th e board of d ir e c to r s ;
ex ercised w ith in th ir t y
days a f t e r
shares.
By t h e a p p l i c a t i o n o f t h i s
sc rib er
t o s h a r e s w o u l d n o t know, a t
f in a l d is p o sitio n of h is
d i r e c t o r s may t r a n s f e r
w h ic h a m o u n ts may be
d esig n ated c la ss
la tte r
the
p ro v isio n a subн
tim e o f p u rc h a s e
In th is
am ounts fro m s u r p l u s
trea te d
of shares.
p o w er may b e
th e' issu a n c e of the
co n trib u tio n .
sta te
th e?
the
to c a p i ta l ,
as c a p i t a l
in r e s p e c t to any
The e n t i r e
co n sid era tio n r e н
c e iv e d f o r any p r e f e r r e d o r s p e c i a l
is
th is
to be c o n sid e re d c a p i t a l ' in th e
s to c k w ith o u t p ar v alu e
sta te
of C o lo ra d o ,^
and
32
- S t a t e o f M a i n e , P r o v i s i o n s o f haw i n F o r c e R e l a t i n g
t o B u s i n e s s C o r p o r a t i o n s , 1930 a s a m e n d ed . Ch. 5 6 , S e c . 1 9 .
33
? The G e n e r a l C o r p o r a t i o n Law o f New J e r s e y , i n c l u d н
i n g a l l s u p p l e m e n ts a n d am endm ents t h e r e t o t o t h e e n d o f th e
L e g i s l a t i v e S e s s i o n o f 1 9 3 8 . T i t . 1 4 , Ch. 8 , S e c . 1 4 : 8 - 6 .
"C o r p o r a t i o n h a w s , a s r e v i s e d a n d a m e n d e d t o
O c t o b e r 1 , 1 S 3 7 . Ch. 4 1 , A r t . 1 , S u b d i v . 1 , S e c . 12 ( f ) .
47
a lso u n le ss
the
the p a r t
c ertific a te
to be c o n s id e r e d
surp lu s
Is
sta te d
o f i n c o r p o r a t i o n o r amendment c r e a t i n g
mon s h a r e s w i t h o u t p a r v a l u e . , a l l
in
comн
th e c o n s i d e r a t i o n so r e н
c e iv e d m ust be c o n s id e re d c a p i t a l .
The s t a t u t e
o f New Y o r k a l l o w s
c h o o s e b e t w e e n tw o a l t e r n a t i v e s
be c a p i t a l i z e d
v alu e;
tio n
the
sh all
at
the
in re g a rd
tim e o f i s s u a n c e
law p r o v id e s
Include
the
th at
e ith er
the
in co rp o rato rs
to th e
of shares
c e rtific a te
one o f t h e
to
amount to
w ithout par
of in co rp o raн
fo llo w in g sta te m e n ts:
A, " T h e - c a p i t a l o f t h e c o r p o r a t i o n s h a l l b e a t l e a s t
e q u a l t o t h e sum o f t h e a g g r e g a t e p a r v a l u e o f a l l i s s u н
ed sh a res h av in g p a r v a lu e , p lu s . . . . d o l la r s (th e
b l a n k s p a c e b e i n g f i l l e d i n w i t h some n u m b e r r e p r e s e n t н
i n g one d o l l a r o r m o re) i n r e s p e c t to e v e r y I s s u e d
s h a r e w i t h o u t p a r v a l u e , p l u s s u c h am ounts a s , fro m tim e
t o t i m e , b y r e s o l u t i o n o f t h e b o a r d o f d i r e c t o r s , may b e
tra n s fe rre d th e re to ; or
B. f The c a p i t a l o f t h e c o r p o r a t i o n s h a l l b e a t l e a s t
e q u a l t o t h e sum o f t h e a g g r e g a t e p a r v a l u e o f a l l i s s u н
ed s h a r e s h a v in g p a r v a l u e , p lu s t h e a g g r e g a t e amount o f
c o n s id e r a tio n re c e iv e d by the c o rp o ra tio n f o r th e i s s u н
a n ce o f s h a r e s w i t h o u t p a r v a l u e , p l u s su c h am ounts a s ,
from tim e to tim e , b y r e s o l u t i o n o f th e b o a r d o f d i r e c t н
o r s , m ay b e t r a n s f e r r e d t h e r e t o . ' 3 5
I n s e c t i o n 13
sta tin g
th at
the
cap ita l
the c a p i t a l ,
is
a g a in d e fin e d b u t m erely by
I f on ly p ar v alu e
s h a l l be e q u a l to
the a g g re g a te
w ith o u t p ar v alu e
are
issu ed ,
par v alu e,
the c a p i t a l
sto ck is
but
if
Issued,
shares
s h a l l be com puted
35 E x t r a c t s f r o m t h e S t o c k C o r p o r a t i o n L a w , G e n e r a l
C o r p o r a t i o n Law, T a x L a w , E x e c u t i v e L a w , a n d P e n a l , E d i t i o n
o f 1 9 3 8 . S e c . 12 ( 4 ) .
59 ? I b i d . , S e c .
13.
48
in accordance w ith th e
of in co rp o ra tio n .
rig h t
statem en t c o n ta in e d
in the c e r t i f i c a t e
I n s u m m a r y , u n d e r _t h e New Y o r k l a w t h e
to a l l o c a t e a p o r t i o n o f th e c o n s i d e r a t i o n r e c e iv e d
from s h a re s w ith o u t p a r v a lu e m ust be d e te rm in e d b y c h a r t e r
p r o v i s i o n a t w hich tim e
i t giay b e d e c i d e d t h a t a l l
the c o n н
s i d e r a t i o n r e c e i v e d ' s h a l l be deemed c a p i t a l o r t h a t a d e н
fin ite ly
named d o l l a r
rem ain d er b e in g
amount p e r
share s h a ll be c a p ita l,
su rp lu s.
A more p o s i t i v e
p r o h i b i t i o n on th e a l l o c a t i o n o f th e
c o n s i d e r a t i o n r e c e iv e d from s h a re s w ith o u t p a r v alu e
found in
W hile
the
the
sta tu tes
a l l of th ese
of In d ian a,
sta te s
use
sists
it
is
t h a t the
c ap ita l
sto ck
The I n d i a n a
i n some o f t h e
F lo rid a,
the
n o t as
In d ian a ^
i n on th e
shares
in н
of
is s u e d and o u ts ta n d in g be c o n s id e re d c a p i t a l . '
s t a t u t e w ould th u s c a p i t a l i z e
tio n receiv ed f o r
th e p a r v alu e
in d icate
power g r a n t e d i s
o th er s ta te s .
a g g re g a te amount p a id
is
and W is c o n s in .
t h e t e r m ??c a p i t a l 1* t o
sta tu to ry o r.le g a l c a p ita l,
broad as
th e
shares
a ll
the c o n s id e ra н
w i t h o u t p a r value, a n d a p p a r e n t l y
of par v alu e
shares
sold fo r p ar.
S ince
5 7 -C e r t a i n Laws C o n c e r n i n g C o r p o r a t i o n f o r P r o f i t , 1 9 3 7 .
Ch . 2 1 5 , P t . I , S e c . 1 ( h ) .
I n d i a n a d e f i n e s ??c a p i t a l s t o c k ?*
e x c e p t w here o t h e r w i s e s t a t e d , a s th e a g g r e g a t e amount o f p a r
v a lu e o f a l l s h a re s o f c a p i t a l s to c k h a v in g a p a r v a lu e , and
t h e a g g r e g a t e num ber o f s h a r e s o f c a p i t a l s t o c k h a v i n g no p a r
v alu e.
S e c . 1 ( g ) . T h i s d e f i n i t i o n o f c a p i t a l s t o c k w hen
t a k e n w i t h th e p r o v i s i o n c o n c e r n i n g c a p i t a l makes i t im p o s s н
i b l e to d e te rm in e the c a p i t a l i f p a r v a lu e sh a re s a re is s u e d
f o r m ore t h a n p a r .
49
In d ian a allo w s
than p a r,
sh a res w ith par v alu e
the c a p i t a l
amount r e c e i v e d .
aggregate
as r e g a rd s
F lorida^о
p ar v alu e
t o "be i s s u e d f o r
su c h s t o c k w ould be
sp ecifies
of issued
th a t the
p lus
w ith o u t p ar v alu e p lu s
sh all c o n stitu te
sin lik ew ise
cu m stan ces,
lim its
fo rb id
sh a re s h a v in g p a r v a lu e and
am ounts
tran sferred
issued
from s u r н
th e c a p i t a l of a c o rp o ra tio n .
alth o u g h i t
does n o t ,
the d i v i s i o n o f th e
a c o rp o ratio n
to c o n s id e r
W isconн
under c e rta in
c irн
c o n sid era tio n re c e iv н
ed b e tw ee n th e c a p i t a l and s u r p l u s . a c c o u n t s .
tio n o b lig es
the
su m o f t h e
the a g g re g a te amount o f c o n s i d e r a ti o n r e c e iv e d f o r
shares
less
T his
ju risd ic н
th at:
The a m o u n t o f a l l m o n e y s a n d t h e m o n e y v a l u e o f a n y
s e r v ic e s or p ro p e rty p a id f o r s h a re s w ith o u t p a r v alu e
as f i x e d a t th e tim e o f th e is s u a n c e o f t h e s h a r e s t h e r e н
f o r by th e o r g a n iz e r s , the d i r e c t o r s , o r th e s to c k h o ld e r s
w h ic h ev e r s h a l l have f i x e d th e p r i c e f o r the is s u a n c e
t h e r e o f , s h a l l c o n s t i t u t e th e c a p i t a l a p p li c a b l e to su ch
shares . . .
T his
s e c t i o n w h ile seem ing
m ent i s
in
the
to e s t a b l i s h
th e g e n e ra l r e q u ir e н
f o l l o w e d b y an e x c e p t i o n w h i c h i s w i t h o u t p a r a l l e l
o th er
ju risd ic tio n s.
The s e c t i o n p r o v i d e s
th at:
. . . .
in case s a id sh ares w ith o u t par v alu e are
s o ld by a c o r p o r a t i o n w hich has a c c u m u la te d a s u r p l u s ,
s u c h p o r t i o n o f th e p r i c e a s s h a l l b e a r t h e same' p r o p o r н
t i o n t o th e t o t a l p r i c e as the s u r p l u s b e a r s to th e
t o t a l o f c a p i t a l a n d s u r p l u s o f t h e c o r p o r a t i o n , m ay b y
r e s o l u t i o n o f th e b o a rd o f d i r e c t o r s a d o p te d p r i o r to
th e s a le o f su c h s to c k be t r e a t e d as s u r p lu s a v a i l a b l e
^ - C o r p o r a t i o n Law , S t a t e o f F l o r i d a , 1 9 2 5 a s a m e n d e d
J u l y 1 , 1 9 3 4 . Ch. 1 0 0 9 6 . A r t . V I, S e c . 2 1 .
3о S t a t u t e s o f W i s c o n s i n R e l a t i n g t o P r i v a t e C o r p o r a н
t i o n s , 1937. Sec. 182.14 ( 1 ) .
to
50
f o r d iv id en d s .^
Thus
th is
law view s
out par v alu e,
the c o n s i d e r a t i o n
assum ing
qu ired a su rp lu s,
p aid fo r
shares w ith н
the c o r p o r a t i o n h as p r e v io u s ly a c н
a s b e i n g c o m p o s e d o f two, s e p a r a t e a n d d i s н
tin c t p arts;
one p a r t c a p i t a l ,
The d i r e c t o r s
are
and the
o th er p a rt
su rp lu s.
allow ed to d iv id e
the c o n s id e r a tio n
In o t h e r w ords,
a s u b s c r ib e r by h is
percen tag e b a s is .
is
makes h i s
i n v e s t m e n t i n c a p i t a l a n d s u r p l u s e q u a l to t h a t
then e x is tin g
te n t of th e
c o n trib u te
conн
trib u tio n
the
presum ed to
on a
sh areh o ld er.
law , b u t
it
is,
t h a t w ould o b t a i n fro m th e
it
is
a n am ount o f money w h ic h
T h is a p p e a rs
u n fo rtu n ately ,
law a s w r i t t e n ;
to be th e
of
in н
n o t the r e s u l t
f o r exam ple;
if
assum ed t h a t a c o r p o r a t i o n w ere o r g a n i z e d w ith a l l
sh a re s w ith o u t p a r v alu e
cash a t e ig h ty d o lla rs
w ould be e i g h t
a su rp lu s
a n d one h u n d r e d s h a r e s
per share,
tho u san d d o l l a r s
su rp lu s
ty -fiv e
c a p i t a l o f the firm
w ere a c c u m u l a t e d ,
and the a g g re g a te
s u r p l u s w ould be tw e n ty p e r c e n t .
one new s h a r e
sold fo r
and -if o v e r a p e r i o d o f tim e
o f tw o t h o u s a n d d o l l a r s
l a t i o n b e tw e e n the
th e
are
Now i f
it
the r e н
o f c a p i t a l and
i s assum ed t h a t
o f s t o c k w i t h o u t p a r v a l u e w ere s o l d f o r n in e - ,
d o lla rs,
b y law th e
d i r e c t o r s may a l l o c a t e
per cen t or n in eteen d o lla rs
to
d o lla rs
d esp ite
to c a p i t a l ,
and t h i s
surp lu s
s to c k h o ld e rs have an in v e stm e n t of
Loc. c i t .
tw enty
and s e v e n t y - s i x
the f a c t t h a t
the o ld
e ig h ty d o lla rs
If
th e
in c a p ita l
and tw e n ty d o l l a r s
in su rp lu s.
s h a r e w ere s o l d f o r one h u n d r e d a n d t e n d o l l a r s ', th e
c a p i t a l may b e c r e d i t e d w i t h e i g h t y - e i g h t d o l l a r s
su rp lu s
cases
ed)
w ith tw enty-tw o d o l l a r s .
if
a ll
d i v id e n d s w ere p a i d
Under e i t h e r
the
the
o f th ese
(and by law th e y a r e
s h a r e h o l d e r s w ould r e c e i v e
and
so a l l o w - ,
sa m e a m o u n t o f d i v i н
dends e v e n th o u g h th e amount i n s u r p l u s r e p r e s e n t i n g
the
o ld sh ares
seen
th at
th is
a n d new s h a r e
law d o e s n o t ,
is
and s u r p lu s
e n tries
resu ltin g
of
the
of th e old
to
It
c a n be
is
shares,
m ake t h e
the p er sh a re
How ever,
in v estm en t in c a p i н
th is
law d o e s o f f e r
m o r e s a f e g u a r d s t h a n m an y t h a t h a v e b e e n d i s c u s s e d ,
be p la c e d
in th e
V e r m o n t ^ l
d iv id en d s uses
o r a m ajor p o r tio n o f
p a id -in
of
the a s s e t s
to th e
a ll
it
p aid o u t o f c a p i t a l
lia b ilitie s
o u ts ta n d in g p ar v alu e
41'
and d e fin e s
re m a in in g a f t e r p ay in g d iv id e n d s
amount o f i t s
it
the c o n t r i b u t i o n to
th e problem o f th e
term c a p i t a l
say in g t h a t d iv id e n d s a re
for
su rp lu s.
In d is c u s s in g
the
the
c o n t r i b u t i o n o f t h e new s h a r e н
sh areh older.
does n o t allo w a l l
issu ed
the a l i q u o t p a r t o f b o th
then issu e d
from th e
h o l d e r e q u a l i n amount t o
tal
sam e.
e x c e p t w hen t h e new s h a r e
f o r an amount e x a c t l y e q u a l
c ap ita l
n o t the
shares
P u b l i c haws o f t h e S t a t e
C o r p o r a t i o n s . 1 9 3 4 . Ch. 2 3 9 , S e c .
in clu d in g
and th e
the
payment o f
d ire c tly by
if
is
the
v alu e
not equal
p ar v alu e
v alu e o f th e
o f Verm ont R e l a t i n g
5850.
of
shares
to
52
w ith o u t p a r v a lu e as d e term in ed a t th e
T his
latter
statem en t
is
not very d e fin ite , b u t i t
ed to keep th e c l a s s i f i c a t i o n
S tates
the
u sin g
the
sta tu to ry c a p ita l.
?sta te d
term ? s t a t e d
Among t h e
c a p i t a l ? to d en o te
core
issu e.
is
in clu d н
co m plete.
the
u n i f o r m it y o f w o rd in g ; how ever,
a b asic
tim e o f t h e i r
c a p i t a l ? to d e s i g n a t e
sta te s
th a t use
sta tu to ry cap ita l
th ere
of s im ila r req u irem en ts
is
the
term
th ere
is
no
among some o f t h e m
w h i c h may b e s u m m a r i z e d
as fo llo w s ;
The ? s t a t e d c a p i t a l ? o f a c o r p o r a t i o n a t
(a)
any tim e
is
t h e sum o f
(1)
the a g g re g a te
p a r v alu e
p a r v alu e o f a l l
th ere to fo re
sh a re s hav in g a
a llo tte d ,
w hether o u t н
sta n d in g or n o t,
(2)
the a g g re g a te
a ll
ted ,
amount o f c o n s i d e r a t i o n r e c e i v e d f o r
sh a res w ith o u t p a r v alu e
th ere to fo re
w hether th en o u ts ta n d in g or n o t,
such p o r t i o n t h e r e o f as
a llo tн
except
s h a l l have b een d e s ig n н
a te d as p a id - i n s u r p lu s ,
(3)
s u c h a m o u n t s a s may h a v e b e e n t r a n s f e r r e d f r o m
surp lu s
to s t a t e d
c a p i t a l upon the d e c l a r a t i o n
of a share d iv id en d ,
(4)
s u c h a m o u n t s a s m ay h a v e b e e n t r a n s f e r r e d f r o m
su rp lu s
to
d ire c to rs,
s ta te d c a p i t a l by a c tio n of th e
53
(b)
l e s s su c h am ounts,
if
any,
a s m ay h a v e b e e n t r a n s f e r н
red by reason of red u c tio n
Such in la r g e
o u tlin e
is
th e
of sta te d
c ap ita l.
p r o v i s i o n o f M in n e s o ta ,^2
th ese
g e n e ra l sta te m e n ts b e in g m o d ified by the fo llo w in g :
(1)
c o n sid e ra tio n receiv ed
in excess o f p ar v alu e f o r
sh a re s w ith p a r v alu e
sh a ll c o n stitu te
p a id -in
-surp lus;
(2) u n l e s s
th e amount to be
for
is
the
in d ic ate d a t
tire
(3) u n l e s s
issuance
amount i s
the
v id es
of shares
the
as p a id - in
surp lu s
w ith o u t p ar v alu e
tim e o f is s u a n c e ,
to be c o n s id e re d s t a t e d
the
enн
c ap ita l;
su b sc rip tio n c o n tra c t ex p ressly proн
o th erw ise,
from th e
trea te d
the
stated
c ap ita l resu ltin g
issu an ce o f sh a re s w ith o u t par v alu e
h av in g l i q u i d a t i o n p r e f e
l e a s t e q u a l to th e
s h a l l be a t
r e n c e ^
amount o f th e
liq u id a tio n
p r e f e r e n c e .44
42 ?
1935.
"M i n n e s o t a - B u s i n e s s
C h . 3 0 0 , S e c . 1 (X ) .
C o rp o ra tio n A ct,
a s amended to
43
- The t e r m " l i q u i d a t i o n p r e f e r e n c e ? m e a n s t h e a m o u n t
o r p o r t i o n o f the a s s e t s r e q u i r e d by th e a r t i c l e s to be d i s н
t r i b u t e d to h o ld e rs of sh a re s of a g iv en c la s s upon d i s s o l u н
tio n , liq u id a tio n , c o n so lid a tio n or m erger, or sa le of a l l
o r s u b s t a n t i a l l y a l l o f th e p ro p e rty o f th e c o rp o r a tio n .
1935.
^4 M i n n e s o t a B u s i n e s s
Ch. 3 0 0 , S e c . 2 0 .
C o rp o ra tio n A c t, as
amended to
54
I l l i n
and s p e c i f i c ,
th o se
o
the
in
t h e w o r d i n g i s much m ore d e t a i l e d
the b a s ic
o u tlin e .
su rp lu s
su rp lu s.
is
as a r e s u l t of the
tim e a l l o t t e d ,
p ar v alu e
of sto ck
c o n sid era tio n fo r
assets
c ap ita l
th e
th a n m oney.
th e
th is
is
is
sh ares w ith o ut par v alu e.
has
For n o n - p r e f e r e n t i a l
tim e o f
c ap ita l
the
the c l a s s
tran sfe r
of shares
in
and the a g re e d
M oreover,
the
if
to
sta te d
th an
event of in v o lu n tary
shares
may b e a s d e t e r m i n e d b y t h e d i r e c t o r s .
th e ?
issu ed fo r
s h a l l be n o t le s s
liq u id a tio n .
to
if
n o t done
in case of in v o lu n ta ry liq u id a tio n ,
a t th e
if
a p referen tial rig h t
p r e f e r e n t i a l amount i n th e
the
sta te d
cap ita l
The d i r e c t o r s may
o f am ounts fro m s u r p l u s
to w h ic h su c h I n c r e a s e s
ap p ly .
Subsec.
is
to c o n s i s t o f th e
is s u e d h av in g a p a r v a lu e
th e a g g re g a te
to s t a t e d
as
shares w ithout
issuance
s ix ty days
If
r e p r e s e n te d by such sh a re s
in d icate
of
tim e o f
sta te d c a p ita l
any sh a res w ith o u t p a r v alu e
the
The e l a b o r a t i o n
issu an ce
is s u e d f o r c a s h and w i t h i n
a c o n sid e ra tio n o th er
the
same r e q u i r e m e n t s
The a m o u n t t o b e a l l o c a t e d
p ar v a lu e m ust be d e te rm in e d a t
sto ck
the
c o n tr o l e x e r c is e d over the d e te rm in a tio n o f th e
amount o f p a i d - i n
p a id -in
w hile
c o n tain s e s s e n t i a l l y
in d ic ate d
found in
i s ,
'f e e B u s in e s s C o r p o r a tio n A c t , 1937.
k, and Sec. 19.
Sec.
2,
55
P en nsylvania^о
except
th at
in case
fo llo w s
of shares
liq u id a tio n preference
sta te d c a p ita l.
the s h a re s
are
w ith o u t p a r v alu e h av in g a
the e n ti r e
c o n s i d e r a t i o n s h a l l be
T his r e q u ir e m e n t
is s a tis fa c to ry
s o l d f o r a n amount e q u a l
the
liq u id a tio n preference,
less
th an
the
the re q u ire m e n t o f I l l i n o i s
liq u id a tio n
to o r g r e a t e r
b u t i f th e -s h a re s w ere
preference,
then
t a l w ould n o t c o n t a i n an a m o u n t e q u a l to
preference.
th an th e
If
th e s h a r e s w ere s o l d f o r
liq u id a tio n preference,
in excess
of th e
as long as
the
C a l i f o r n i a ,4*7 i n a l i k e m a n n e r ,
cap iн
liq u id a tio n
an amount g r e a t e r
sta te d
liq u id a tio n preference
so ld f o r
the s t a t e d
the
th an
c a p i t a l w i l l be
of such s h a re s .
fo llo w s
the b a s ic
p r o v is io n s m en tio n ed above b u t w ith c e r t a i n m o d i f i c a t i o n s .
The a m o u n t o f ' t h e c o n s i d e r a t i o n
s u rp lu s m ust be d e s ig n a te d p r i o r
ance o f
e n tire
th e s t o c k and In th e
amount o f t h e
to be a l l o c a t e d
to o r a t t h e
absence
c o n sid eratio n
in
agreed c o n s id e ra tio n
par v alu e
sto ck
is
th is
sta te ),
tim e o f
s h a l l be s t a t e d
less
o nly
the
c ap ita l.
th an par
(as
is
th e amount o f th e
s h a l l be c o n s i d e r e d s t a t e d
i s s u e d f o r am ounts
issu н
o f such d e s ig n a tio n
I f p a r v alu e s to c k has been issu e d f o r
allo w ed by s t a t u t e
to p a i d - i n
in excess
c a p ita l;
of par,
if
such
46 P u r d o n 1s P e n n s y l v a n i a S t a t u t e s , A n n o t a t e d P e r m a n e n t
E d i t i o n 1 9 3 8 , T i t . 1 3 - 1 5 . T i t . 1 5 , C h . 49B , A r t . 1 , S e c .
2852-2 a n d A r t. V I, Sec. 28 5 2 -6 1 4 .
^ й e e r i n g ' s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a ,
1 9 3 7 . D i v . 1 , P t . 4 , T i t . 1 , C h . 3 , S e c . 30T5E.
56
excess
s h a l l be p a i d - i n
su rp lu s;
in
the case o f sh a re s w ith н
o u t p a r v alu e h av in g a l i q u i d a t i o n p re fe re n c e
agreed c o n s id e ra tio n
S ince
is
th is
sta tu te
p ro vided
th at
s h a l l be c o n s id e re d s t a t e d
uses
the ag reed c o n s id e ra tio n
s c r ib e r b e fo re d e d u ctin g th e
in r e g a r d to
sale
liq u id a tio n a t a p rice
of shares
less
ing
is
as
i t d id w ith
th an the
the
the
o f the
issu an ce
w ith o u t par v alu e
are
to
the am ount o r p r o p o r tio n
the a s s e t s
th e m eaning o f
the
ev en th o u g h th e w ordн
sh areh o ld ers,
amount to be p a i d - i n
shares.
or
su rp lu s
H ow ever,
if
at
shares
i s s u e d f o r p r o p e r t y whose v a lu e h a s
n o t b een d eterm in ed a t th e
m ust be d e te rm in e d ,
P en n sy lv an ia,
liq u id a tio n preference.
The i n c o r p o r a t o r s ,
d i r e c t o r s m ust d eterm in e
tim e o f th e
subн
w ith o u t p ar v alu e h av in g a
c o re r e q u ir e m e n t as sum m arized,
d issim ila r.
s h a l l be c o n s tru e d
be r e c e i v e d from th e
O h io ^ о a d h e r e s r a t h e r c l o s e l y
b asic
it
s e l l i n g and u n d e rw ritin g
The p r o b l e m a r i s e s ,
the
cap ita l.
charges and expenses of o rg an н
and any c o m p e n s a tio n f o r
such s h a r e s .
e n tire
th e term ag reed c o n s id e r a tio n ,
to mean th e am ount r e c e i v e d o r t o
iza tio n
the
tim e o f t h e
t o be t r e a t e d
issuance
of
as p a id - in
and as soon as p o s s i b l e ,
the
the
sto ck ,
su rp lu s
v alu e o f
m ust be d e te r m in e d and e n te r e d on th e b o o k s.
T hree o t h e r s t a t e s
use
the
term " s t a t e d
c a p ita l"
w ith
G e n e r a l and F o r e ig n C o r p o r a t i o n A cts o f the S t a t e
o f O h io , a n n o ta te d 1959.
T i t . I X , D i v . I , Ch. 1 , S e c . 8 6 2 3 17, Sec. 8 6 2 3 -2 5 , and Sec. 862 3 -3 7 .
57
the
In te n t of In d ica tin g
fin itio n s
are f a r
less
S o u th D akota p r o v i d e s
th ere
the s t a t u t o r y
p recise
th at
in
c ap ita l,
but
the d eн
th an th o se m entioned above.
the
a rticle s
of
in co rp o ratio n
s h a l l be s t a t e d :
(c)
E i t h e r (1) th e am ount o f s t a t e d c a p i t a l w i t h
w hich th e c o r p o r a t i o n w i l l b e g i n b u s i n e s s , w hich s h a l l
n o t b e l e s s t h a n F iv e H undred D o l l a r s ($5500.00); and
t h a t th e c o r p o r a t i o n w i l l c a r r y on b u s i n e s s w ith a s t a t н
ed c a p i t a l w hich s h a l l n o t be l e s s th a n the a g g re g a te
a m ount o f t h e p r e f e r e n c e to w h ic h a l l I s s u e d and o u t s t a n d н
in g sh a re s h a v in g a p r e f e r e n c e as to p r i n c i p a l Is e n t i t l н
e d , and i n a d d i t i o n t h e r e t o an amount t h e r e i n s t a t e d in
r e s p e c t to ev ery sh are o f s to c k Iss u e d and o u ts ta n d in g
o th e r th a n s to c k h av in g a p re fe re n c e as to p r i n c i p a l
w hich amount s h a l l n o t be l e s s th a n F iv e D o l l a r s ($ 5 .0 0 )
f o r e a c h s h a r e , a n d s u c h a d d i t i o n a l am o u n t .as f r o m t i m e
to tim e may b y r e s o l u t i o n o f t h e b o a r d o f d i r e c t o r s o f
th e c o r p o r a t i o n be t r a n s f e r r e d t h e r e t o ; o r (2) th e amount
o f s t a t e d c a p i t a l w ith w hich the c o r p o r a t io n w i l l b e g in
b u s i n e s s , w h i c h i n no e v e n t s h a l l b e l e s s t h a n F i v e
H undred D o l l a r s ( $ 5 0 0 .0 0 ) ; a n d t h a t th e c o r p o r a t i o n w i l l
c a r r y on b u s i n e s s w i t h a s t a t e d c a p i t a l c o n s i s t i n g o f
th e a g g r e g a t e o f t h e am ounts r e c e i v e d b y i t a s c o n s i d e r a н
t i o n f o r th e I s s u a n c e o f i t s s h a r e s w i t h no n o m in a l o r
p a r v a lu e , the a g g re g a te p a r v a lu e o f a l l Is s u e d and o u t н
s ta n d in g s h a r e s , i f an y , h a v in g a n o m in al o r p a r v a lu e ,
a n d s u c h a d d i t i o n a l a m o u n t s a s f r o m t i m e t o t i m e may b y
r e s o l u t i o n o f th e b o a rd o f d i r e c t o r s o f the c o r p o r a t io n
be t r a n s f e r r e d t h e r e t o . 49
The m e a n i n g o f t h e f i r s t
f o r when t h e
the l i g h t
statem en ts
50
cles
a p riv ate
of
the
not im p o ssib le.
c o r p o r a t i o n may,
is
d o u b tfu l,
In terp reted
in
p ro b lem o f p r e c i s e m eaning
if
so
i n c o r p o r a t i o n o r b y am endm ent,
4.0
Ch. 9 2 ,
if
a ltern a tiv e s
th e r e in co n tain ed are
of o th er p ro v isio n s
becomes d i f f i c u l t ,
.(1 )
of th ese
A ccording
p rovided
issu e
to
sectio n
in i t s
a rtiн
sh ares w ith o u t
' C o r p o r a t i o n Laws o f S o u t h D a k o t a , 1 9 3 8 .
S ec. 8777-A , S u b s e c . 1 c .
^ I b i d ? , Sub s e c . 1 .
P t.
17,
58
p a r v alu e
o th er
than sto ck p re fe rre d
ferred
as to
a tio n ,
or s u b je c t to red em p tio n a t a f ix e d
seems
d istrib u tiv e
to p r o h i b i t
ference
it
in
the a s s e t s
of th e
p rice.
or preн
corporн
T h is
s h a r e s w i t h o u t p a r valu e'' fro m h a v i n g p r e н
as to d iv id en d s
co n tin u in g ,
shares
as to d iv id e n d s ,
o r to l i q u i d a t i o n
is req u ire d
th at
t h e r e be
preference,
and-
in d ic ate d :
The n u m b e r o f s h a r e s w i t h a n o m i n a l o r p a r v a l u e , i f
a n y , and th e number o f s h a r e s w i t h o u t a n o m in a l o r p a r
v a l u e t h a t may b e i s s u e d b y t h e c o r p o r a t i o n , a n d t h e
c l a s s e s , i f an y , in to w hich su ch s h a re s a re t o be d i v i d н
ed t o g e t h e r w ith a s ta te m e n t o f th e d i s t i n g u i s h i n g p r e н
f e r e n c e s , r i g h t s , p r i v i l e g e s , and r e s t r i c t i o n s o f each
c l a s s .5 1
Does th e
th e.ab o v e
statem en t re g a rd in g p re fe re n c e s
se n te n c e a p p ly to p a r v a lu e
w ith o u t p a r valu e?
If
it
does
in the
shares,
a p p ly to
shares
v a l u e , how c a n s u c h s h a r e s h a v e p r e f e r e n c e
p rev io u s
sectio n ?
a lte rn a tiv e
to
In view o f t h e s e
be
in te r p r e te d as
c a p i t a l e q u a l to
the
of
shares
the p a r v a lu e
the
ag g reg ate
aggregate
th e . in te n tio n of
tio n
t h a t the
^
the
It
o f the
I b i d . , Sub s e c .
w ith o u t par
is
1(a).
th e
the
first
an amount e q u a l to
(fiv e
d o llars
per
sh a re s w hether of p a r v a lu e
th at
Much m o r e p r o b a b l y i s
f i r s t a lte rn a tiv e
shares
liq u id a tio n preference
can h a r d ly be b e li e v e d
law .
of
p ro v id in g f o r a s ta te d
o f a n a m e d m in im u m p e r s h a r e
w ith o u t p ar v alu e?
or to
part
in view o f
p ro v isio n s
o u tsta n d in g plu s
s h a r e m in i m u m ) f o r o u t s t a n d i n g
last
sh o u ld be
or
such is
the
in te rp re te d
assum pн
as
59
m eaning t h a t
the
v alu e
sh ares h av in g par v alu e
of a ll
sta te d
c a p ita l
so p r o v i d e d b u t b y p r e s u m p t i o n )
ence
is
to be
p lu s
th e
(w h eth er
f u l due to a c o n f l i c t
d o lla rs
per share
in
the l a t t e r
sectio n s)
(m in i m u m f i v e
the
liq u id a tio n
can be
p lu s
to
from s u r p l u s .
exact In te rp re ta tio n
issued
c ap ita l
s h a l l be e q u a l
ceived fo r
to
it
the
d o lla rs)
for a ll
stip u la te s
ag g reg ate
sh a res w ith o u t par v alu e plus
v alu e o f a l l
shares
is
d oubtн
a named num ber o f
shares
plus
The s e c o n d a l t e r n a t i v e
for
preferн
e ith e r w ith or
o u t p a r v a l u e h a v i n g no l i q u i d a t i o n p r e f e r e n c e ,
tran sfe rred
par
(w hile n o t s p e c i f i c a l l y
of s to c k h aving l i q u i d a t i o n p re fe re n c e ,
w ith o u t p ar v alu e
ag greg ate
th at
am ounts
is
the
w ithн
su bject
sta te d
c o n sid eratio n r e н
the
ag g reg ate
Is s u e d h av in g a p ar v a lu e ,
p lu s
par
am ounts
t r a n s f e r r e d from s u r p lu s .
The l a s t
,rs t a t e d
two s t a t e s
c a p i t a 1 M, b u t
in th is
group a ls o use
the
term
th e e x p a n s io n o f th e m eaning o f th e
t e r m l e a v e s much t o b e d e s i r e d ,
fo r th e
law d i r e c t s
th atr
For the p u rp o se o f t h i s a r t i c l e th e s t a t e d c a p i t a l
(as t h a t term i s h e r e i n a f t e r u sed in t h i s a r t i c l e ) o f a
c o r p o r a t io n i s s u i n g s h a re s w ith o u t n o m inal o r p a r v a lu e
s h a l l be t h e c a p i t a l w i t h w h ic h t h e c o r p o r a t i o n w i l l
b e g in b u s in e s s I n c re a s e d by any n e t a d d itio n s t h e r e t o ,
o r d im in ish e d by any n e t d e d u c tio n s th e re fro m ; b u t
s t a t e d c a p i t a l s h a l l n o t In clu d e any n e t p r o f i t s or s u r н
p lu s e a r n in g s u n t i l t r a n s f e r r e d to c a p i t a l , and s h a l l
n o t b e l a r g e r i n am o u n t t h a n t h e e x c e s s , a s shown b y t h e
books o f t h e c o r p o r a t i o n , o f I t s a s s e t s o v e r and above
I t s l i a b i l i t i e s , o t h e r th a n l i a b i l i t i e s on a c c o u n t o f
s h a r e s o f s t o c k I s s u e d o r to be I s s u e d b y s u c h c o r p o r a н
tio n .
In the c a se o f a c o r p o r a tio n h a v in g o u ts ta n d in g
s h a r e s w ith a nom inal o r p a r v a lu e , a s w e ll as s h a re s
w i t h o u t n o m i n a l o r p a r v a l u e , f o r .the p u r p o s e o f t h i s
a r t i c l e th e p o r t i o n o f s t a t e d c a p i t a l a p p li c a b l e to the
s h a r e s w ith o u t a nom inal o r p a r v a lu e s h a l l be th e
c e ss o f s t a t e d c a p i t a l o v e r and above th e t o t a l p a r
v a lu e o f o u t s t a n d i n g s h a r e s h a v in g a n o m inal o r p ar
v a l u e .52
T his
sectio n
is
and as can be
guide
given by b o th M is s o u r i^
seen i t
in reg a rd to
offers
the
a n c[
very l i t t l e
in
M
60
exн
e x i c o ,
^4
t h e way o f a
am ount o f c o n s i d e r a t i o n t h a t m u st be
capi ta liz e d .
S t a t e s h a v i n g no p o s i t i v e
c ap ita l.
T h e r e a r e some s t a t e s
d e fin itio n
ized
in
o f the
th eir
A labam a,
ju risd ic tio n .
A rizona,
New H a m p s h i r e ,
K entucky,
Texas,
t h a t h a v e no s t a t e m e n t o r
The s t a t e s
cap ita l.
homa,
N orth D akota,
in th ese
sta te s
the. l a c k o f
s t a t e s m ay b e t h e f a c t
N ebraska,
groijp i n c l u d e
M ontana,
N ebraska,
Oklahom a,
O regon,
e tc .,
b u t no d e t a i l
the
th at
the
is
sta tu to ry
s u c h a. d e f i n i t o n
N o rth D a k o ta , M ontana,
of
f r e q u e n t l y m ake some
one c o u ld a c t u a l l y d e te r m i n e
One r e a s o n f o r
some o f t h e s e
th is
U t a h , W yo m ing , a n d t h e D i s t r i c t
The s t a t u t e s
so t h a t
in
M ississip p i,
m en tio n of c a p i t a l o r f ix e d c a p i t a l ,
g iv en
of sta tu to ry
c a p ita l of a c o rp o ra tio n organн
N orth C a ro lin a ,
S outh C a ro lin a ,
C olum bia.
sta tu to ry
d e fin itio n
in
law i n O klaн
and the D i s t r i c t
of
G e n e r a l C o r p o r a t i o n Laws a n d M i s c e l l a n e o u s P r o v i s i o n s o f t h e S t a t e o f M i s s o u r i , R e v i s e d S t a t u t e s o f 1929 a n d
am endm ents t h r o u g h 1 9 3 3 .
Ch. 3 2 , A r t . 1 6 , S e c . 5 1 0 2 .
63
Loc. c i t .
^
Ch. 4 7 ,
Q o r p o r a t i o n Laws o f t h e
S e c . 3 1 5 (L aws o f 1 9 2 3 ) .
S tate
o f New M e x i c o , 1 9 2 8 .
61
Colum bia d oes n o t p r o v id e
K e n tu c k y ,so u th
preferred
V irg in ia
D a k o t a , 56 ancj W i s c o n s i n 5 ^ do n o t p e r m i t
In a d d itio n ,
to d e fin e
sta tu to ry c a p ita l.
to make i t
the r e g u l a r g ro u p s .
blem o f i s s u i n g
shares
W est V i r g i n i a 5 8
f o r a g iv en c o n s id e r a tio n m entions
c o n s id e ra tio n over th e ag g reg ate
wi t h p a r v a l u e
su rp lu s
sh a ll c o n stitu te
w ithout p ar v alu e .
a risin g
M assach u setts
stip u la te s
from th e
in d isc u ssin g
th at
i s made
to
in such
in clu d e
them
in m eetin g th e
proн
and w ith o u t p ar v alu e
th at
the ex cess
p ar v alu e
o f the
of shares
th e amount a p p l i c a b l e
N o th in g .Is
sale
it
im possible
w ith p ar v alu e
sta te s
A l t h o u g h t h e y do
some m e n t i o n o f s t a t u t o r y c a p i t a l ,
shares
W est
a n d M a s s a c h u s e t t s may b e i n c l u d e d am o n g t h e
an i n d i r e c t m anner as
In
sh ares w ith o u t par v alu e.
s h a re s .w ith o u t p a r v a lu e .
th at f a i l
m ake
for
Issued
to
sa id concerning p a id - in
of sh ares w ith o u t par v alu e .
the l i a b i l i t y
th eir lia b ility
of sh areh o ld ers
s h a l l be com puted as f o l l o w s :
. . . . s h a r e s o f s t o c k w ith p a r v a lu e t o be com putн
ed f o r t h i s purpose a t t h e i r p a r v a lu e as f ix e d a t th e
55 C a r r o l l 1s K e n t u c k y S t a t u t e s . A n n o t a t e d B a l d w i n ' s
1956 E d i t i o n . Ch. 3 2 . A r t . I , S e c . 5 6 4 - 2 .
33 C o r p o r a t i o n Laws o f S o u t h D a k o t a 1 9 3 3 .
Ch. 9 2 , S e c . 8 7 7 7 -A , S u b s e c . 1.
S tatu tes
t i o n s , 1937. Sec.
o f W isco n sin R e l a t i n g
1 8 2 .1 4 .
to
P t.
P riv ate
17,
C orpora-
58 C o r p o r a t i o n Laws o f W e s t V i r g i n i a . a d o p t e d b y
L e g i s l a t i v e S p e c i a l S e s s i o n , M arch 1930 w i t h am endm ents t o
d a te o f I s s u e , J u ly 1, 1935.
Ch. 3 1 , A r t . 1 , S e c . 2 2 .
62
tim e and s h a r e s w i t h o u t p a r v a l u e to be com puted a t th e
v a lu e a t th e tin e o f issu e of the cash , p ro p e rty ,
s e r v i c e s , o r e x p e n s e s f o r w h ic h t h e y w ere i s s u e d , b u t
n o t i n c l u d i n g p a i d - i n s u r p l u s . 59
W hether t h i s
c o rp o ra tio n
d eterm in e
is
is
the
an a tte m p t to d e fin e
n o t known, b u t
lia b ility
th e
c ap ita l
the fo rm u la
of sh areh o ld ers
How ever,
sectio n
has been c l a s s i f i e d
n o t known,
P rovisions
anom alous
the
e x a c t u se o f the
in th is
concerning; o r g a n i z a t i o n e x p e n s e s .
s e c t i o n d e a lin g w ith th e problem o f th e
o rg a n iz a tio n appears
Illin o is
it
t o be u s e d t o
and co n ceiv ab ly
m ig h t be so c o n s i d e r e d .
is
sin ce
is
o f the
in the
and P e n n sy lv a n ia
law s of
so m e o f t h e
provide
in
group.
A rath er
cost of
sta te s.
id e n tic a l sectio n s
th at
The r e a s o n a b l e c h a r g e s a n d e x p e n s e s o f o r g a n i z a t i o n
o r r e o r g a n i z a t i o n o f a c o r p o r a t i o n a n d r e a s o n a b l e comн
p e n s a tio n fo r th e sale or u n d e rw ritin g o f i t s sh a re s ,
m a y b e p a i d o r a l l o w e d by s u c h c o r p o r a t i o n o u t o f ' t h e
c o n s i d e r a t i o n r e c e i v e d by i t in payment f o r i t s s h a re s
w ith o u t th e r e b y r e n d e r i n g su ch s h a r e s n o t f u l l p a id and
n o n -assessab le.
T his e x c e p tio n i s n o te w o rth y e s p e c i a l l y
the
s ta te d c a p ita l bo th of th ese
sin ce
ju risd ic tio n s
in d e fin in g
in clu d e
the
59
G e n e r a l Laws o f t h e C o m m o n w e a l t h o f M a s s a c h u s e t t s ,
The T e r c e n t e n a r y E d i t i o n , 1 9 3 2 . T i t . X X I I , C h . 1 5 6 , S e c . 3 5 .
60
The B u s i n e s s
C o r p o r a tio n A ct,
1937.
Sec.
20.
P urdon*s P e n n s y lv a n ia S t a t u t e s . A n n o ta te d Perm aн
n e n t E d i t i o n , 1 9 3 8 . T i t . 1 3 - 1 5 , T i t . 1 5 , C h . 49B , A r t . V I ,
Sec. 2852-606.
63
ag g reg ate
g ate
p a r v alu e
amount o f th e
out p ar v alu e
c o n sid e ra tio n receiv ed fo r shares
less
p a id -in su rp lu s.
o f sh a re s h av in g p a r v alu e and th e
the
In view o f t h i s f a c t
shares
a risin g
from th e u n d e r w r itin g c o s t ?
to
sta te d c a p ita l
expense m ight th e n be a llo w e d
th ro u g h o u t the
life
W ou ld t h e p a r
and th e u n d e rw r itin g c o s t
it
is
su rp lu s.
L o u isian a
in th e
As r e g a r d s t h e
su b tract
th e am ount,
c a p i t a l m ig h t a p p e a r as r e q u i r e d by law ,
c a p i t a l vsrould b e l e s s ' b y t h e
expense
o r i t m ig h t be
c h a rg e d to a d i s c o u n t on s to c k a c c o u n t,
i s no s u r p l u s fro m w h ich to
sta te d
The o r g a n i z a н
to r e m a in on th e books
o f the o r g a n iz a tio n ,
w r i t t e n o f f a g a i n s t .th e
if
th e d i s c o u n t on
o r g a n i z a t i o n e x p e n s e o r d i s c o u n t on s t o c k ?
tio n
in cid en t
d isco u n t,
and i f
w hile
the
th ere
the
actu al
amount o f u n d e r w r i t i n g c o s t .
lik ew ise a llo w s a reasonable
c h a r g e for the
to
of the
th e
to
and the p ro v is io n
w h a t m eth o d w ould be u s e d to r e c o r d
to
w ith н
a m o u n t t h a t m ay h a v e b e e n a l l o t t e d
above,
v a lu e be c a r r i e d
aggreн
o rg an izatio n
and s a l e
sto ck
fo llo w in g w ords:
A c o r p o r a t i o n m a y 'p a y as c o s t o f o r g a n i z a t i o n o r r e н
o r g a n iz a tio n the re a so n a b le ch arg es and expenses i n c i н
d e n t t h e r e t o , a n d m ay a l s o p a y o r a l l o w r e a s o n a b l e comн
p e n s a tio n f o r the s a le o r u n d e r w r itin g a t th e tim e o f
o r g a n iz a tio n o r t h e r e a f t e r o f i t s s h a r e s , or any p a rt
th ereo f
Wo m e n t i o n i s m a d e o f t h e r i g h t o f t h e c o r p o r a t i o n
{20
1938.
' G e n e r a l C o r p o r a t i o n Laws o f t h e
Sec. 7.
S ta te
to a sse ss
of L o u isian a.
64
the
sh areh o ld ers.
b u t adds
O hio a l s o f o l l o w s
th e a d d itio n a l p ro v is io n
o r allo w ed o r any b a la n c e
s h a l l be s t a t e d
ance
sheet
on th e
the L o u isia n a
t h a t ??a l l a m o u n t s
c o r p o r a t i o n books and on e v e r y b a l н
therefrom u n t i l
th e w hole t h e r e o f h as b e e n w r i t t e n
d i s c o u n t on s h a re s m u st be a m o r tiz e d .
the
b alan ce
item s
s h o u ld be c a r r i e d
sh e e t as a d e fe rre d
w i l l be r e c a l l e d
issu an ce
ing
the
o f par v alu e
th is
sh areh o ld ers
th e
o f the
sheet
c o n n ectio n
in
t h a t Ohio a l l o w s
th an p a r.
the
In enum eratн
less
th at
h a v in g p reem p tiv e r i g h t s m ust be g iv e n an o p p o rн
to buy the
a ll
the
is not d e te rm in a b le .
l a w s o f K a n s a s о ^ a n d Ohioоо p r o v i d e
shares
offered,
??t h e n
and i f
sh areh o ld ers
than the
less
p rice
the
or se c u ritie s
of K ansas,
are n o t
to be
a t w h ich th e y w ere o f f e r e d
reaso n ab le
c o m p e n s a t i o n a n d allow ance
оо G e n e r a l a n d F o r e i g n C o r p o r a t i o n A c t s
o f O hio, A n n o ta te d 1939. Sec. 8 6 2 3 -2 9 .
о^;S t a t e
shares
t h e b o a r d o f d i r e c t o r s may
o r any p a r t o f su c h sh a re s
issu ed a t not le ss
to
sid e
or as d ed u ctio n
shares fo r le s s
ta k e n by the s h a r e h o l d e r s ,
cause
W hether t h i s means
c o n d i t i o n s u n d e r w h i c h s h a r e s may b e s o l d f o r
th an p a r v alu e th e
tu n ity
in
im ply t h a t th e
on th e a s s e t
charge,
new w o r t h s e c t i o n o f t h e b a l a n c e
It
so p a i d
th e r e o f n o t p re v io u s ly charged o ff
o f f . ? о'-5 T h i s m e t h o d o f t r e a t m e n t s e e m s t o
th at
sta tu te
S e s s io n Law s. 1939.
'Q ^ n e r a l . a n d F o r e i g n C o r p o r a t i o n A c t s
o f O hio, A n n o tated 1939, Sec. 8623-35.
of th e S ta te
Ch.
152,
o f the
S ec.45.
S ta te
65
for
sale
u n d e rw ritin g or purchase
In c o n tra s t
th at
the
to
th ese
t h e r e o f . "66
sta tu te s,
C a l i f o r n i a 6 7
t e r m " a g r e e d c o n s i d e r a t i o n 5* u s e d
stip u la tes
in d e fin in g s ta te d
c a p ita l
s h a l l mean t h e am ount to b e r e c e i v e d b e f o r e d e d u c t н
in g
c h a rg e s and e x p e n se s o f o r g a n i z a t i o n and com pensaн
the
tio n
for
.the s a l e
.S u m m a r y .
or u n d erw ritin g
o f such s h a r e s .
In d isc u ssin g
th e
c a p ita l,
sta te s
c ap ita l
or leg al
s t o c k 1*,
s e v e n te e n u se th e term " c a p i t a l " , and e i g h t u se th e
w ords " s t a t e d
c a p ita l."
d ictio n s
re g a rd in g th e
from th e
issu an ce
p ly b y t h e
by the
par v alu e
amount o f s t a t e d
th at
the
of such shares
o f the s h a re s
less
are
- o f th e
to
67
S tate
term " c a p i t a l
w ith
c a p ita l rep re se n te d
the
the a g g re g a te
e x c e p tio n o f the
I n d i a n a , 'a n d Rhode I s l a n d w h ic h
shares
co n d itio n s,
such sh a re s
of K ansas,
ju risн
a n s w e r e d v e r y slimн
to be e q u a l to
Is
c o n sid e ra tio n receiv ed fo r
PFi
1937.
is
Issued under such c o n d itio n s
in re s p e c t
the
c a p i ta l resL iltin g
is
sta tu to ry
th ey allo w p a r v alu e
th an par under c e r ta in
shares
tal
sin ce
shares
issu ed ,
ju ris d ic tio n of C a lifo rn ia ,
sta te s,
use
The p r o b l e m i n m o s t o f t h e
o f p a r v alu e
sta te m en t
issu e
fiv e
concept of s ta tu to ry
to be
pro v id e
the
Issued fo r
t h a t w he n
sta tu to ry cap iн
to be e q u a l to
such s h a re s .
S e ssio n la w s . 1939.
the a g g re g a te
In Kansas
Ch. 1 5 2 ,
S e c .45.
P e e r i n g 1s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a .
D i v . 1 , P t . IV , T i t . 1 , Ch. I l l , S e c . 3 0 0 b .
66
and Ohio th e
may b e
v alu e
c ap ita l,
issued fo r le s s
shares.
the
are
issu ed f o r
am ount.
shares
th an p ar,
the
less
issued fo r
d eterm in in g
tio n s
ev id en t,
p laced
p lace
be
In d ian a,
lim ita tio n s
th a t
the
how ever,
h a v e no s p e c i f i c
w hen p a r
im ply t h a t p a r
allo w s
is
p a r v alu e
is s u e d the
th at
amount
th e m ajo r problem in
c a p ita l cen ters
to
su rp lu s,
Iow a,
the
about the r e s t r i c н
c o rp o ra tio n
to a l l o c a t e
a
p a id -in su rp lu s.
The s t a t e s
of
M ichigan, and W isco n sin u n q u a l i f i e d l y
o v e r th e amount o f th e
p a id -in su rp lu s.
sta tu to ry c a p ita l.
c o n sid era tio n
In d ian a re q u ir e s
shares
V irg in ia
c o n sid e ra tio n receiv ed fo r
s h a l l be c o n s id e r e d c a p i t a l ;
shares
how ever,
th is
th at
th at
w ith o u t p a r v alu e
lik ew ise
pro v id es
w ith o u t p a r v alu e
sta te
p erm its
s u b s c r i b e r b y a g re e m e n t to pay a n amount i n a d d i t i o n
CQ
par
th an par w ith c o n sid e ra b le r e н
the c o n s id e r a tio n re c e iv e d f o r
con sid ered
the
c o n s i d e r a ti o n r e c e iv e d from s h a re s w ith o u t p ar
may b e c r e d i t e d
a ll
shares
to p a r . 68
on t h e r i g h t o f
to a s p e c i a l
F lo rid a,
than par b u t
less
the s t a t u t o r y
p o r tio n o f the
v alu e
to be e q u a l to
p re s u m a b ly when p a r s h a r e s a r e
is
par
amount - to be c a p i t a l i z e d
c a p i t a l i z e d m u st be e q u a l
It
is
the
New M e x i c o , b y i n t e r p r e t a t i o n ,
to b e
strictio n ;
the f a c t t h a t
M a r y l a n d *a n d W e s t V i r g i n i a
p ro v is io n co n cern in g
shares
d e sp ite
to
the
the
p R e fe re n c e s to th e s t a t u t e s and a d e t a i l e d d i s c u s s i o n
r e g a r d in g th e s a le o f p a r v alu e sh a re s f o r a c o n s id e r a tio n
l e s s th a n p a r w i l l be found in C h ap ter I I I .
67
c o n s id e ra tio n p aid
for shares,
be c o n s id e r e d p a i d - i n
th a t a l l th e
v alu e
ag g reg ate
th at
a g g re g a te p a r v alu e
per cen t of th e
sta tu to ry
shares
su rp lu s,
to ta l p rice
th is
to the
req u ires
v ote
th at
the
fifty
shares w ith ou t
th at
if
the
corporн
co n sid eraн
to the
shares as
Idaho,
Nevada,
Tennessee,
to
the
p a id -in
lim ita tio n s
sam e r e l a t i o n
to
to
th e s u rp lu s a l н
t o t a l o f c a p i t a l and s u r p l u s .
K ansas,
or sh areh o ld ers
c ertain
th e
in c lu d in g A rkansas,
G eo rg ia,
v a lu e be c a r r i e d
least
the
t h e same a s M i c h i g a n r e g a r d н
r e c e iv e d f o r the
c o n s i d e r a ti o n r e c e iv e d from
of course,
s h a ll in clu d e
is s u e d and a t
amount to b e a r
Rhode I s l a n d ,
the d i r e c t o r s
c ap ita l
c ap ita l.
s u rp lu s , a p o r tio n o f th e
M aryland, M in n e so ta,
sy lv an ia,
sta tu to ry
s h a r e s w i t h o u t p a r v a l u e m ay b e c a r r i e d
Many s t a t e s ,
M aine,
c o n sid era tio n r e н
and f u r t h e r p ro v id e s
re a d y accu m u lated b e a rs
D elaw are,
stip u la te
shares w ith o u t par
c o n sid era tio n receiv ed fo r
tio n receiv ed f o r
c u t,
in
of par shares
a tio n has accum ulated a
th e
a n d Io w a
of th e
in clu d ed
W isco n sin p ro v id e s
in g p a r v a lu e
p aid -in
F lo rid a
p ar v alu e
p a r i s s u e s be
M ichigan .r e q u ir e s
par v a lu e .
su rp lu s.
c o n sid e ra tio n receiv ed fo r
and th e
ceived f o r
w h ic h a d d i t i o n a l am o u n t may
C a lifo rn ia ,
Illin o is,
New J e r s e y ,
C on n ectiн
L o u isian a,
O hio,
and W ashington,
Pennн
perm it
o rd e r t h a t a p o r tio n o f the
sale
of
su rp lu s
on t h i s
sh ares w ith o u t par
acco u n t.
T here a r e ,
p riv ileg e .
G eorgia
power be g r a n t e d b y a c h a r t e r p r o v i s i o n o r
of sto ck h o ld ers
and M aine p l a c e s
the
power i n th e h an d s
68
of th e
sto c k h o ld ers,
who m ay d e l e g a t e
it
to th e board of
d ire c to rs under general or sp e cia l a c t.
an d Nevada r e q u i r e
sta te d
th at a t
lea st
the
v alu e
when s u c h s h a r e s a r e
v alu e
f o r a g i v e n common c o n s i d e r a t i o n .
n o is
c a p ita l rep re se n tin g
and M innesota
vides
o th erw ise
be c a r r i e d
in
th e
the
sta te )
amount e q u a l to t h e
c a p ita l
When s h a r e s w i t h o u t
are
issu ed ,
req u ire
t h a t .th e re m ust
to su c h s h a r e s ,
preference
sta te d
the
e n tire
e ith er
th at a ll
the
c o n sid era tio n receiv ed fo r
s h a l l be s t a t u t o r y
number o f d o l l a r s
per share
c a p i t a l and th e e x c e s s ,
p lu s.
The s t a t e
type
of p ro v isio n
Is
Im possible
am biguous
sio n .
as
c a p ita l.
w ith o u t p ar v alu e
it
circu m н
c o n s id e r a tio n be t r e a t e d
A New Y o r k c o r p o r a t i o n m a y p r o v i d e b y c h a r t e r
sio n
an
o f the s h a r e s ;
C a li f o r n ia ,. C olorado and P e n n sy lv a n ia u n d e r s i m i l a r
sta n c e s req u ire^ th a t
I lliн
su b sc rip tio n c o n tra c t proн
in re s p e c t
liq u id a tio n
w ith o u t p ar
sh a res h av in g par
preference
(except i f
to s t a t e d
th e sh a re s
issu e d w ith
latter
D elew are,
some a m o u n t m u s t b e i n c l u d н
ed in
p ar v a lu e h av in g a l i q u i d a t i o n
A rkansas,
c a p ita l,
shares
o r t h a t a named
s h a l l be c o n s id e re d
by p resu m p tio n ,
p ro v iн
sta tu to ry
w ould be p a i d - i n
surн
o f S o u th D akota l i k e w i s e h a s an a l t e r n a t i v e
t h a t may b e
to
sum m arize
and hence r e f e r e n c e
C olorado p ro v id e s
t i o n r e c e iv e d from th e
th at
sales
inclu d ed
th is
In
th e .c h a rte r;
law f o r t h e m eaning i s
s h o u l d b e made t o
If
however,
any p a r t o f th e
of shares
the d is c u s н
co n sid eraн
w ith o u t p ar v alu e
is
69
to be c o n s i d e r e d p a i d - i n
m ined by th e
noted
th at
ch arter
in th is
su rp lu s,
the amount m ust be d e t e r н
o r a n amendment t h e r e t o .
group of s t a t e s
co n sid ered p a id -in
su rp lu s
if
I t w i l l be
any amount i s
to be
th e amount m ust be s t a t e d
in the
ch arter.
F ive o th e r
s t a t e s : ; n am ely,
M assach u setts,
New M e x i c o , V e r m o n t , a n d W e s t V i r g i n i a ,
"c a p ita l?,
"ca p ita l
been m entioned
in th e
g iven h ere because
q uate a s
sto c k ,? or "sta te d
the a tte m p ts
in d ic atin g
in th e
th e type
and w ith w hich the
at d e fin itio n
in te rp retatio n
of d e fin itio n s
d o u b tfu l.
the
in ad eн
They h a v e
purpose of
th a t a re f r e q u e n tly given
the m ost b a s i c
tim e
of a llo c a tio n
su rp lu s,
fo rn ia,
I d a h o ,' L o u isia n a,
the f o llo w in g
in an
concept of c o rp o ra tio n
M innesota,
(Rhode I s l a n d m i g h t b e
co rp o ratio n s
of the
o f c e r t a i n ' am ounts
situ atio n
amount m ust be d e te rm in e d a t th e
e x ists:
to
In C a liн
and W ashington the
tim e o f i s s u a n c e
of the
in c lu d e d by i n t e r p r e t a t i o n ) ;
sta te s
Illin o is,
K ansas, M ich ig an,
d eterm in e
th e m ethod o f d i v i s i o n
shares
so
law y er and a c c o u n ta n t m ust d e a l
p a id -in
do m estic
are
sta tu to ry c a p ita l.
As t o t h e
shares
c a p i t a l ? and have
d is c u s s io n m erely f o r
a tte m p t to d eterm in e
fin an ce--th e
use th e term s
c h a p t e r , b u t no s u m m a r i z a t i o n n e e d be
t o make p r e c i s e
been in clu d ed
M isso u ri,
o f A rkansas,
P en n sy lv an ia,
issu e d f o r cash and w ith in
at
the
Del&v/are,
and Nevada m u st
tim e
o f issuance
for
s i x t y d a y s when t h e s h a r e s
70
are
i s s u e d f o r p r o p e r t y ; O hio s t i p u l a t e s
are
so ld fo r cash
the
th at
amount to he a l l o c a t e d
if
to
are
tim e o f i s s u a n c e
of th e
sto ck ,
m ust d e te rm in e
th e 'a m o u n t o r p r o p o r t i o n
ered c a p ita l.
N ew ,Jersey a llo w s
p riv ile g e w ith in
shares.
th e
payment o f an amount in
shares w ith o u t par v a lu e ;
su rp lu s.
O hio,
the d i r e c t o r s
the
to e x e rc is e
issu an c e
th is
excess
provide f o r
can be c r e d ite d
circ u m sta n ce s
t r e a t e d as p a id - in
C a lifo rn ia ,
Illin o is,
the
to
su b scrib er
su rp lu s.
K ansas,
and P e n n s y lv a n ia , have p r o v i s i o n s
Two o f t h e
n o is
co sts
and P e n n s y lv a n ia ,
allo w
th ese
sto ck a s s e s s a b le ..
L o u isian a,
d ealin g
iz a tio n and u n d e rw ritin g expensei
o u t m aking th e
allo w s
tim e o f s u b s c r i p t i o n what p o r t i o n o f th e
am o u n t was t o b e
sta te s,
so d raw n a s t o
o f the
excess o f th e c o n s id e ra tio n fo r
Under th e s e
w o u ld know a t t h e
F ive
the d i r e c t o r s
V ir g in ia , a s has b een m entioned p r e v io u s ly ,
s u b s c r i p t i o n agreem ent to be
to ta l
the
t h a t w i l l be c o n s i d н
th ir ty days a f te r
th e
p a id -in
and i f
surн
s o l d f o r p r o p e r t y whose v a l u e h a s n o t b e e n d e t e r н
m ined a t t h e
th is
shares
p aid -in
p lu s m u st be d e te r m in e d a t t h e ? tim e o f i s s u a n c e ,
shares
the
to b e
w ith organн
sta te s,
I lliн
deducted w ith н
L o u i s i a n a a n d Ohio a l l o w
s u c h c h a r g e s b u t no comment i s made c o n c e r n i n g a s s e s s m e n t s
In th e L o u isian a
u n d erw ritin g
th e b alan ce
law ;
Ohio r e q u i r e s t h a t
co st not p rev io u sly w ritte n
sh eet.
c h a r g e when i t
K ansas
arises
and Ohio a l s o
out of
the
t h e amount o f th e
o f f be c a r r ie d
on
sa n c tio n such a
non-purchase by sto c k h o ld e rs
71
as a r e s u l t o f g r a n t i n g them p r e - e m p tiv e r i g h t s .
sh areh o ld ers
to o t h e r s
fail
fo r a p rice
was o f f e r e d t o
charge
to buy the s h a r e s ,
the
not less
sto ck h o ld ers,
sta te d
the
s t o c k m ay b e
the p r ic e
a t w hich i t
C a lifo rn ia
does
t o be d e d u c te d i n d e te r m in in g
c ap ita l.
It
itse lf
is,
of course,
dangerous
of th e
a v a ila b ility
reco g n ized th a t th e re
is n o th in g of
In a llo w in g by law th e a l l o c a t i o n
c o n s i d e r a t i o n r e c e i v e d from th e
to a s p e c i a l
su rp lu s acc o u n t.
of such s u rp lu s
sale
of shares
The d a n g e r a r i s e s
fo r d iv id en d s.
of a porн
out of
or n o t used as a b a s is
c alcu latin g
a cq u isitio n
shares,
the
le g a lity
of th e
i t m ig h t be c o n s id e r e d a s p e c i a l
It
is
o th e r purposes
necessary
purposes,
re stric tio n
p lu s
type
of sta te d
p a id -in
lo sses, bu t
and u n a v a ila b le
what e x t e n t
the
for use.
sta tu tes
of
allo w p a id - in su rp lu s' to be used f o r c o r н
and
in
so. d o i n g i t m a y b e - f o u n d
s h o u l d b e p l a c e d o n t h e u s e of. t h e
o r on t h e
to th e
asid e
to d e te rm in e to
the v a rio u s s t a t e s
p o rate
set
for
of treasu ry
c a p i t a l a g a i n s t w hich m ig h t be c h a r g e d c e r t a i n
a ll
the
I f such su rp lu s
cannot be p aid out in d iv id en d s
for
issued
except th a t a reaso n ab le
f o r u n d e r w r i t i n g may b e a l l o w e d .
n o t allo w -u n d erw ritin g ch arg es
tio n
th an
th e
If
a llo c a tio n
su rp lu s
of th e
th at
p aid -in
some
surн
c o n s i d e r a t i o n from s to c k
acco u n t.о ^
о ^This p r o b le m w i l l be c o n s i d e r e d
C h a p te r V I.
in S ectio n B of
CHAPTER I I I
THE
CONSIDERATION FOR THE ISSUANCE OP SHARES
I
Purpose o f th e
ch ap ter.
th e fo llo w in g problem s?
m oney o r o t h e r w i s e ,
payment f o r
shares
c h a p te r w ill d e a l w ith
c o n sid era tio n ,
in th e
form o f
t h a t may b e r e c e i v e d b y a c o r p o r a t i o n
issued;
t h a t may be a c c e p t e d
group re s p o n s ib le
the
T his
th e amount o f t h e
in payment o f c a p i t a l
fo r th e
d eterm in atio n
in
c o n sid eratio n
sto ck ;
and the
o f the v a lu e s
to be
receiv ed .
In
the p re v io u s
c h a p t e r a t t e n t i o n was d i r e c t e d
d e t e r m i n a t i o n o f t h e m eaning o f th e
as p ro v id e d by the
er
in d e ta il
ceived
sta tu tes.
the ty p e
It
the
i s no w n e c e s s a r y t o
issuan ce
said
th at
shares
assets
is,
issu ed
In g e n e ra l,
it
d iv id en d s.
o r f o r su rp lu s
H ow ever,
may
in
c a p ita l-
j u s t what ty p e
of
a n d w h a t k i n d o f s e r v i c e s may b e r e c e i v e d m u s t b e
d eterm in ed .
v alu e
share
reн
of sto ck ,
o f a c o r p o r a t i o n may b e i s s u e d o n l y
exchange fo r a s s e t s , f o r s e r v ic e s ,
ize d --th a t
co n sid н
t h a t m ay b e
of shares
s h a r e s b o th w ith and w ith o u t p a r v a l u e .
be
the
term s t a t u t o r y c a p i t a l
and amount o f a s s e t s
in exchange fo r
to
th at
the
F urtherm ore,
is
it
secured f o r the
v alu e re c e iv e d
im pairm ent o r d i l u t i o n
ing s h a r e h o ld e r s .
i s n e c e s s a r y to
shares,
sh o u ld be
of th e
c o n s id e r the
b e c a u s e when s t o c k
su ch as
in te rests
to
is'
p re v e n t the
of the th e n e x i s t н
T his c h a p t e r w i l l expand th e f o llo w in g o u tlin e :;
S e c t i o n A. T y p e s o f A s s e t s a n d S e r v i c e s
to be R e c e iv н
ed i n Payment o f S u b s c r i p t i o n s .
S e c t i o n B. V a l u a t i o n o f A s s e t s
to be R eceiv ed f o r
S u b scrip tio n s.
S e c t i o n G. C o n s i d e r a t i o n t o b e R e c e i v e d f o r S h a r e s
w ith
Par V alue.
S e c t i o n D. C o n s i d e r a t i o n t o b e R e c e i v e d f o r S h a r e s
w ith o u t Par V alue.
S e c tio n E.
Summary.
S e c tio n
A.
Type o f A s s e t s a n d S e r v i c e s
to be R eceiv ed in
Payment o f S u b s c r i p t i o n s .
C o n stitu tio n a l p ro v isio n s r e la tiv e
assets
or serv ices
to be re c e iv e d
The c o r p o r a t i o n l a w s o f m o s t o f
the c o n s t i t u t i o n s
. ed i n payment f o r
p rovide
shares
w i l l f i r s t be g iv en to
to
the
type o f
i n payment o f s u b s c rip tio n s .
the
sta te s
and f r e q u e n t l y
t h a t c e r t a i n a s s e t s may b e a c c e p t of sto ck
the
issu ed .
C o n sid e ratio n
c o n s titu tio n a l p ro v isio n s
th at
g o v e rn su ch pay m en ts.
T h e .sta te
v isio n
th at
o f A labam a p r o v i d e s b y c o n s t i t u t i o n a l p r o н
trn o c o r p o r a t i o n s h a l l
c e p t f o r m oney,
lab o r done,
issu e
sto ck or bonds exн
or p ro p erty a c tu a lly re c e iv e d ,
74
and a l l f i c t i t i o u s
in c r e a s e s in sto c k or in d e b ted n ess s h a l l
be v o i d . ?-*- -The c o n s t i t u t i o n s o f th e s t a t e s o f Arizona,оA r k a n s a s , 3 C o lo r a d o ,1^ D e la w a r e , 5 ^ Id aho,о Kentucky,*^
L o u is ia n a ,о M i s s o u r i , ^ M ontana , 1 0 Nebraska,-*--*- N orth Dakota,-*-о
Oklahoma ,
1
13
P e n n s y l v a n i a , 1^ S outh C a r o lin a
, 15
,South D akota,16.
C o n s t i t u t i o n o f Alabama o f 1 9 0 1 . A r t . X I I . S e e . 234
2 C o n s t i t u t i o n o f A r iz o n a , A r t . XIV, S e c .
6
.
3 C o n s t i t u t i o n o f A rkansas o f 1 8 7 4 , A r t . X I I , S e c .
4 C o n s t i t u t i o n o f C o lo r a d o , A r t . 1 5 , S e c . 9 .
5 C o n s t i t u t i o n o f D e la w a r e , A r t . 9 , S e c . 3 .
6
8
.
C o n s t i t u t i o n o f I d a h o , A r t . X I, S e c . 9 .
7 C o n s t i t u t i o n o f th e Commonwealth o f K en tu ck y ,
S e c . 193.
8
C o n s tit u tio n o f L o u isia n a , 1921, A rt. X I I I , S ec. 2.
9 C o n s t i t u t i o n o f th e S t a t e o f M i s s o u r i . A r t . 1 2 .
Sec.
8
.
10
Sec.
1 0
.
11
Sec.
6
C o n s t i t u t i o n o f th e S t a t e o f Montana. A r t . XV,
C o n s t i t u t i o n o f th e S t a t e o f N eb ra sk a , A r t . X I I ,
.
12
C o n s t i t u t i o n o f th e S t a t e o f N orth D a k o ta , A r t . VIX
S ec. 138.
13 C o n s t i t u t i o n o f th e .S t a t e o f Oklahoma, A r t . IX,
Sec. 3 9 .
?*?4 C o n s t i t u t i o n o f th e Commonwealth o f P e n n s y l v a n i a ,
.
A
r t . XVI, S e c . 7 .
1873
15 C o n s t i t u t i o n o f th e S t a t e o f S o u th C a r o l i n a , 1 8 9 5 ,
A r t . IX , S e c . 1 0 .
16 C o n s t i t u t i o n o f th e S t a t e o f S ou th D a k o ta , A r t . 1 7 ,
Sec. 8 .
75
T e x a s , 1 7 and Utah 1 8 f o l l o w i n e s s e n t i a l s
c e r ta in a d d itio n s.
t h i s p r o v i s i o n w it h
C o lo r a d o , Id a h o , and Montana a l l o w th e
i s s u a n c e o f s t o c k f o r s e r v i c e s p e r fo r m e d .
D elaw are a l l o w s
th e c o r p o r a t i o n to r e c e i v e l e a s e s i n payment f o r s e c u r i t i e s
issu e d .
Oklahoma adds th e w ords:
th e par v a lu e
.
. . .**
. . .
t o th e amount o f
T h is id e a o f par v a lu e i s a l s o found
i n th e C o n s t i t u t i o n o f th e S t a t e o f N e b r a s k a . w h ich r e a d s :
No c o r p o r a t i o n s h a l l be p e r m it t e d to i s s u e s t o c k or
bonds e x c e p t f o r an e q u i v a l e n t i n money p a id o r la b o r
d o n e , o r p r o p e r t y a c t u a l l y r e c e i v e d and a p p l i e d to th e
p u r p o se f o r w h ich su c h c o r p o r a t i o n was c r e a t e d , and
n e i t h e r la b o r nor p r o p e r t y s h a l l be r e c e i v e d i n payment
o f s t o c k o r bond s a t a g r e a t e r v a l u e th a n th e a c t u a l
v a l u e a t t h e tim e s a i d l a b o r was done o r p r o p e r t y a c t u a l н
l y d e l i v e r e d , and a l l f i c t i t i o u s i n c r e a s e o f s t o c k o r
i n d e b t e d n e s s s h a l l be v o i d . A l l s t o c k s h a l l have a f a c e
par v a l u e . . .
.1 9
This s e c t i o n , i t w i l l be n o t e d , p r o v id e s f o r th e v a l u a t i o n
o f a s s e t s , and i n a d d i t i o n r e q u i r e s t h a t a s s e t s r e c e i v e d
m ust be a p p l i e d to c o r p o r a t e p u r p o s e s .
h ave par v a l u e .
The s t o c k a l s o must
K entucky h a s th e same i d e n t i c a l w o rk in g ,
e x c e p t t h a t t h e s e n t e n c e c o n c e r n in g s t o c k v a l u a t i o n i s o m it н
ted .
S outh C a r o lin a f o l l o w s th e Alabama C o n s t i t u t i o n , b u t
adds one word w hich c h a n g es th e m ea n in g ; th e s e c t i o n r e a d s :
17
C o n s t it u t io n o f th e S ta te o f T ex a s, A r t. X II, S e c .6 .
C o n s t i t u t i o n o f U t a h , A r t. 1 2 , S e c . 5 .
1о C o n s t i t u t i o n o f th e S t a t e o f N e b r a s k a . A r t . X I I ,
Sec.
6
.
-
n . . . . l a b o r d o n e , o r money o r p r o p e r t y a c t u a l l y r e c e i v e d
or su b scrib e d . . . . * *
There i s c o n s i d e r a b l e d i f f e r e n c e
b e tw e e n i s s u i n g s t o c k f o r a s s e t s r e c e i v e d r a t h e r t h a n f o r
a ssets
t h a t have b e e n m e r e ly s u b s c r i b e d . ,
p r o v i s i o n i s worded s l i g h t l y d i f f e r e n t
V i r g i n i a , PO whose
from th e above
g r o u p , a l l o w s s t o c k t o be i s s u e d f o r m oney, p r o p e r t y , or
se r v ic e s.
Those s t a t e s h a v in g c o n s t i t u t i o n a l p r o v i s i o n s
f r e q u e n t l y su p p le m e n t t h e s e r e q u ir e m e n t s w it h more s p e c i f i c
r e g u l a t i o n i n th e c o r p o r a t i o n la w , and t h o s e s t a t e s n o t h a v н
i n g - c o n s t i t u t i o n a l p r o v i s i o n s u s u a l l y g o v e r n t h e payment o f
s h a r e s b y s t a t u t o r y e n a c tm e n t w hich a r e now to be c o n s id e r e d .
S ta tu to r y p r o v isio n s r e l a t i v e
to t h e ty p e o f a s s e t s
and s e r v i c e s to be r e c e i v e d i n payment o f s u b s c r i p t i o n s . In
th e s t a t u t o r y r e q u ir e m e n ts r e g a r d in g payment o f s u b s c r i p н
t i o n s t h e r e i s a c e r t a i n g e n e r a l p e r s i s t e n c e as t o ty p e b u t
a w ide v a r i a t i o n i n d e t a i l s .
The U niform B u s in e s s C orp oraн
t i o n A ct p r o v id e s t h a t , ^ S u b s c r i p t i o n s f o r s h a r e s may be
made p a y a b l e , a s p r o v id e d i n s u b d i v i s i o n I I I and IV o f t h i s
s e c t i o n , w it h c a s h , o t h e r p r o p e r t y , t a n g i b l e o r i n t a n g i b l e ,
o r w i t h n e c e s s a r y s e r v i c e s a c t u a l l y r e n d e r e d t o th e c o r p o r a н
t i o n . T h i s
s e c t i o n i s f o l l o w e d c l o s e l y b y th e la w s o f
C o n s t it u t io n o f th e S ta t e o f V i r g i n i a . A r t. X II,
Sec.
167.
U niform B u s i n e s s C o r p o r a t io n A c t .
S e c . 15 ( I I ) .
'7 7
Id a h o ,
22
L o u i s i a n a , 2 5 and W a sh in g to n .2 ^
It is sig n ific a n t
t h a t th e Idaho la w adds to th e above th e s e n t e n c e ; "This
s h a l l n o t p r e v e n t th e c o r p o r a t i o n c o n t r a c t i n g to pay f o r
f u t u r e s e r v i c e s i n s t o c k and i s s u i n g th e s t o c k u n d er su ch
c o n t r a c t a s th e s e r v i c e s s h a l l a c t u a l l y be r e n d e r e d .
?25
W hile th e w o rd in g v a r i e s w i d e l y , the c o n c e p t em bodied i n
th e U niform B u s i n e s s C o r p o r a tio n A ct i s fo u n d i n the la w s
o f many s t a t e s .
In g e n e r a l th e s u b s c r i p t i o n o r th e p u r c h a se
p r i c e o f the c a p i t a l s t o c k , b o th par v a l u e s h a r e s and s h a r e s
w it h o u t p a r - v a l u e ,
( a lt h o u g h i n some s t a t e s
t h i s I s b y two
s e p a r a t e s e c t i o n s ) may be p a id f o r w h o l l y o r i n p a r t b y c a s h ,
by l a b o r d o n e , b y s e r v i c e s a c t u a l l y r e n d e r e d , b y p e r s o n a l
p r o p e r ty , or by r e a l, p r o p e r ty .
T h is i s
th e b a s i c l i m i t a н
t i o n o f th e s t a t e s o f Alabama , 2 5 C a l i f o r n i a , 2 ^ D e la w a r e ,2 о
22
Idaho C ode. 1 9 3 2 . T i t . 2 9 , Ch. I , S e c . 2 9 - 1 1 9 .
p*z
G e n e ra l C o r p o r a t io n Laws o f t h e S t a t e o f L o u i s i н
a n a , 1 9 3 8 . S e c . 15 ( I I ) .
^
Laws Concerning: P r i v a t e C o r p o r a t i o n s . S e c . 3 8 0 3 -
25
Idaho C ode. 1 9 3 2 . T i t . 2 9 , Ch. I , . S e c . 2 9 - 1 1 9 .
15 ( 2 ) .
2 5 D o m e stic C o r p o r a tio n Laws o f Alabama, 1 9 2 4 . Ch.
274, A r t . 4 , S ec. 6990.
2 ^ P e e r i n g 1s C i v i l Code o f th e S ta t e o f C a l i f o r n i a ,
1 9 3 7 . D iv . I , P t . IV, T i t . I , Ch. I l l , S e c . 2 9 8 .
2о G e n e ra l P r o v i s i o n s R e s p e c t i n g D o m e stic and F o r e ig n
C o r p o r a t io n s C o n ta in e d i n the G e n e ra l C o r p o r a t io n Laws o f
t h e S t a t e o f D e la w a r e . a s amended to 1 9 3 7 . Ch. 6 5 , A r t. I ,
Sec. 14.
78
F l o r i d a , 20 G e o r g i a ,30 I l l i n o i s , 31 I n d i a n a , 32 K a n s a s ,33
M a in e ,34 M a s s a c h u s e t t s , 33 M ic h ig a n ,33 M i n n e s o t a ,3 ^ M i s s i s н
s i p p i , 30 M i s s o u r i , 30 N ev a d a ,40 New H a m p sh ire,41
20
Compiled G en eral Laws of- F l o r i d a . 1 9 2 7 . T i t . I l l ,
Ch. I I , A r t . 3 , S e c . 5 9 8 5 .
3 0 A c ts and R e s o l u t i o n s o f th e G en era l A ssem b ly o f
S t a t e o f G e o r g ia . 1 9 3 7 - 1 9 3 8 . P t . I , T i t . I , S e c . 12 amendн
in g S e c . 2 2 - 3 0 8 o f th e Code o f G e o r g ia . 1 9 3 5 .
31
The B u s i n e s s
32
C e r t a in Laws
C o n c er n in g C o r p o r a tio n s f o r
2 1 5 , P t. I I , A rt. 1 , S e c . 6 ( e ) .
1 9 3 7 . Ch.
33
C o r p o r a t io n A c t . 1 9 5 7 . S e c . 1 8 .
P r o fit.
S t a t e o f K a n sa s, S e s s i o n Laws. 1 9 3 9 . Ch. 1 5 2 ,
Sec. 40.
34
S t a t e o f M aine, P r o v i s i o n s o f Law i n F o rce R e l a t н
in g to B u s in e s s C o r p o r a t i o n s . 1 93 0 a s amended. Ch. 5 6 ,
Sec. 18.
T? K
G en era l Laws o f th e Commonwea1 th o f M a s s a c h u s e t t s .
T e r c e n te n a r y E d i t i o n , 1 9 3 2 . T i t . XX II, Ch. 1 5 6 , S e c . 1 6 .
S t a t e o f M ic h ig a n , G en eral C o r p o r a t io n Law s, 1 9 3 8 .
Sec. 21.
*27
M in n eso ta B u s i n e s s C o r p o r a t io n A c t , 1 9 3 3 , a s a mended t o 1 9 3 5 . Ch. 3 0 0 , S e c . 1 4 .
30
Corpora t i o n s , Ch. 100 o f th e M i s s i s s i p p i Code o f
1 9 5 0 a s amended th ro u g h 1 9 3 5 . A r t . I , S e c . 4 1 3 2 .
^ G e n e r a l C o r p o r a tio n Laws and M i s c e l l a n e o u s P r o v i н
s i o n s o f th e S t a t e o f M i s s o u r i . R e v is e d S t a t u t e s o f 1 9 2 9 .
and amendments th r o u g h 1 9 3 3 . Ch. 3 2 , A r t . 1 , S e c . 4 5 4 6 .
40
S t a t e o f N evada, D o m e stic and F o r e ig n C o r p o r a t io n
Laws, a s amended t o 1 9 3 7 , S e c . 1 2 .
B u s i n e s s C o r p o r a t io n Law and R e g u l a t i o n o f F orн
e ig n C o r p o r a tio n s, 1937. S e c . 3 1 .
4 1
79
New J e r s e y , ^2 jjew Y ork , 4 3 N orth C a r o l i n a , 4 4 N orth D a k o ta , 4 5
P e n n s y l v a n i a , 4 о Rhode I s l a n d , 4 ^ S ou th C a r o l i n a , 4 0 T en n esн
s e e , 4 9 T exas,
50
Vermont ,
51
V ir g in ia ,
52
West V i r g i n i a , 5 3
40
The G e n e ra l C o r p o r a t io n Law o f New J e r s e y , i n c l u d н
i n g a l l su p p le m e n ts and amendments t h e r e t o to t h e end o f th e
L e g i s l a t i v e S e s s i o n o f 1 9 3 8 . T i t . 1 4 , Ch. 3 , S e c . 1 4 : 3 - 9 .
E x t r a c t s from th e S to c k C o r p o r a t io n Law, G en era l
C o r p o r a t io n Law, Tax Laws, E x e c u t i v e Law, and P e n a l , E d i t i o n
o f 1 9 3 8 . S t o c k C o r p o r a t io n A c t . A r t . 7 , S e c . 6 9 .
S t a t e o f N orth C a r o l i n a , C o r p o r a t io n Laws. Ch. 22:
o f C o n s o l i d a t e d S t a t u t e s o f 1 9 3 5 . Ch. 2 2 , A r t . 5 , S e c . 1 1 5 7 .
44
45
C o r p o r a t io n Laws o f th e S t a t e o f N orth D a k o ta :
G e n e ra l and C o o p e r a t i v e . R e v is e d to J u l y 1 , 1925 and s u p p l e н
m ents th r o u g h 1 9 3 7 . Ch. 1 2 , S e c . 4 5 2 8 .
45
Purdon1s P e n n s y lv a n ia Sta t u t e s . A n n o ta te d Permanн
e n t E d i t i o n , 1 9 3 8 . T i t . 1 3 - 1 5 , T i t . 1 5 , Ch. 49B , A r t . V I,
S e c . 2 8 5 2 -6 0 3 A .
4 ^ G e n e ra l C o r p o r a t io n Law o f th e S t a t e o f Rhode
I s l a n d , a s amended 1 9 3 2 . Ch. 2 4 8 , A r t . I I , S e c . 29 and 3 1 .
Code o f Laws o f S ou th C a r o l i n a . 1 9 3 2 . T i t . 3 7 , Ch.
A r t . 1 , S e c . 7 6 9 2 , and A r t . 2 , S e c . 7 7 2 8 .
4 0
153,
49
D o m e stic and F o r e ig n C o r p o r a t io n Laws o f
1 9 3 6 . Ch. 5 , A r t . I , S e c . 3 7 2 5 .
T en n essee,
^ V ernon 1s Texas S t a t u t e s , 1936 C e n t e n n ia l E d i t i o n .
T i t . 3 2 , Ch. 2 , S e c . 1 3 0 8 .
c*l
P u b lic Laws o f t h e Sta t e o f Vermont Hr la t i n g to
C o r p o r a t i o n s . 1 9 3 4 . Ch. 2 3 9 , S e c . 5 8 3 0 .
C O
^ V i r g i n i a C o r p o r a t io n Law, w i t h a l l amendments t o
June 2 1 , 1 9 3 8 , Ch. 1 4 7 , S e c . 3 7 8 8 .
? C o r p o r a t io n Law o f West V i r g i n i a . a d o p te d by
L e g i s l a t u r e , S p e c i a l S e s s i o n , March 1930 w it h amendments t o
d a t e o f i s s u e , J u ly 1 , 1 9 3 5 . Ch. 3 1 , A r t . 1 , S e c . 2 8 .
80
W isc o n sin ,о ^ and Wyoming^о as w e l l a s t h a t o f I d a h o , L o u i s i н
a n a , and W ash in gton m e n tio n e d a b o v e .
To t h i s g e n e r a l c o n c e p t c e r t a i n s t a t e s add im p o r ta n t
f e a t u r e s w h ich a r e s i g n i f i c a n t .
C a lifo r n ia о о a l l o w s th e
c a n c e l l a t i o n o f a d e b t or s e c u r i t y to be c o n s i d e r e d payment
fo r sto ck .
Maineо^ and Wyomingоо m e n tio n s p e c i f i c a l l y t h a t
m in e s , m a n u f a c t o r i e s , and o t h e r n e c e s s a r y p r o p e r t y may be
p u r c h a se d b y s t o c k i s s u e s ; f u r t h e r m o r e , t h e s t o c k o f any
company owning m in in g , m a n u f a c t o r ie s o r p r o d u c in g n e c e s s a r y
m a t e r i a l s may b e a c q u ir e d th r o u g h th e i s s u a n c e o f s h a r e s .
New Jerseyоо and W isconsinоо s a n c t i o n th e p u r c h a se o f th e
s t o c k o f any o t h e r company, n e c e s s a r y o r d e s i r a b l e , by means
o f sto ck iss u a n c e .
о^ S t a t u t e o f W is c o n s in R e l a t i n g t o P r i v a t e C orporaн
t io n s , 1937. S ec. 1 8 2 .0 6 .
о^ S e s s i o n Laws o f Wyoming. 1 9 3 9 . Ch. 6 2 , S e c . 17
am ending Ch. 2 8 , A r t . 3 , S e c . 2 8 - 3 0 1 .
оо P e e r i n g 1s C i v i l Code o f th e S t a t e o f C a l i f o r n i a .
1 9 3 7 . D iv . 1 , P t . IV, T i t . 1 , Ch. I l l , S e c . 2 9 8 .
о^ S t a t e o f M aine, P r o v i s i o n s o f Law i n F orce R e l a t н
i n g to B u s i n e s s C o r p o r a t i o n s . 1930 a s amended. Ch. 5 6 , S e c . 18.
5 8 R e v is e d S t a t u t e s o f t h e S t a t e o f Wyoming. 1 9 3 1 .
Ch. 2 8 , A r t . I , S e c . 2 8 - 1 2 8 .
оо The G e n e ra l C o r p o r a t io n Law o f New J e r s e y , i n c l u d н
i n g a l l su p p le m e n ts and amendments t h e r e t o , t o th e en d o f
th e L e g i s l a t i v e S e s s i o n o f 1 9 3 8 . T i t . 1 4 , Ch. 3 , S e c . 1 4 : 3 - 9 .
оо S t a t u t e s o f W is c o n s in R e l a t i n g to P r i v a t e C orporaн
t io n s . 1937. S e c . 1 8 2 .0 6 .
81
D e la w a r e ,6 -*- K a n s a s ,6 о N evada ,
65
and N orth C a r o lin a 6 4
i n s e r t th e word l e a s e s i n th e g e n e r a l s t a t e m e n t .
setts,
65
New H am p sh ire ,
66
M assachuн
and N orth C a r o l i n a 6 7 add th e word
" e x p e n s e s " and New Hampshire a l s o appends t h e p h r a se " r i g h t s
and f r a n c h i s e s , g o o d w i l l , and p a t e n t r i g h t s . "
Vermont6о i n н
c l u d e s r i g h t s , f r a n c h i s e s , m a c h in e r y , m e r c h a n d is e , h i l l s r e н
c e iv a b le , stock , l e a s e s , p a te n ts , g o o d w ill, e t c .
V ir g in ia 6^
to be i n c l u s i v e m e n tio n s l e a s e s , o p t i o n , m i n e s , m in e r a l
r i g h t s , p a t e n t s , r i g h t s o f w ay, e a s e m e n t s , and c o n t r a c t s .
61 G e n e r a l P r o v is io n s R e s p e c t i n g Domes t i c and Fore ig n
C o r p o r a t io n s c o n t a in e d i n t h e G e n e ra l C o r p o r a t io n Laws o f
th e S t a t e o f D e la w a r e , a s amended to 1 9 3 7 . Ch. 6 5 , A r t . I ,
Sec. 14.
40.
62 s t a t e o f K a n sa s, S e s s i o n Laws, 1 9 3 9 . Ch. 1 5 2 , S e c .
?
-----------------------------
63 S t a t e o f N evada, D o m e stic and F o r e ig n C o r p o r a tio n
Laws, as amended t o 1 9 3 7 . S e c . 1 2 .
64 s t a t e o f N orth C a r o l i n a , C o r p o r a t io n Laws, Ch. 22
o f th e C o n s o lid a t e d S ta t u t e s o f 1955^ Ch. 2 2 , A r t . 5 , S e c .
1157.
63 G e n e ra l Laws o f t h e Cornmonwea1 t h o f M a s s a c h u s e t t s ,
T e r c e n te n a r y E d i t i o n , 1 9 3 2 . T i t . X X II, Ch. 1 5 6 , S e c . 1 6 .
63 B u s in e s s C o r p o r a t io n Law and R e g u l a t i o n o f F o r e ig n
C o r p o r a tio n s, 1937. S e c . 3 1 .
37 s t a t e o f N orth C a r o l i n a , C o r p o r a tio n Laws, Ch. 22
o f t h e C o n s o l i d a t e d S t a t u t e s o f 1 9 5 5 . Ch. 2 2 , A r t . 5A, S e c .
1 1 67 ( b n
p u b l i c Laws o f t h e S t a t e o f Vermont R e l a t i n g to
Corpora t i o n s . 1 9 3 4 . Ch. 2 3 9 , S e c . 5 8 3 0 .
68
62 V i r g i n i a C o r p o r a t io n Law, w it h a l l amendments to
J u n e, 2 1 , 1 9 3 8 .
Ch. 1 4 7 , S e c . 3 7 8 8 .
82
Florida*'7о p e r m it s th e i s s u a n c e o f . s t o c k f o r money o n l y , unн
l e s s p r o v id e d o t h e r w i s e i n th e c h a r t e r , and i f s o p r o v id e d ,
th e g e n e r a l p r o v i s i o n above a p p l i e s .
The l i m i t a t i o n r e g a r d н
in g a c c e p t a n c e o f c a s h i s fo u n d i n T e n n e s s e e ^ w h ich p r o н
v i d e s t h a t f o r m a n u fa c tu r in g and m in in g com panies n o t h in g
b u t c a s h i s t o be t a k e n i n payment o f any p a r t o f th e c a p i н
t a l s t o c k , w it h th e e x c e p t i o n t h a t la n d may b e ta k e n a t i t s
f a i r c a s h v a l u e , and p a t e n t s may be a c c e p t e d .
For com panies
o t h e r th a n m a n u fa c tu r in g and m in in g com p an ies th e g e n e r a l
p r o v isio n a p p li e s .
K entucky 172 r e q u i r e s p r e f e r r e d s t o c k to
be i s s u e d f o r c a s h o r i t s e q u i v a l e n t .
M in n eso ta q u a l i f i e s
th e g e n e r a l i t y o f th e p r o v i s i o n b y i n c l u d i n g th e p h r a se "no
s h a r e s s h a l l b e a l l o t t e d e x c e p t i n c o n s i d e r a t i o n o f c a s h or
o th er p rop erty . . . .
r e c e i v e d o r to b e r e c e i v e d
or se r - .
v i c e s r e n d e r e d o r to be r e n d e r e d . " ' 175 Whether t h e s e p h r a s e s
would a l l o w s t o c k to b e i s s u e d p r i o r to r e c e i p t o f v a l u a b l e
c o n s i d e r a t i o n i s n o t known, b u t , b y i n t e r p r e t a t i o n from a n н
o t h e r s e c t i o n , s h a r e s , u n l e s s th e s u b s c r i p t i o n a greem en t
p r o v i d e s o t h e r w i s e , s h a l l be i s s u e d o n l y when p a id f o r .
>74
7 0 C om piled G en era l Laws o f F l o r i d a . 1 9 2 7 .
T it. I I I .
Ch. I I , A r t . 3 , S e c . 5 9 8 5 .
7 ^ D o m e stic and F o r e ig n C o r p o r a t io n Laws o f T e n n e s se e .
1 9 3 6 . Ch. 5 , A r t . I , S e c . 3 8 7 5 , and S e c . 3 8 8 1 .
7^ C a r r o l l *s K en tu ck y S t a t u t e s , A n n o ta te d B a l w i n ? s
1936 E d i t i o n . Ch. 3 2 , A r t . I , S e c . 564 ( 1 ) .
175 M in n eso ta B u s i n e s s C o r p o r a t io n A c t ,
1933 a s amendн
ed t o 1 9 3 5 7 ?ChT"5Ua,"Sec: 14 T l ) .
------7^ lb i d . . S e c . 16 (V II) and s e e a l s o S e c . 17 ( I ) .
85
Some o f th e o t h e r s t a t e s a r e n o t a s s p e c i f i c as t h o s e
a b o v e ; f o r e x a m p le , C o n n e c t ic u t ^7 5 io w a ,
78
M aryland ,
77
and
O h io17о p r o v id e f o r t h e i s s u a n c e o f s h a r e s i n r e t u r n f o r money
o r c o n s i d e r a t i o n o t h e r th an m oney.
C o lo r a d o , 7 9 Montana ,
80
and New M e x ico 8 1 a llo w , th e i s s u a n c e o f s t o c k f o r money or
p r o p e r t y i n c l u d i n g m in e s , m a n u f a c t o r i e s and o t h e r p r o p e r t y .
New M exico a l l o w s s t o c k i n m in in g o r m a n u fa c tu r in g com p anies
to be p u r c h a se d w i t h s t o c k .
O regon8^ and U tah 8 8 p e r m it th e
i s s u a n c e o f s t o c k f o r money o r p r o p e r t y , Oregon a d d in g th e
p h r a se " s t o c k i n o t h e r com p an ies.'*
I t s h o u ld be n o t i c e d
t h a t t h e s e s t a t u t e s do n o t m e n tio n i s s u a n c e o f s t o c k f o r
_
7 ^ C o r p o r a t io n haws o f th e S ta t e o f C o n n e c t i c u t , Reн
v i s e d 1 9 3 7 . Ch. 1 9 1 , P t . IB , S e c . 2 5 ; Ch. 1 9 1 , P t . IF p ,
S e c . 4 6 ; and Ch. 1 9 1 , P t . IP 3 , S e c . 8 8 .
Code o f Io w a, 1 9 3 5 . T i t . XIX, Ch. 3 8 5 , S e c . 8 4 0 9 ,
and S e c . 8 4 1 3 .
76
7 7 Laws o f Maryland R e l a t i n g
to B u s i n e s s C o r p o r a t io n s ,
A n n o ta te d T w e lf t h E d i t i o n , 1 9 3 7 . .A r t . 2 3 , S e c . 4 3 .
G e n e ra l and F o r e ig n C o r p o r a t io n A c t s o f th e S ta t e
o f O h io , A n n o ta te d 1 9 3 9 . T i t . IX , D iv . I , Ch. 1 , S e c . 8 6 2 3 10 and S e c . 8 6 2 3 - 1 7 .
79
C o r p o r a t io n Laws. r e v i s e d and amended t o O c to b er 1,
1 9 3 7 . Ch. 4 1 , A r t . 1 , S u b d iv . 1 , S e c . 13 and 1 2 e .
80
R e v is e d Codes o f M ontana, 1 9 3 5 . Ch. 1 7 , S e c . 5 9 7 0 .
8 1 C o r p o r a t io n Laws o f t h e S t a t e o f New M e x ic o , 1 9 2 8 .
Ch. I I , A r t . I , S e c . 81 and 8 2 .
Oregon C o r p o r a t io n L aw s, 1 9 3 6 . T i t . XXV, Ch. I I ,
S e c . 2 5 - 2 1 8 and S e c . 2 5 - 2 2 7 .
R e v is e d S t a t u t e s o f U t a h . i 9 3 3 . T i t . 1 8 , Ch. 2 ,
S e c . 1 8 - 2 - 5 and S e c . 1 8 - 2 - 7 .
84
I
la b o r d o n e j h o w e v e r , th e c o n s t i t u t i o n s o f C o lo r a d o , Montana,
-
-
and U tah do a l l o w th e i s s u a n c e o f s t o c k f o r l a b o r done and
b y s t a t u t e C olorad o a l l o w s s h a r e s w it h o u t par v a l u e to be
iss u e d fo r s e r v ic e .
Columbia
04.
The r e q u ir e m e n ts i n th e D i s t r i c t o f
r e g a r d in g th e k in d o f a s s e t s
t h a t may be r e c e i v e d
f o r s t o c k a r e u n c e r t a i n and n o t c o n c l u s i v e , b u t p r o b a b ly
t h e y may be . i n t e r p r e t e d as a l l o w i n g s h a r e s to be i s s u e d f o r
money o r p r o p e r t y .
I t m ig h t be m e n tio n e d b e f o r e l e a v i n g t h i s s u b j e c t
t h a t M a s s a c h u s e tts ,о о M ichigan,оо and Tennesseeо"^ have a
f e a t u r e r e g a r d i n g s u r p l u s t h a t i s r a t h e r u n u s u a l.
The
M ic h ig a n la w r e a d s a s f o l l o w s :
S h a res o f c a p i t a l s t o c k s h a l l be i s s u e d o n l y f o r
money, o r o t h e r p r o p e r t y , r e a l o r p e r s o n a l , t a n g i b l e or
i n t a n g i b l e , a c t u a l l y conveyed or t r a n s fe r r e d to th e c o r н
p o r a t i o n f o r i t s u s e and l a w f u l p u r p o s e s , or i n i t s
p o s s e s s i o n a s s u r p lu s o r f o r l a b o r o r s e r v i c e s a c t u a l l y
r e n d e r e d t o t h e c o r p o r a tio n .о о
The m ean ing o f th e p h r a s e ,
n o t known.
? i n i t s p o s s e s s i o n a s surplus** i s
The e n t r y s h o u ld be a d e b i t to an a s s e t a c c o u n t
S e e Code o f Laws f o r th e D i s t r i c t o f C olu m b ia.
1 9 2 8 . T i t . ~ 5 , Ch. 1 , S e c . 4 .
о4
8 о G en era l Laws o f t h e Commonwea1 t h o f M a s s a c h u s e t t s .
T e r c e n te n a r y E d i t i o n , 1 9 3 2 . T i t . X X II, Ch. 1 5 6 , S e c . 1 6 .
оо S t a t e o f M ic h ig a n , G en era l C o r p o r a t io n Laws. 1 9 3 8 .
Sec. 21.
о^ D o m e stic and F o r e ig n C o r p o r a t io n Laws o f T e n n essee .
1 9 3 6 . Ch. 5 , A r t . I , S e c . 3 7 2 5 .
оо S t a t e o f M ic h ig a n , G en era l C o r p o r a t io n Laws. 1 9 3 8 .
Sec. 21.
85
and a c r e d i t to t h e c a p i t a l s t o c k .
I t i s t r u e t h a t th e a -
mount c r e d i t e d t o t h e c a p i t a l s t o c k a c c o u n t m ig h t n o t be
e q u a l t o th e d e b i t to t h e a s s e t a c c o u n t s i n c e some o f th e
c o n t r i b u t i o n m ig h t be e n t e r e d i n th e p a i d - i n s u r p lu s a c c o u n t.
N e v e r th e le ss ,
th e p h r a s e ,
11
i n i t s p o s s e s s i o n a s s u r p l u s , ??
w ould h a r d l y be u s e d to i n d i c a t e t h e c r e a t i o n o f a p a i d - i n
s u r p lu s.
S e c tio n
B.
V a lu a tio n o f A s s e ts
to be R e c e iv e d f o r S u b s c r i p t i o n s
V a lu a t io n o f c o n s i d e r a t i o n o t h e r th an money r e c e i v e d
i n payment o f s u b s c r i p t i o n s .
C o n c er n in g th e v a l u a t i o n o f
c o n s i d e r a t i o n o t h e r th a n c a s h , - - i . e . ,
p r o p e r t y , r e a l and
p e r s o n a l , t a n g i b l e and i n t a n g i b l e and s e r v i c e s , - - t h a t may
b e r e c e i v e d i n payment f o r s t o c k , th e g e n e r a l r u l e i s
th a t
t h e v a l u a t i o n p l a c e d on su ch a s s e t s by t h e boatfd o f d i r e c t н
ors
(so m e tim e s b y t h e b o a rd o f d i r e c t o r s o r s h a r e h o l d e r s ) ,
i n th e a b s e n c e o f f r a u d or n e g l i g e n c e , w i l l be u p h e ld b y th e
c o u r t s .о ^ S h a r e s so i s s u e d w i l l be c o n s i d e r e d to be f u l l y
89 po r exam ple s e e th e s t a t u t e s o f A r k a n s a s, C a l i f o r н
n i a , C o n n e c t i c u t , D e la w a r e , F l o r i d a , G e o r g ia , I n d i a n a , Idahcv
I l l i n o i s , Iow a, K a n sa s, K en tu ck y , L o u i s i a n a , M aine, Maryland,
M ic h ig a n , N evada, New J e r s e y , New M e x ic o , New Y ork , N orth
C a r o l i n a , O h io , O regon , S ou th D a k o ta , T e n n e s s e e , U ta h ,
V erm ont, V i r g i n i a , W a sh in g to n , and W is c o n s in .
86
p a id s t o c k and n o t l i a b l e
to f u r t h e r c a l l .
and e n d e a v o r in g to make more s p e c i f i c
s t a t u t e s u se v a rio u s p h r a se s.
In q u a l i f y i n g
t h e word '?v a l u e '1 th e
The c o n c e p t o f " f a i r v a l u e to
t h e c o r p o r a t i o n i n m o n e ta r y term s" i s u s e d b y C a lifo r n ia о о
and Minnesota;о-*- ohioо^ and West V irg in iaо о u s e th e words
" f a i r v a l u e . " The term " f a i r v a lu e " o r " f a i r v a l u a t i o n " i s .
u s e d when s p e a k in g o f par v a l u e s h a r e s b y th e s t a t u t e s o f
I d a h o , L o u i s i a n a , о 5 P en n sy lv a n ia ,о о and W a sh in g to n . о 17
Utahоо u s e s t h e words " f a i r c a s h v a lu e " and Oregonоо u s e s
P e e r i n g ^ C i v i l Code o f t h e S t a t e o f C a l i f o r n i a ,
1 9 3 7 . D Iv . 1 , P t . IV, T i t . 1 , Ch. I l l , S e c . 3 0 0 a .
91 M in n eso ta B u s i n e s s C o r p o r a t io n A c t . a s amended to
1 9 3 5 . Ch. 3 0 0 , S e c . 14 ( i l ) .
92
G e n e r a l and F o r e ig n C o r p o r a t io n A c t s o f th e S t a t e
o f O h io , A n n o ta te d 1 9 3 9 . T i t . IX, D iv . I , Ch. 1 , S e c . 8 6 2 3 -1 7 .
оо C o r p o r a t io n haws o f West V i r g i n i a . a d o p te d by
L e g i s l a t i v e S p e c i a l S e s s i o n , March 1930 w it h amendments to
d a t e o f I s s u e , J u l y , 1 9 3 5 . Ch. 3 1 , A r t . 1 , S e c . 2 8 .
94
Idaho C ode. 1 9 3 2 . T i t . 2 9 , Ch. 1 , S e c . 2 9 - 1 1 9 .
оо G e n e r a l C o r p o r a t io n Laws o f th e S t a t e o f L o u i s i н
ana , 1 9 3 8 . S e c . 1 5 .
9 о Purdon* s P e n n s y lv a n ia S t a t u t e s . A n n o ta te d Permanн
e n t E d i t i o n , 1 9 3 8 . T i t . 1 3 - 1 5 . T i t . 1 5 , Ch. 49b A r t . VI,
S ec. 2852-603.
Q*7 Laws C o n c er n in g P r i v a t e C o r p o r a t i o n s . S e c . 3 8 0 3 -1 5 .
9 о R e v is e d S t a t u t e s o f U t a h . 1 9 3 3 . T i t . 1 8 , Ch. 2 ,
Sec. 1 8 -S -5 .
99
Oregon C o r p o r a t io n Law s. 1 9 3 6 . T i t . XXV, Ch. I I .
S ec. 25-227.
87
th e same words a p p ly i n g to s h a r e s w it h o u t par v a l u e .
The -
Maryland,-*-0о Texas,-*-0 -*- and D i s t r i c t o f C olum bia1 0^ s t a t u t e s
c o n t a i n th e words ?a c t u a l v a l u e ? and- C o n n e c t i c u t 1 0 3 u s e s th e
same p h r a se when d i s c u s s i n g t h e i s s u a n c e o f s h a r e s w it h o u t
par v a l u e .
The id e a i s
e x p r e s s e d b y th e words ?a c t u a l l y
w o rth i n money? i n th e s t a t u t e o f V erm ont . 1 0 ^7 N orth Dakota -*0 0
and W is c o n s in 1 0 6 r e q u i r e t h a t t h e p r o p e r t y be v a lu e d a t i t s
? tr u e money v a l u e . ?
F lo r id a
"
I07
u s e s th e p h r a se ? j u s t v a l u a -
t i o n ? ; Alabama 108 r e q u i r e s t h a t t h e p r o p e r t y be ta k e n a t i t s
100
Laws o f Maryland R e l a t i n g to B u s i n e s s C o r p o r a tio n s,
A n n o ta te d , T w e lfth E d i t i o n , 1 9 3 7 . A r t . 2 3 , S e c . 3 9 ( 2 ) and
4 1 (9 ).
V ernon 1s Texas S t a t u t e s . 1936 C e n t e n n ia l E d i t i o n .
T i t . 3 2 , Ch. 2 , A r t . 1 3 0 8 , and i n Ch. 3 , S e c . 1353 th e words
?r e a s o n a b l y w orth th e sum a t w h ich i t was r e c e i v e d ? a p p e a r s .
10^ Code o f Laws f o r th e D i s t r i c t o f C o lu m b ia . 1 9 2 8 .
T i t . 5 , Ch. 9 , S e c . 2 6 9 .
103
C o r p o r a t io n Laws o f th e S t a t e o f C o n n e c t i c u t , Re
v i s e d 1 9 3 7 . Ch. 1 9 1 , P t . IF 3 , S e c . 8 7 .
104
P u b lic Laws o f th e S t a t e o f Vermont R e l a t i n g to
C o r p o r a t i o n s . 1 9 3 4 . Ch. 2 3 9 , S e c . 5 8 3 0 .
C o r p o r a t io n Laws o f th e S t a t e o f N orth D a k o ta :
G e n e ra l and C o o p e r a t i v e . R e v is e d to J u l y 1 , 1925 w i t h su p н
p le m e n ts t o 1 9 3 7 . Ch. 1 2 , S e c . 4 5 2 8 .
100
. 1 0 6 S t a t u t e s o f W is c o n s in R e l a t i n g to P r i v a t e C orpora t i o n s 1937. S ec. 1 8 2 .0 6 .
C om piled G e n e ra l Laws o f F l o r i d a . 1 9 2 7 . T i t . I l l ,
Ch. I I , A r t . 3 , S e c . 5 9 8 5 .
107
108
D o m e stic C o r p o r a t io n Laws o f Alabama, 1 9 2 4 .
Ch. 2 7 4 , A r t . 4 , S e c . 6 9 9 0 .
88
" 'rea so n a b le v a l u a t i o n " ; and Iowa 1 0 9 demands t h a t t h e " r e a l
.v a lu e" o f th e a s s e t s be d e t e r m in e d .
New J e r s e y s t a t e s th e
id e a i n t h e s e w ord s: " r e a s o n a b ly w orth i n money a t a bona
f i d e v a l u a t i o n . M a i n e - * - ! - * - r e q u i r e s a tfbona fi<3.e and f a i r
v a lu a tio n ."
K en tu ck y r e q u i r e s t h a t "no p r o p e r t y s h a l l be
r e c e i v e d i n payment o f s t o c k a t a g r e a t e r v a lu e th an t h e
m ark et p r i c e a t t h e
d e l i v e r e d ."-*-1 2
tim e s a i d l a b o r was done o r p r o p e r t y
One s t a t e , M ontana ,
113
a l l o w s an a r b i t r a r y
v a lu e to be s e t on m in e s .a n d th e v a lu e so d e te r m in e d i s c o n н
s i d e r e d c o n c l u s i v e r e g a r d l e s s o f th e a c t u a l v a l u e .
M in n eso ta i n a d d i t i o n t o th e p r o v i s i o n m e n tio n e d
above h a s a s e c t i o n t h a t i s w orth y o f e x t e n d e d comment.
T h is s e c t i o n i s a s f o l l o w s :
S h a r e s w i t h o r w it h o u t par v a l u e s h a l l n o t be a l l o t н
t e d f o r a c a s h c o n s i d e r a t i o n w h ich i s u n f a i r to th e th e n
s h a r e h o l d e r s nor f o r a c o n s i d e r a t i o n o t h e r th a n c a s h
upon a v a l u a t i o n t h e r e o f w h ich i s u n f a i r to su ch s h a r e н
h o ld e r s . I I 4
109
Code o f Io w a . 1 9 3 5 . Ch. 3 8 5 , S e c . 8 4 1 4 .
119
The G e n e ra l C o r p o r a t io n haw o f New J e r s e y , i n c l u d н
in g a l l su p p le m e n ts and amendments t h e r e t o to the end o f th e
L e g i s l a t i v e S e s s i o n o f 1 9 3 8 . T i t . 1 4 , Ch. 3 , S e c . 1 4 : 3 - 9 .
S t a t e o f M aine, P r o v i s i o n s o f haw i n F orce R e l a t н
in g t o B u s i n e s s C o r p o r a t i o n s . Ch. 5 6 , S e c . 1 0 1 .
111
! ! 2 C a r r o l l 1s K entucky S t a t u t e s . A n n o ta te d B a ld w in 's
1936 E d i t i o n . Ch. 3 2 , A r t . 1 , S e c . 5 6 8 .
113
R e v is e d Codes o f Montana, 1 9 3 5 . Ch. 1 7 , S e c . 5970.
11^r M in n eso ta B u s i n e s s C o r p o r a t io n A c t , a s amended to
1 9 3 5 . Ch. 3 0 0 , S e c . 1 5 .
89
T h is means t h a t th e book v a l u e o f th e s h a r e s m ust be t a k e n
in to c o n s id e r a tio n b efo re a l l o t t i n g sh a r e s.
I f th e corporaн
t i o n r e q u i r e s t h e in co m in g s h a r e h o l d e r s to pay th e book
v a l u e p er s h a r e , i t
I s m o st c e r t a i n l y a v e r y e q u i t a b l e a r н
ran gem en t f o r th e n a l l th e s h a r e h o l d e r s o f t h e same c l a s s
w ould h a v e an e q u a l in v e s t m e n t i n th e company.
A d d i t i o n a l r e s t r i c t i o n s on th e payment o f s u b s c r i p н
tio n s .
The n e x t q u e s t i o n to be d e te r m in e d i s t h e a d d i t i o n - .
a l l i m i t a t i o n s p la c e d on the a s s e t s
ment f o r c a p i t a l s t o c k .
t o be a c c e p t e d a s p a y н
T hese l i m i t a t i o n s d e a l w i t h th e
g e n e r a l problem o f t h e r e c e i p t o f t h e a s s e t s and a l s o o f th e
i n c o r p o r e a l p e r s o n a l p r o p e r t y o f f e r e d a s payment f o r s h a r e s .
M a ssa ch u setts
^ and New Hampshire p r o v id e t h a t :
No s t o c k s h a l l a t any tim e be i s s u e d u n l e s s t h e c a s h ,
or th e p r o p e r ty , r i g h t s , f r a n c h is e s , s e r v i c e s , or e x н
p e n s e s f o r w h ich i t h a s b e e n a u t h o r i z e d to be i s s u e d ,
s h a l l h ave b e e n a c t u a l l y r e c e i v e d , c o n v e y e d , t r a n s f e r r e d ,
r e n d e r e d t o , or i n c u r r e d b y , th e c o r p o r a t i o n . . .
M aryland
p ersonal se r v ic e s
^ d o e s n o t a l l o w th e i s s u a n c e o f s t o c k f o r
to be r e n d e r e d i n th e f u t u r e .
These p r o н
v i s i o n s , o f c o u r s e , m e r e ly r e i n f o r c e th e s e c t i o n s a l r e a d y
en u m era ted r e q u i r i n g t h a t th e a s s e t s be a c t u a l l y on hand
G e n e r a l Laws o f t h e Commonwea1 th o f M a s s a c h u s e t t s .
T e r c e n t e n a r y E d i t i o n , 1 9 3 2 . T i t . XX II, Ch. 1 5 6 , S e c . 1 6 .
B u s i n e s s C o r p o r a t io n Law and R e g u l a t i o n o f F orн
e ig n C o r p o r a tio n s, 1937. S ec. 3 7 .
I I 17 Laws o f M aryland R e l a t i n g t o B u s i n e s s C orp oraн
t i o n s . A n n o ta te d T w e lft h E d i t i o n , 1 9 3 7 . A r t . 2 3 , S e c . 4 1 ( 6 ).
90
and t i t l e
p a s s e d to th e c o r p o r a t i o n b e f o r e i s s u i n g c a p i t a l
s tock .
The law s o f th e s t a t e s o f I d a h o ,
see,
1^0
118
M i n n e s o t a ,11о T en n esн
and W ash in gton p r o v id e t h a t ?*when a c o r p o r a t i o n h a s
r e c e i v e d a n o t e or u n c e r t i f i e d ch ec k a s c o n s i d e r a t i o n f o r
s h a r e s , s u c h s h a r e s s h a l l n o t be c o n s i d e r e d a s f u l l y p a id
f o r u n t i l su c h a n o t e or ch e c k h a s b e e n p a i d .
?181
The same
p r o v i s i o n w i t h a m inor ch an ge i s fo u n d i n th e la w o f L o u i s i н
ana ,1 2 2 and th e s u b s t a n c e o f th e r e q u ir e m e n t i s fo u n d i n the
s t a t u t e s o f M a s s a c h u s e t t s , 12*^
118
M
i s s o u r i ,
1 84 jforth D a k o t a ,12^
Idaho C o d e. 1 9 3 2 . T i t . 2 9 , C h . . 1 , S e c . 2 9 - 1 2 9 .
1 1 0 M in n eso ta B u s i n e s s C o r p o r a tio n A c t , a s amended to
1 9 3 5 . Ch. 3 0 0 , S e c . 17 ( I I I ) .
1 8 8 D o m e stic and F o r e ig n C o r p o r a t io n Laws o f T e n n esн
s e e , 1 9 3 6 . Ch. 5 , A r t . I , S e c . 3 7 2 5 .
Laws C o n c er n in g P r i v a t e C o r p o r a t io n s ? S e c . 1 6 ( 3 ) .
T h is i s a l s o th e w ord in g u s e d i n th e U niform B u s i n e s s C orporн
a t i o n A c t , S e c . 16 ( i l l ) .
G e n e ra l C o r p o r a t io n Laws o f th e S t a t e o f L o u i s i н
ana . 1 9 3 8 . S e c . 16 ( I I ) .
G e n e ra l Laws o f th e Commonwea1 th o f M a s s a c h u s e t t s .
T e r c e n t e n a r y E d i t i o n , 1 9 3 2 . Ch. 1 5 6 , S e c . 1 6 .
G en era l C o r p o r a t io n Laws and M i s c e l l a n e o u s P r o v i н
s i o n s o f th e S t a t e o f M i s s o u r i , R e v is e d S t a t u t e s o f 1929 and
amendments th r o u g h 1 9 3 3 . Ch. 3 2 , A r t . 7 , S e c . 4 9 4 4 .
1 2 ^ C o r p o r a t io n Laws o f th e S t a t e o f N orth D a k o t a : Genн
era l^^and C o o p e r a t i v e , R e v is e d to J u l y 1 , 1925 and su p p le m e n ts
to 19371 Ch. 1 2 , S e c . 4 5 2 9 .
91
P e n n s y lv a n ia ,
126
and Rhode I s l a n d 1 2 7 w i t h th e a d d i t i o n t h a t
su ch n o t e s s h a l l 'n o t be c o n s i d e r e d payment e v e n th o u g h th e
n o t e i s s e c u r e d b y ' p l e d g e o r o t h e r in s t r u m e n t . The M i s s i s s i p н
p i law i s e s s e n t i a l l y th e same w ith ' th e r e q u ir e m e n t t h a t no
n o t e , o b l i g a t i o n , o r s e c u r i t y o f any k in d s h a l l be t a k e n or
h e l d as payment f o r c a p i t a l s t o c k . 1 2 8
The l e g i s l a t o r s o f
th e s t a t e o f I l l i n o i s word t h e s e c t i o n v e r y s u c c i n t l y :
" N e it h e r p r o m is s o r y n o t e s n or f u t u r e s e r v i c e s s h a l l c o n s t i н
t u t e paym ent, o r p a r t - p a y m e n t , f o r s h a r e s o f a
c o r p o r a t i o n ? ? ^
M ic h ig a n 1 6 8 h a s th e same g e n e r a l r e q u ir e m e n t r e g a r d in g n o t e s
and s e r v i c e s , an d i n a d d i t i o n p r o h i b i t s th e d e l i v e r y o f
s t o c k p a id f o r i n t h i s way.
t a t i o n to t h a t o f I l l i n o i s
I n d ia n a 1 6 1 adds one o t h e r l i m i н
and M ichigan, b y p r o h i b i t i n g th e
a c c e p t a n c e o f u n c e r t i f i e d c h e c k s as paym ent.
P urdon1s P e n n s y lv a n ia S t a t u t e s . -Annotated Permanн
e n t E d i t i o n , 1 9 3 8 . T i t . 1 3 - 1 5 . T i t . 1 5 , Ch. 49B , A r t . V I,
S ec. 2852-604.
126
1 8 7 G e n e ra l C o r p o r a t io n Law o f t h e S t a t e o f Rhode
I s l a n d , as amended to 1 9 3 2 . Ch. 2 4 8 , A r t . I I , S e c . 3 7 .
1 2 8 C o r p o r a t i o n s . Ch. 100 f M i s s i s s i p p i Code o f 1950
a s amended to 1 9 3 5 . Ch. 1 0 0 , A r t . I , S e c . 4 1 4 8 .
1 2 8 -The B u s i n e s s C o r p o r a t io n A c t , 1 9 3 7 . S e c . 1 8 .
168
S t a t e o f M ic h ig a n , G e n e r a l C o r p o r a t io n Law, 1 9 3 8 .
Sec. 21.
1 ^^ C e r t a i n Laws C o n c er n in g C o r p o r a t io n s f o r P r o f i t ,
1 9 3 7 . Ch. 2 1 5 , P t . I I , A r t . 1 , S e c . 6 ( e ) .
92
New York
1"52
and U tah
1 SS
make i t a m isdem eanor, to r e н
c e i v e any n o t e i n payment o f an i n s t a l l m e n t on s t o c k . Monta-n a 134 p r o v id e s t h a t i f
s h a r e s a r e i s s u e d a s a r e s u l t o f th e
a c c e p t a n c e o f p r o m is s o r y n o t e s su ch f a c t m ust be i n d i c a t e d
on th e f a c e o f t h e c e r t i f i c a t e and f a i l u r e
to do so i s a
m isd em ean o r, p u n is h a b l e b y f i n e o r im p riso n m en t o r b o t h .
Vermont a p p a r e n t l y would a l l o w s h a r e s to be i s s u e d upon th e
r e c e i p t o f n o t e s , f o r th e la w p r o v i d e s t h a t s h a r e s may be
i s s u e d f o r " b i l l s r e c e i v a b l e . " - 1-3 5
S e c t i o n C.
C o n s i d e r a t i o n to be
R e c e iv e d f o r S h a r e s w i t h Par V alue
S h a res w i t h o a r v a l u e i s s u e d f o r c o n s i d e r a t i o n e q u a l
to par v a l u e .
W hile i t
ju r isd ic tio n s,
it
i s n o t s p e c i f i c a l l y p r o v id e d i n a l l
i s p r o b a b ly assum ed i n a l l ,
m e n tio n e d a s e x c e p t i o n s b e lo w ,
e x c e p t th ose
t h a t par v a l u e s h a r e s a r e to
?*"3 ^ E x t r a c t s from th e S t o c k C o r p o r a t io n Law. G e n e ra l
C o r p o r a t io n Law, Tax Law, E x e c u t i v e Law and P e n a l . E d i t i o n
o f 1 9 3 8 . P e n a l, S e c . 6 6 4 .
1 3 3 R e v is e d S t a t u t e s o f U t a h , 1 9 3 3 .
T i t . 1 0 3 , Ch. 1 2 ,
Sec. 1 0 -1 2 -4 , (3 ).
134
R e v is e d Codes o f M ontana, 1 9 3 5 . Ch. 1 7 , S e c . 5968.
135
P u b lic Laws o f th e S t a t e o f Vermont R e l a t i n g to
C o r p o r a t i o n s , 1 9 3 4 . Ch. 2 3 9 , S e c . 5830 I I 3 b .
93
be i s s u e d o n l y f o r par v a l u e .
I n o t h e r w o r d s,
c o n s i d e r a t i o n o t h e r th a n c a s h s h o u ld b e ,
th e c a s h or
i n t h e judgm ent o f
th e a u t h o r i z i n g g r o u p , u s u a l l y t h e board o f d i r e c t o r s , e q u a l
i n v a l u e t o th e par v a l u e o f th e s t o c k o r o t h e r s e c u r i t i e s
iss u e d .
An e x p l i c i t s e c t i o n so p r o v i d i n g i s c o n t a i n e d i n
th e s t a t u t e s o f A rk an sas, 1 5 6 F lo r id a ,
ho,
159
Illin o is,
M ic h ig a n ,
144
140
Io w a ,
M in n e s o t a ,
141
145
1 5 ,7
L o u isia n a ,
M isso u r i,
146
G e o r g ia ,
142
158
Idaн
M a ssa ch u setts,
New H am p sh ire ,
145
1 4 *7
1 5 6 P o p e1s D i g e s t o f t h e S t a t u t e s o f A r k a n s a s , 1 9 3 7 .
Ch. 3 7 , A r t . I I , S e c . 2 1 4 3 .
1 5 . 7 C o r p o r a t io n Law. S t a t e o f F l o r i d a . 1 92 5 a s amendн
ed t o J u ly 1 , 1 9 3 4 .
Ch. 1 0 0 9 6 , A r t . 4 , S e c . 1 1 .
138 A c ts and R e s o l u t i o n s o f t h e G e n e r a l A ssem b ly o f
th e S t a t e o f G e o r g ia . 1 9 3 7 - 1 9 3 8 . P t . I , T i t . I , S e c . 12 amendн
in g S e c . 2 2 - 3 0 8 o f t h e Code o f G e o r g ia , 1 9 3 5 .
159
Idaho C ode. 1 9 3 2 . T i t . 2 9 , C h . l , S e c . 2 9 - 1 1 9
140
The B u s i n e s s C o r p o r a t io n A c t , 1 9 3 7 . S e c . 1 7 .
141
Code o f Io w a , 1 9 3 5 .
T i t . XIX, Ch. 3 8 5 , S e c . 8 4 1 2 .
142
G e n e r a l C o r p o r a t io n
S e c . 15 ( I I I ) .
Laws o f t h e S t a t e o f L o u i s i н
ana, 1938.
(3 ).
1 4 5 G e n e r a l Laws o f t h e Commonwea1 th o f M a s s a c h u s e t t s ,
T e r c e n te n a r y E d i t i o n , 1 9 3 2 . T i t . X X II, Ch. 1 5 6 , S e c . 1 5 .
144
Sec * 1 8 ?
S t a t e o f M ic h ig a n , G e n e r a l C o r p o r a t io n Law s, 1 9 3 8 .
1 4 3 M in n eso ta B u s in e a s C o r p o r a tio n A c t , 1933 as amendн
ed t o 1935"!! CF. 5 0 0 , Sec". I4 ( I I I ) .
146
G e n e ra l C o r p o r a tio n Laws and M i s c e l l a n e o u s P r o v i н
s i o n s o f th e S t a t e o f M i s s o u r i ,R e v is e d S t a t u t e s o f 1929 and
amendments th r o u g h 1 9 3 3 .
Ch. 3 2 , A r t . 7 , S e c . 4 9 3 3 .
1 4 .7
B u s in e s s C o r p o r a t io n Law and R e g u l a t i o n o f F o r e ig n
C o rp o ra tio n s . 1937.
Sec,
11.
94
New J e r s e y ,
148
New Y ork ,
V er m o n t,15^' W a sh in g to n ,
149
155
P e n n sy lv a n ia ,
West
V
150
i r g i n i a , 1 ^
T ennessee,
151
an^ W is c o n s in . 1 5 5
Oklahoma^1 Sfi so p r o v id e s b y c o n s t i t u t i o n a l la w .
In o r d e r t o show th e g e n e r a l f e a t u r e s o f t h e s e p r o v i н
sio n s,
th e m o st im p o r ta n t t y p e s a r e i n d i c a t e d .
The U niform
B u s i n e s s C o r p o r a t io n A c t , w h ich i s r e p r o d u c e d i n t h e s t a t u t e s
o f I d a h o , L o u i s i a n a , and W ash in gton i s a s f o l l o w s :
I I I . S u b s c r i p t i o n s f o r s h a r e s h a v in g a par v a lu e
s h a l l be made p a y a b le :
3.48 ijfoe g e n e r a l C o r p o r a t io n Law o f New J e r s e y , i n c l u d н
in g a l l su p p le m e n ts and amendments t h e r e t o to th e end o f th e
L e g i s l a t i v e S e s s i o n 1 9 3 8 . T i t . 1 4 , Ch. 8 , S e c . 1 4 : 8 - 1 .
1 4 9 E x t r a c t s from th e S to c k C o r p o r a t io n Law. G en eral
C o r p o r a t io n Law. Tax Law. E x e c u t i v e Law and P e n a l . E d i t i o n of
1 9 3 8 . S to c k C o r p o r a t io n Law, A r t . 7 , S e c . 6 9 .
1 cn
Purdon* s P e n n s y lv a n ia S t a t u t e s . A n n o ta te d Permanн
e n t E d i t i o n , 1 9 3 8 . T i t l e s 1 3 - 1 5 . T i t . 1 5 , Ch. 49B. A r t . V I,
S ec. 2 85 2-603.
D o m e stic and F o r e ig n C o r p o r a t io n Laws o f T e n n esн
s e e . 1 9 3 6 . Ch. 5 , A r t . I , S e c . 3 7 2 5 .
P u b lic Laws o f t h e S t a t e o f Vermont R e l a t i n g t o
Corpora t i o n s . 1 9 3 4 . Ch. 2 3 9 , S e c ; 5 8 3 0 .
155
Laws C o n c er n in g P r i v a t e C o r p o r a t i o n s . S e c . 15 ( 3 ) .
C o r p o r a t io n Laws o f West V i r g i n i a . a d o p te d b y th e
L e g i s l a t u r e S p e c i a l S e s s i o n , March 1 93 0 w it h amendments t o
d a t e o f i s s u e , J u l y 1 , 1 9 3 5 . Ch. 3 1 , A r t . 1 , S e c . 2 5 .
1 '^4
S t a t u t e s o f W is c o n s in R ela t i n g t o P r i v a t e C orp orн
a t io n s . 1937. S e c . 1 8 2 .0 6 .
155
156
Sec. 39.
C o n s t i t u t i o n o f th e S t a t e o f Oklahoma. A r t . I I ,
95
(a ) w it h caa h t o an amount n o t l e s s th an th e a g н
g r e g a t e par v a l u e o f th e s h a r e s s u b s c r i b e d f o r ; or
(b) w it h c o n s i d e r a t i o n o t h e r th a n c a s h , the f a i r
v a l u e o f w h ic h , t o t h e c o r p o r a t i o n i s n o t l e s s th a n t h e
a g g r e g a t e par v a l u e o f th e s h a r e s s u b s c r i b e d f o r . ^ 7
The s t a t u t e o f F l o r i d a w h ile much s h o r t e r i s q u i t e p o s i t i v e :
S h a r es o f s t o c k o t h e r th an s h a r e s w i t h o u t n om in al
v a l u e o r par v a lu e may b e i s s u e d o n l y f o r a c o n s i d e r a н
t i o n h a v in g a v a l u e , , i n th e judgm ent o f th e Board o f
D i r e c t o r s o f th e c o r p o r a t i o n s a t l e a s t e q u i v a l e n t to
t h e f u l l par v a l u e o f t h e s t o c k so to b e i s s u e d ; . .
The s t a t u t e o f M in n eso ta i s u n u s u a l, f o r i t p r o v i d e s :
The amount o f c o n s i d e r a t i o n t o be r e c e i v e d , i n c a s h
o r o t h e r w i s e , s h a l l n o t be l e s s th a n th e par v a l u e o f
s h a r e s h a v in g a par v a l u e so a l l o t t e d n o r l e s s th a n th e
s t a t e d c a p i t a l to be r e p r e s e n t e d b y s h a r e s w i t h o u t par
v a l u e so a l l o t t e d .
The p r o v i s i o n s o f t h i s s u b d i v i s i o n
s h a l l n o t a p p ly to s h a r e s o f i t s own s t o c k a c q u ir e d b y
th e c o r p o r a t i o n h a v in g a par v a l u e a l l o t t e d i n c o n s i d e r н
a t i o n o f th e c a n c e l l a t i o n o f an in d e b t e d n e s s o f su ch
c o r p o r a t i o n th e amount o f w hich i s a t l e a s t e q u a l t o th e
par v a l u e o f th e s h a r e s so a l l o t t e d , u n l e s s t h e c o n s i d н
e r a t i o n r e c e i v e d b y su c h c o r p o r a t i o n upon the c r e a t i o n
o f su c h in d e b t e d n e s s was l e s s than 85 p e r c e n t o f th e
amount o f su ch i n d e b t e d n e s s .1 ^ 9
Thus, t h i s a c t makes an e x c e p t i o n when d e a l i n g w it h t h e c a n н
c e l l a t i o n o f i n d e b t e d n e s s , b u t more s i g n i f i c a n t i s
t h e r e q u ir e н
m e n t, m e n tio n e d a b o v e , w h ich p r o v id e s t h a t th e c o n s i d e r a t i o n
be n o t u n f a i r to t h e th e n e x i s t i n g s h a r e h o l d e r s .
U niform B u s i n e s s C o r p o r a t io n A c t ? S e c . 15 ( I I I ) .
C o r p o r a t io n Law. S t a t e o f F l o r i d a . 1925 a s amendн
ed to J u l y 1 , 1 9 3 4 . Ch. 1 0 0 9 6 , A r t . 4 , S e c . 1 1 .
159
M in n eso ta B u s i n e s s C o r p o r a t io n A c t , 1933 a s amendн
ed to 1 9 3 5 . Ch. 3 0 0 , S e c . 14 ( I I I ) .
96
N orth Dakota
t &n
p r o v id e s t h a t i f
s h a r e s w i t h par v a l u e f o r a s s e t s l e s s
are l i a b l e .
K entucky
th e d i r e c t o r s i s s u e
th a n p a r , t h e d i r e c t o r s
p r o v id e s t h a t p r e f e r r e d s t o c k h a v н
in g par v a l u e s h a l l n o t be i s s u e d u n l e s s p ar s h a l l h a v e b e e n
r e c e iv e d .
S h a r e s w i t h par v a lu e i s s u e d f o r a c o n s i d e r a t i o n l e a s
th a n par v a l u e .
E x c e p t i o n to th e g e n e r a l r u l e ;
i.e .,
sta tes
a l l o w i n g th e i s s u a n c e o f s t o c k w it h par v a l u e upon r e c e i p t o f
v a l u e l e s s th a n par v a l u e , i s fo u n d i n th e s t a t u t e s o f C a l i н
fo r n ia ,
I n d i a n a , K a n s a s , M aryland, New M e x ic o , O h io , r
Rhode I s l a n d , and West V i r g i n i a .
I n d ia n a 162! p r o v i d e s t h a t par v a l u e s h a r e s s h a l l n o t
b e i s s u e d f o r l e s s th a n t h e par v a l u e t h e r e o f u n l e s s th e a r t i н
c l e s o f i n c o r p o r a t i o n p r o v id e t h a t su c h s h a r e s may b e s o l d a t
le ss
th a n t h e i r p ar v a l u e .
In p r i n c i p l e C a l i f o r n i a r e q u i r e s
t h a t t h e par v a l u e s t o c k be i s s u e d a t p a r , b u t makes an e x c e ip tio n .to
t h i s g e n e r a l r u l e i n th e f o l l o w i n g w ords:
The v a l u e o f t h e c o n s i d e r a t i o n to be r e c e i v e d b y a
c o r p o r a t i o n f o r th e i s s u a n c e o f s h a r e s h a v in g par v a lu e
s h a l l be a t l e a s t e q u a l to t h e par v a l u e t h e r e o f ;
C o r p o r a t io n Laws o f t h e S t a t e o f N orth D a k o t a :
G e n e r a l and C o o p e r a t i v e , R e v is e d t o J u ly 1 , 1925 su p p le m e n ts
to 1 9 3 7 . Ch. 1 2 , S e c . 4 5 2 8 .
C a r r o l l *s K en tu ck y S t a t u t e s . A n n o ta te d B a ld w in ? s
1936 E d i t i o n . Ch. 3 2 , A r t . I , S e c . 5 6 4 - 1 .
1 S 2 C e r t a i n Laws C o n cern in g C o r p o r a t io n s f o r P r o f i t ,
1 9 3 7 . Ch. 2 1 5 , P t . I I , A r t . 1 , S e c . 6 "(c) .
p r o v i d e d , h o w e v e r , t h a t th e c o r p o r a t i o n may i s s u e a t
l e s s th a n p a r , a s f u l l y p a id u p , s h a r e s h a v in g par v a l u e ,
ormay i s s u e s e c u r i t i e s c o n v e r t i b l e i n t o f u l l y p a id s h a r e s
h a v in g par v a lu e or i s s u e s e c u r i t i e s w it h an o p t i o n to
p u r c h a se f u l l y p a id s h a r e s h a v in g a par v a l u e a t a p r i c e
l e s s th a n t h e par v a l u e o f s h a r e s i s s u a b l e on c o n v e r s i o n
o r on th e e x e r c i s e o f su c h o p t i o n s , i f th e b oa rd o f
d i r e c t o r s - d e t e r m in e t h a t su ch s h a r e c a n n o t be s o l d a t
p a r , o r t h a t su c h s e c u r i t i e s c a n n o t be s o l d u n l e s s made
c o n v e r t i b l e i n t o par v a lu e a t th e p r i c e f i x e d l e s s th a n
p a r , o r w i t h o u t th e o p t i o n to p u r c h a se par v a lu e s h a r e s
a t t h e p r i c e f i x e d l e s s th an par.-*-оо
Under t h i s s e c t i o n p r i o r s h a r e h o l d e r s may n o t be a b l e
to p r o t e c t t h e i r i n t e r e s t s , f o r , u n l e s s th e c o n t r a r y i s p r o н
v id e d i n t h e a r t i c l e s ,
th e b o a rd o f d i r e c t o r s may i s s u e s h a r e s
w i t h o u t g i v i n g t h e s h a r e h o l d e r s a ch a n ce to s u b s c r i b e t o th e
new s h a r e s w h ich are" t o be i s s u e d .-*-о4
The r i g h t to i s s u e
s h a r e s w h ic h a r e c o n v e r t i b l e i n t o s h a r e s h a v in g a par v a lu e
a t a p r i c e l e s s t h a n t h e par v a l u e o f th e s h a r e s i n t o w hich
th e o r i g i n a l s h a r e s may be c o n v e r t e d i s l i k e l y to l e a d to an
e x c e s s i v e amount o f par v a lu e s t o c k o u t - s t a n d i n g u n l e s s an
a d ju s t m e n t i s r e q u i r e d t o be made i n th e s t a t e d c a p i t a .
The
same comment m ig h t be made c o n c e r n in g th e i s s u a n c e o f s h a r e
o p tio n s.
By r e f e r r i n g to s e c t i o n 300b I t seem s su c h an a d j u s t н
ment i s n o t r e q u i r e d f o r t h i s s e c t i o n s t a t e s t h a t :
Whenever i s s u e d s h a r e s h a v in g par v a l u e a r e changed
o r c o n v e r t e d I n t o th e same o r a g r e a t e r o r s m a l l e r number
o f s h a r e s w i t h o u t par v a l u e , o r i n t o s h a r e s w i t h a
P e e r i n g 1 s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a .
1 9 3 7 . D i v . 1 , P t . IV, T i t . 1 , Ch. I l l , S e c . 2 9 9 .
164
I b i d . , P i v . 1 , P t . IV, T i t .
1 , Ch. I l l ,
Sec. 297.
98
d i f f e r e n t par v a l u e , w h eth er o f th e same o r d i f f e r e n t
c l a s s e s , th e s t a t e d c a p i t a l s h a l l n o t be ch an g ed w i t h o u t
p r o c e e d in g s f o r i n c r e a s e o r r e d u c t i o n o f s t a t e d c a p i t a l
in accordance w ith t h is t i t l e . 1 6 5
I t w i l l a l s o be n o t e d t h a t a c c o r d i n g t o C a l i f o r n i a la w th e
d i r e c t o r s m e r e ly d e t e r m in e t h a t t h e s h a r e s c a n n o t be s o l d f o r
par.
S\ich i s n o t th e c a s e i n t h e la w s o f K a n sa s 1 6 6 and
Ohio^5 ^ w h ich h a v e d e f i n i t e and e x p l i c i t r e q u ir e m e n ts u n d er
w h ich t h e r i g h t i s g r a n t e d t o s e l l s h a r e s h a v in g a par v a lu e
at le ss
th a n p a r .
These r e q u ir e m e n t s a r e a s f o l l o w s :
A c o r p o r a t i o n , b y a c t i o n o f i t s b oard o f d i r e c t o r s ,
may i s s u e and s e l l , a t l e s s th a n par v a l u e , s h a r e s h a v н
i n g par v a l u e , o r i s s u e and s e l l s e c u r i t i e s c o n v e r t i b l e
I n t o s h a r e s h a v in g par v a l u e a t a p r i c e l e s s th a n th e
p ar v a l u e o f th e s h a r e s i s s u a b l e on c o n v e r s i o n , o r i s s u e
and s e l l s e c u r i t i e s w it h an o p t i o n ( s e p a r a b l e o r i n s e p н
a r a b l e from t h e s e c u r i t y ) to p u r c h a se a t l e s s th a n par
s h a r e s h a v in g par v a l u e i f
1 . The c o r p o r a t i o n h a s b e e n i n e x i s t e n c e more th a n
two y e a r s : and
2 . The b o a rd o f d i r e c t o r s s h a l l f i n d t h a t su c h s h a r e s
c a n n o t be s o l d a t p a r , o r t h a t i t i s n e c e s s a r y o r d e s i r н
a b l e to s e l l su ch s e c u r i t i e s ; and
3 . The b o a rd o f d i r e c t o r s s h a l l f i x a p r i c e l e s s th a n
par f o r su ch s h a r e s or f i x a p r i c e , w h ich may be l e s s
th a n p a r , f o r s e c u r i t i e s c o n v e r t i b l e i n t o s h a r e s h a v in g
par v a l u e o r f o r s e c u r i t i e s c o n v e r t i b l e i n t o s h a r e s h a v н
in g a par v a lu e g r e a t e r than, th e s e c u r i t i e s o r f o r s e c u r
I t i e s w it h an o p t i o n ( s e p a r a b l e o r i n s e p a r a b l e from th e
s e c u r i t y ) to p u r c h a se su c h s h a r e s a t a p r i c e l e s s th a n
p a r , and s h a l l c a u s e su ch s h a r e s o r s e c u r i t i e s to be
o f f e r e d t o th e s h a r e h o l d e r s , i f a n y , e n t i t l e d as
155
I b i d . . D iv . 1 ,
P t . IV, T i t . 1 , Ch. I l l ,
Sec. 300b.
166
S t a t e o f K a n s a s , S e s s i o n Laws, 1 9 3 9 . Ch. 1 5 2 , S e c .
G e n e r a l and F o r e ig n C o r p o r a t io n A c ts o f t h e S t a t e
o f O h io, A n n o t a te d , 1 9 3 9 . T i t . IX , D iv . I , Ch. I , S e c . 8 6 2 3 -
1 6 . ---------
99
h e r e i n a f t e r p r o v id e d i n t h i s a c t to p r e e m p tiv e r i g h t i n
r e s p e c t o f su c h s h a r e s , a t th e p r i c e so f i x e d f o r su c h
s h a r e s or s e c u r i t i e s .
I f t h e r e a r e no s h a r e h o l d e r s haV'
i n g p r e e m p tiv e r i g h t s , su c h s h a r e s o r s e c u r i t i e s s h a l l
he o f fe r e d to a l l s h a r e h o ld e r s .
I f a l l o f t h e s h a r e s o r s e c u r i t i e s so o f f e r e d s h a l l
n o t h av e b e e n p u r c h a se d b y su c h s h a r e h o l d e r s w i t h i n a
r e a s o n a b l e tim e and on r e a s o n a b l e c o n d i t i o n s f i x e d by
t h e b o a rd o f d i r e c t o r s , th e n th e b o a r d o f d i r e c t o r s may
c a u s e a l l or any p a r t o f su c h s h a r e s o r s e c u r i t i e s to
be i s s u e d and s o l d a t n o t l e s s th a n t h e p r i c e a t w h ich
t h e y were o f f e r e d t o su ch s h a r e h o l d e r s , l e s s r e a s o n a b l e
c o m p e n s a tio n , a llo w a n c e o r d i s c o u n t f o r th e s a l e , under'
w r i t i n g o r p u r c h a se t h e r e o f .
A c o r p o r a t i o n , by a c t i o n o f i t s b o a rd o f d i r e c t o r s ,
s u b j e c t to p r e e m p tiv e r i g h t s , i f a n y , o f s h a r e h o l d e r s ,
may a l s o , f o r th e p u rp o se o f m a r k e tin g s h a r e s , i s s u e and
s e l l s h a r e s h a v in g a par v a l u e a t su c h d i s c o u n t from th e
p a r v a lu e t h e r e o f a s w o u ld amount to o r n o t e x c e e d
r e a s o n a b l e c o m p e n s a tio n f o r t h e s a l e o r u n d e r w r it in g o f
su c h s h a r e s , w h ich d i s c o u n t s h a l l be t r e a t e d a s a c o s t
o f o r g a n iz a tio n or fin a n c in g .
Upon s a l e o f su c h s h a r e s o r i s s u e o f s h a r e s , upon c o n н
v e r s i o n o f su ch s e c u r i t i e s , o r e x e r c i s e o f su c h o p t i o n
r i g h t s , th e c o r p o r a t i o n s h a l l i n c l u d e th e p ar amount o f
su ch s h a r e s i n i t s s t a t e d c a p i t a l . ^ 8
169
K a n sa s4
*
f o l l o w s t h e Ohio s t a t u t e e x c e p t t h a t th e l a s t two
p a ra g ra p h s q u o te d above a re n o t in c lu d e d i n the s e c t i o n .
H ow ever, i n a l a t e r s e c t i o n d e a l i n g w it h o p t i o n r i g h t s ,
it
is
p r o v id e d t h a t wi n c a s e t h e s h a r e s o f s t o c k o f th e c o r p o r a t i o n
t o be i s s u e d upon th e e x e r c i s e o f su ch r i g h t o r o p t i o n s s h a l l
be s h a r e s h a v in g a par v a l u e ,
t h e p r i c e o r p r i c e s so to be
r e c e i v e d t h e r e f o r s h a l l be n o t l e s s th a n t h e par v a lu e
168
LQ.c ?
169
S t a t e o f K a n sa s, S e s s i o n L aw s. 1 9 3 9 . C h .1 5 2 , Sec.45.
100
th e r e o f." l^ O *
d e fin ite
The law In t h e s e two s t a t e s
th an i s
th e la w o f C a l i f o r n i a .
th e n i s much more
B oth Kansas and Ohio
p r o v id e t h a t a p u r c h a s e r o f s t o c k u n d er th e c o n d i t i o n m e n tio n н
ed i s n o t l i a b l e f o r an y amount o t h e r th a n h i s s u b s c r i p t i o n
p r ic e .
The Code o f Rhode Islan d -^ -^ p e r m it s t h e i s s u a n c e o f
s h a r e s w i t h par v a l u e f o r l e s s
rath er r ig id r u le s .
th an t h e par v a l u e und er
A r e s o l u t i o n may b e p a s s e d b y a m a j o r i t y
v o t e o f t h e i n c o r p o r a t o r s , or s h a r e h o l d e r s
( i f two o r more
c l a s s e s o f s h a r e s , a v o te o f a m a jo r ity in I n t e r e s t o f each
c la s s o f shares) e n t it le d
to v o t e , o r th e b oard o f d i r e c t o r s
may p a s s th e r e s o l u t i o n , when a u t h o r i z e d t o do so b y t h e a f н
f ir m a t iv e v o te o f th e In co r p o r a to r s or s h a r e h o ld e r s , to is s u e
par v a l u e s h a r e s a t l e s s th a n p ar f o r c a s h , f o r p r o p e r t y , o r
fo r s e r v ic e s .
cate
P r io r to th e i s s u a n c e o f t h e s h a r e s a c e r t i f i н
( s i g n e d b y th e p r e s i d e n t o r v i c e - p r e s i d e n t ,
tre a su r e r or
a s s i s t a n t t r e a s u r e r , and a m a j o r i t y o f t h e d i r e c t o r s ) m ust be
f i l e d w i t h th e s e c r e t a r y o f s t a t e s e t t i n g f o r t h t h e s t o c k to
b e . i s s u e d and th e v a l u e o f t h e a s s e t s
to be r e c e i v e d . S h a r es
i s s u e d u n d er t h e s e c o n d i t i o n s are to be c o n s i d e r e d f u l l y p a i d ,
b u t th e s h a r e s so i s s u e d s h a l l s t a t e
170
1 *71
t h a t : ttThe s t o c k
I b i d . . Ch. 1 5 2 , S e c . 4 6 .
G e n e ra l C o r p o r a t io n Law o f th e S t a t e o f Rhode
I s l a n d , a s amended 1 9 3 2 . Ch. 2 4 8 , A r t . I I , S e c . 3 0 .
101
r e p r e s e n t e d b y t h i s c e r t i f i c a t e was i s s u e d und er s e c t i o n
th ir ty
6
f t h e G en eral C o r p o r a t io n
The c a p i t a l o f th e
c o r p o r a t i o n when s t o c k i s so i s s u e d s h a l l be th e amount o f
c a s h r e c e i v e d a n d /o r th e v a l u e s a t w h ich th e p r o p e r t y and
s e r v i c e s were r e c e i v e d
by th e c o r p o r a t i o n . T h is p r o v i s i o n
n u llifie s
o v e r v a lu in g p ro p erty r e c e iv e d
any n eed f o r
in payн
ment o f s t o c k i s s u e d .
West V i r g i n i a u n l e s s
o t h e r w i s e p r o v id e d i n th e
c h a r te r , a llo w s sto c k h o ld e r s by vo te o f th r e e -fo u r th s o f a l l
s h a r e s o u t s t a n d i n g and e n t i t l e d to v o t e t o a u t h o r i z e
th e
d i r e c t o r s to i s s u e par
as f u l l y
p a id s h a r e s .
v a l u e s t o c k f o r l e s s t h a n par
Maryland-*-^ l i k e w i s e , s u b j e c t to c h a r t e r o r b y н
law r e s t r i c t i o n s , s a n c t i o n s
th e i s s u a n c e o f f u l l y p a id and
n o n - a s s e s s a b l e s h a r e s o f par s t o c k f o r money o r a c o n s i d e r a н
t i o n o t h e r th an money l e s s
th a n t h e par v a l u e o f su ch s h a r e s
o r o f s h a r e s i n t o w h ich su c h s h a r e s a r e c o n v e r t i b l e ; p r o v i d н
e d , t h a t ( 1 ) i f t h e r e a r e no s h a r e s o u t s t a n d i n g and e n t i t l e d
to v o t e o r i f empowered to do so b y th e c h a r t e r ,
172
the b oard o f
L o c. c i t .
C o r p o r a t io n Laws o f West V i r g i n i a , A dopted b y th e
L e g i s l a t u r e , S p e c i a l S e s s i o n , March 1930 w it h amendments to
d a t e o f I s s u e , J u ly 1 , 1 9 3 5 . Ch. 3 1 , A r t . 1 , S e c . 2 9 .
Laws o f Maryland R e l a t i n g t o Bus i n e s s C o r p o r a tio n a .
A n n o t a t e d , T w e lf t h E d i t i o n , 1 9 3 7 . A r t . 2 3 , S e c . 4 1 ( 8 ) , S e c .
43 an d 4 4 .
102
d i r e c t o r s may a u t h o r i z e th e i s s u a n c e o f th e s h a r e s and d e t e r н
m ine t h e v a lu e o f t h e a s s e t s to be r e c e i v e d ;
( 2 ') i f t h e r e a r e
s h a r e s o u t s t a n d i n g and e n t i t l e d t o v o t e , t h e b o a rd o f d i r e c t н
o r s may a d v i s e th e s h a r e h o l d e r s to a u t h o r i z e th e i s s u a n c e o f
su c h s h a r e s f o r a s p e c i f i e d c o n s i d e r a t i o n and th e s h a r e s may
b e i s s u e d upon an a f f i r m a t i v e v o t e o f t w o - t h i r d s o f t h e sh a res
o f each c l a s s o f s to c k o u tsta n d in g ;
(3 )
e r s th e b o a r d o f d i r e c t o r s to a u t h o r i z e
i f t h e c h a r t e r empowн
th e i s s u a n c e o f su c h
s t o c k a s a u t h o r i z e d i n s e c t i o n ( 1 ) a b o v e ; and i f a s t a t e m e n t
i n d i c a t i n g t h e f a c t s and s i g n e d by t h e p r e s i d e n t o r v i c e p r e s i d e n t and a t t e s t e d b y t h e s e c r e t a r y o r an a s s i s t a n t - s e c r e t a r y i s p r e p a r e d an d s u b m it t e d t o th e S t a t e Tax C om m ission.
New M e x ico 1,7о w h i l e n o t s p e c i f i c a l l y a l l o w i n g t h e i s s u a n c e o f
s h a r e s w i t h par v a l u e f o r l e s s t h a n p a r , d o e s , h o w e v e r , a c н
c o m p lis h a p p r o x im a t e l y th e same t h in g th r o u g h i t s
r e g a r d in g s h a r e h o ld e r s ? l i a b i l i t y .
p r o v isio n
T h is s t a t e p r o v i d e s t h a t
where t h e w hole o f t h e c a p i t a l s t o c k s h a l l n o t h a v e b e e n p a id
i n and t h e c a p i t a l i s n o t s u f f i c i e n t t o pay th e c o r p o r a t e
d e b t s , e a c h s h a r e h o l d e r i s bound to pay on e a c h s h a r e w hich
h e h o l d s t h e sum n e c e s s a r y t o c o m p le te t h e f u l l payment o f
s u c h sh a r e o r su ch p a r t o f t h e amount a s i s r e q u i r e d t o pay
th e c o r p o r a te d e b t s .
T h is s e c t i o n v a r i e s v e r y l i t t l e
from
th e u s u a l l i a b i l i t y s e c t i o n , b u t a l a t e r s e c t i o n p r o v id e s
lt7о C o r p o r a t io n Laws o f t h e S t a t e o f New M e x ico , 1 9 2 8 .
Ch. I I , A r t . I , S e c . 4 8 .
103
tha t :
No s t o c k h o l d e r s 1 l i a b i l i t y f o r u n p a id s t o c k s h a l l a t н
t a c h to any s t o c k i s s u e d b y any c o r p o r a t i o n und er th e
terras o f t h i s a r t i c l e : P r o v id e d , t h a t a t t h e tim e o f f i l н
in g the c e r t i f i c a t e a se p a r a te c e r t i f i c a t e s h a l l be s i g n н
ed and e x e c u t e d i n th e same manner t h a t th e c e r t i f i c a t e
o f i n c o r p o r a t i o n i s f i l e d , d e c l a r i n g t h a t t h e r e s h a l l be
no s t o c k h o l d e r s ? l i a b i l i t y on a c c o u n t o f any s t o c k i s s u н
ed and s h a l l be f i l e d i n t h e o f f i c e o f th e S t a t e C orp ora н
t i o n C om m ission t o g e t h e r w i t h t h e c e r t i f i c a t e o f i n c o r н
p o r a t i o n , and l i k e w i s e c e r t i f i e d and r e c o r d e d i n t h e
o f f i c e o f th e County C le r k , and th e c e r t i f i c a t e o f i n c o r н
p o r a t i o n , t o g e t h e r w it h s a i d d e c l a r a t i o n o f n o n - l i a b i l i t y
o f s t o c k h o l d e r s s h a l l be p u b l i s h e d a s h e r e i n a f t e r p r o v i d н
ed.
T h is s e c t i o n s h a l l n o t a p p l y to any o f th e p r o v i н
s i o n s f o r t h e i s s u a n c e o f s t o c k and th e f i x i n g l i a b i l i t y
and t h e means o f e n f o r c i n g l i a b i l i t y upon th e same c o n н
t a i n e d i n any o t h e r s e c t i o n o f t h i s a r t i c l e b u t s h a l l be
c o n s t r u e d a s a s e p a r a t e and d i s t i n c t p r o v i s i o n and a s
c r e a t i n g a s e p a r a t e and d i s t i n c t c l a s s o f c o r p o r a t i o n s ,
b u t e a c h c o r p o r a t i o n t a k i n g a d v a n ta g e o f t h e p r o v i s i o n s
o f t h i s s e c t i o n m ust add t o i t s c o r p o r a t e name i n th e
c e r t i f i c a t e o f i n c o r p o r a t i o n , and i n e v e r y o t h e r c e r t i f i н
c a t e , r e p o r t , o r r e c o r d , r e q u i r e d b y la w , and i n e v e r y
c o n t r a c t , o r o t h e r c o r p o r a t e in s t r u m e n t , t h e words ? No
S t o c k h o ld e r s ? L i a b i l i t y . ??I*?о
T h is s e c t i o n would a l l o w a c o r p o r a t i o n to i s s u e s h a r e s w it h a
par v a l u e f o r l e s s th a n p a r , and th e s h a r e h o l d e r w ould n o t be
l i a b l e f o r th e d i f f e r e n c e teetween t h e c o n s i d e r a t i o n p a id and
th e p a r V alue o f t h e
c e rtific a te .
In t h i s
ju risd ic tio n ,
th is
i s p o s s i b l e o n l y th r o u g h a d e f i n i t e p r o c e d u r e and l e g a l , n o t ic e .
Issuan ce o f shares b e fo r e f u l l y p a id .
N ex t m ust be
c o n s i d e r e d th e power o f t h e c o r p o r a t i o n to i s s u e s h a r e s o f
s t o c k b e f o r e th e s h a r e s a r e f u l l y p a i d , f o r b y so d o in g a
176
I b i d . , Ch. I I , A r t .
I, Sec. 49.
104
c o r p o r a t i o n may a c t u a l l y a c c o m p lis h th e same p u r p o se a s i s s u н
in g s h a r e s f o r l e s s
th a n p a r .
Even th ou g h t h e s t a t u t e s do
n o t c o n t a i n a s p e c i f i c p r o v i s i o n r e g a r d i n g th e I s s u a n c e o f
p a r t l y p a id
sh a re s t h i s can
h a r d l y be c o n s i d e r e d c o n c l u s i v e
e v id e n c e o f
th e g r a n t i n g o f t h e power s i n c e a r e s t r i c t i o n
may be im posed by o t h e r s e c t i o n s w h ic h , w h i l e n o t s p e c i f i c a l н
l y on t h e p o i n t , a r e n e v e r t h e l e s s a p p l i c a b l e .
A ls o t h e r e
s h o u ld be ta k e n i n t o a c c o u n t the f a c t t h a t w h i l e many s t a t e s
make no s p e c i f i c m e n tio n o f t h i s
it is
p a id .
ty p e o f c e r t i f i c a t e
is s u e ,
t a c i t l y assum ed t h a t a sh a r e may be i s s u e d b e f o r e f u l l y
In d e t e r m in in g a s h a r e h o l d e r ? s l i a b i l i t y
l y s t a t e d t h a t when th e w hole o f th e
i t i s frequentн
amount s u b s c r i b e d h as
n o t b e e n p a id i n t h e s h a r e h o l d e r i s l i a b l e f o r t h e d i f f e r e n c e
b e tw e e n t h e amount p a id i n and t h e par v a l u e .
Many o f t h e
s t a t e s p r o v id e f o r th e s a l e o f s h a r e s w it h th e payment to be
made on th e c a l l o f t h e board o f d i r e c t o r s , commonly c a l l e d
s a l e on i n s t a l l m e n t s o n
r e q u ir e s
th e o t h e r h an d , i f th e s t a t u t e
t h a t no c a p i t a l s t o c k s h a l l be i s s u e d f o r a l e s s
amount th a n
th e par v a lu e p a i d - i n ,
tha t ,
h i b i t i o n on
th e i s s u a n c e o f p a r t l y
p a id s h a r e s .
1 77
in e s s e n c e ,
i s a proн
F u r th er m o r e,
For exam ple s e e th e c o m p ile d la w s o f C a l i f o r n i a ,
C o lo r a d o , C o n n e c t i c u t , F l o r i d a , G e o r g ia , I n d ia n a , I l l i n o i s ,
Iow a, K a n sa s, K e n tu c k y , L o u i s i a n a , M aine, M a s s a c h u s e t t s ,
M ichigan* M i s s i s s i p p i , M i s s o u r i , M ontana, N evada, New Y ork,
N orth C a r o l i n a , O h io , P e n n s y lv a n i a , Rhode I s l a n d , S outh C aroн
l i n a , T e n n e s s e e , T e x a s , V i r g i n i a , W is c o n s in , West V i r g i n i a ,
and Wyoming.
i t w i l l be remembered, t h a t th e c o n s t i t u t i o n o f some s t a t e s
r e q u i r e s t h a t money and p r o p e r t y m u st be r e c e i v e d b e f o r e
sh ares are is s u e d .
With t h e s e q u a l i f i c a t i o n s i n m ind , a t t e n н
t i o n ca n be tu r n e d t o t h e c o m p ile d s t a t u t e s o f C o n n e c t i c u t , 1*^о
I d a h o , I l l i n o i s , 1оо L o u i s i a n a , 1 о 1 M i n n e s o t a ,1оо New Hampн
s h i r e , 1 о^ O h i o ,1о^ and W a sh in g ton 1оо w h ich do n o t a l l o w a
c e r tific a te
f u l l y p a id .
to be i s s u e d f o r a s h a r e u n t i l su c h sh a r e i s
The s t a t e o f Iowa p r o v i d e s t h a t no c e r t i f i c a t e
f o r a sh a r e s h a l l be i s s u e d u n t i l t h e c o r p o r a t i o n h a s r e c e i v н
ed t h e par v a l u e t h e r e o f , and- t h a t a c e r t i f i c a t e
iss u e d conн
t r a r y t o t h i s p r o v i s i o n , o r i s s u e d when th e p r o p e r t y v a l u a н
t i o n h a s n o t b e e n a p p r o v ed b y t h e e x e c u t i v e c o u n c i l s h a l l be
1 *^о C o r p o r a t io n Laws o f t h e S t a t e o f C o n n e c t i c u t , R eн
v i s e d 1 9 3 7 . Ch. 1 9 1 , P t . Rq, S e c . 4 6 .
179
180
Idaho C o d e. 1 9 3 2 . T i t . 2 9 , Ch. 1 , S e c . 2 9 - 1 2 0 .
The B u s i n e s s C o r p o r a t io n
A c t,1937. S e c . 2 1 .
G e n e ra l C o r p o r a t io n Laws o f th e S t a t e o f
an a. 1938. S ec. 1 6 ( 1 ) .
L o u isiн
M in n eso ta B u s i n e s s C o r p o r a t io n A c t , 1933 a s amendн
ed to 1 9 3 5 . Ch. 3 0 0 , S e c . 1 7 ( 1 ) .
188
1оо Bus in e a s Corpora t i o n Law and R eg u la t i o n o f F o r н
e i g n C o r p o r a t i o n s , 1 9 3 7 . Ch. 2 2 5 , S e c . 3 7 .
G e n e ra l and F o r e ig n Corpora t i o n A c ts o f th e S t a t e
o f O h io , A n n o ta te d 1 9 3 9 . S e c . 8 6 2 3 - 3 0 .
185
1 6 (1 ).
Laws C o n c er n in g P r i v a t e C o r p o r a t i o n s .
S ec. 3803-
106
v o i d . -*-8 о
But i n a n o t h e r s e c t i o n w h ich seem s to be r e g u l a t н
in g t h e i s s u a n c e o f p a r t l y p a id s h a r e s i t i s p r o v id e d t h a t :
No c e r t i f i c a t e o r s h a r e o f s t o c k s h a l l be i s s u e d , d e н
l iv e r e d , or tr a n sfe r r e d by a c o r p o r a tio n , o f f i c e r , or
a g e n t t h e r e o f o r b y t h e owner o f su c h c e r t i f i c a t e o r
s h a r e w i t h o u t h a v in g e n d o r s e d on th e f a c e t h e r e o f what
amount o r p o r t i o n o f t h e par v a l u e h a s b e e n p a id to t h e
c o r p o r a t i o n i s s u i n g t h e sam e, and w h eth er su ch payment
h a s b e e n i n money o r p r o p e r t y . . . .18*7
T h is s e c t i o n seem s to be i n d i r e c t c o n f l i c t w i t h th e p r e v i o u s
s e c t i o n , f o r i f a s h a r e c a n n o t be i s s u e d u n t i l f u l l y p a id why
is
i t n e c e s s a r y to p r o v id e t h a t .the p o r t i o n o f par p a id on a
s h a r e b e e n d o r s e d on the f a c e o f th e c e r t i f i c a t e ?
In a s i m i н
l a r manner W is c o n s in p r o v id e s t h a t no s t o c k s h a l l be i s s u e d
u n t i l v a l u e e q u a l t o p ar h as b e e n r e c e i v e d ,-*-8 8 and t h e n In
a n o t h e r s e c t i o n p r o v i d e s t h a t i f any s t o c k I s t r a n s f e r r e d ,
w h ich i s n o t f u l l y p a i d , t h e c o r p o r a t i o n may, .b y a g reem en t to
be n o t e d on i t s
s t o c k b o o k , d i s c h a r g e th e s t o c k h o l d e r m aking
su c h t r a n s f e r from l i a b i l i t y
to I t f o r th e u n p a id p a r t o f
t h i s s t o c k s u b s c r i p t i o n and a c c e p t t h a t o f th e p e r s o n to whom
t h e s t o c k i s t r a n s f e r r e d i n . h i s p l a c e . ^89
These two s e c t i o n s
seem to be In d i r e c t c o n f l i c t .
Code o f Io w a . 1 9 3 5 . T i t . XIX, Ch. 3 8 5 , S e c . 8 4 1 2 .
An a f f i d a v i t r e g a r d i n g p r o p e r t y v a l u e i s a l s o r e q u i r e d in.
New H am p sh ire. See B u s i n e s s C o r p o r a tio n Law and R e g u l a t i o n o f
F o r e ig n C o r p o r a t i o n s . Ch. 2 2 5 , S e c . 3 5 .
186
187
Code o f Iow a, 1 9 3 5 . T i t . XIX, Ch. 3 8 5 , S e c . 8 4 0 8 .
-*"8 8
S t a t u t e s o f W iscons i n Rela t i n g to P r i v a t e C orporaн
t io n s . 1937. S ec. 1 8 2 .0 6 .
189
I b id . . S e c . 1 8 2 .0 9 .
107
S ou th C a r o lin a l i k e w i s e p r o h i b i t s th e i s s u a n c e o f
s h a r e s u n t i l f u l l y p a id e x c e p t when b y term s o f th e s u b s c r i p н
t i o n th e c a p i t a l s t o c k i s
to be p a id i n i n s t a l l m e n t s . 1 9о
This e x c e p t i o n f o r a l l p r a c t i c a l p u r p o s e s d e f e a t s t h e p r o h ib н
itio n .
By c o n s t i t u t i o n a l p r o v i s i o n t h i s s t a t e a l l o w s s t o c k
to be i s s u e d o n l y f o r p r o p e r t y a c t u a l l y r e c e i v e d o r s u b s c r i b 1 Q1
ed.
M innesota^ x p e rm its
p erty
receiv ed
sto ck
to be i s s u e d f o r c a s h o r p ro н
o r to b e r e c e iv e d o r s e rv ic e s re n d e re d o r
to
be re n d e re d .
By so p r o v i d i n g i n t h e c e r t i f i c a t e o f i n c o r p o r a t i o n
i n th e s t a t e s o f F l o r i d a , 19^ New Y o r k ,1^*"* and T e n n e s s e e , ^
and i n th e b y - la w s i n t h e c a s e o f C a l i f o r n i a ,
ta ,
195
195
N orth Dakoн
and S o u th D a k o t a ,1о^ th e b o a rd o f d i r e c t o r s may be
190
Sec. 7746.
Code o f Laws o f S o u th C a r o l i n a . 1 9 3 2 . Ch. 1 5 3 ,
1 9 1 M in n e so ta B u s i n e s s C o r p o r a t io n A c t . 1933 a s amendн
ed t o 1 9 3 5 . Oh. 3 0 0 , S e c . 1 4 ( lT I
1 9 ^ C o r p o r a t io n Law, S t a t e o f F l o r i d a , 1925 a s amendн
ed to J u l y 1 , 1 9 3 4 . Ch. 1 0 0 9 6 , A r t . 4 ,, S e c . 1 2 .
19^ E x t r a c t s from th e S to c k C o r p o r a t io n Law, G e n e r a l
C o r p o r a t io n Law, Tax Law, E x e c u t i v e Law and P e n a l , E d i t i o n o f
1 9 3 8 . S to c k C o r p o r a t io n Law, A r t . 7 , S e c . 7 4 .
D o m e stic and F o r e ig n C o r p o r a t io n Laws o f T e n n e s se e .
1 9 3 6 . Ch. 5 , A r t . I , S e c . 3 7 2 6 .
-1-о5 P e e r i n g Ts C i v i l Code o f t h e S t a t e o f C a l i f o r n i a .
1 9 3 7 . D i v . 1 , P t . IV , T i t . 1 , Ch. I l l , S e c . 2 9 8 .
195
C o r p o r a t io n Laws o f t h e S t a t e o f N orth D a k o t a :
G e n e ra l and C o o p e r a t i v e , R e v i s e d to J u l y 1 , 1925 w it h s u p p l e н
m ents to 1 9 3 7 . Ch. 1 2 , S e c . 4 5 2 7 .
19*7 C o r p o r a t io n Laws o f S o u th D a k o t a . 1 9 3 8 . P t . 1 7 , Ch.
1 , A rt. 2 , S ec. 8775.
108
g i v e n th e a u t h o r i t y t o i s s u e s h a r e s a s p a r t l y p a id u n d er su ch
r e s t r i c t i o n s as may he t h e r e i n c o n t a i n e d .
C a l i f o r n i a r e q u ir e s
t h a t t h e amount r e m a in in g u n p a id s h a l l he shown on th e c e r t i н
fic a te ;
N o rth Dakota and T e n n e s s e e r e q u i r e t h a t t h e amount
p a id b e shown.
F l o r i d a and New York p r o v id e t h a t ,
I f upon t h e c e r t i f i c a t e
i s s u e d to r e p r e s e n t su ch s t o c k t h e
amount p a id t h e r e o n s h a l l be s p e c i f i e d ,
s h a l l n o t he s u b j e c t to an y l i a b i l i t y
the h o l d e r t h e r e o f
to th e c o r p o r a t i o n e x н
c e p t f o r t h e payment o f t h e amount shown b y su ch c e r t i f i c a t e
a s u n p a i d . -*-9о
W ith o u t q u e s t i o n A rk a n sa s
In d ia n a ,
202
, 199
D e la w a r e ,
200
G e o rg ia , 2 0 -*-
K a n sa s , 2 0 3 amd M a s s a c h u s e t t s 2 0 4 a l l o w th e issuance
198 C o r p o r a t io n Law, S t a t e o f F l o r i d a . 1 9 2 5 . Ch. 10096,
A r t . 4 , S e c . 1 2 , and E x t r a c t s from t h e S t o c k C o r p o r a t io n Law.
G e n e ra l C o r p o r a t io n Law. Tax -Law, E x e c u t i v e Law, and Pena1 .
E d i t i o n o f 1 9 3 8 . S to c k C o r p o r a t io n Law, A r t . 7 , S e c . 7 4 .
199
Pope *s D i g e s t o f th e S t a t u t e s o f A r k a n s a s . 1 9 3 7 .
Ch. 3 7 , A r t . I I , S e c . 2 1 4 4 .
200
G e n e ra l P r o v i s i o n s R e s p e c t i n g D o m e stic and F o r e ig n
C o r p o r a t io n s C o n ta in e d i n th e G e n e r a l C o r p o r a t io n Laws o f th e
S t a t e o f D e la w a r e . 1 9 3 7 . Ch. 6 5 , A r t . 1 , S e c . 14 and 2 0 .
2 0 A c t s and R e s o l u t i o n s o f t h e G e n e r a l A sse m b ly o f
t h e S t a t e o f G e o r g ia , 1 9 3 7 - 1 9 3 8 . P t . I , T i t . I , S e c . 13 amendн
in g S e c . 2 2 - 3 0 8 o f th e Code o f G e o r g ia , 1 9 3 5 .
C e r t a i n Laws C o n c er n in g C o r p o r a t io n s f o r P r o f i t ,
1 9 3 7 . Ch. 2 1 5 , P t . I I , A r t . 1 , S e c . 6 ' ( f ) .
202
203
S t a t e o f K a n s a s , S e s s i o n Laws. 1 9 3 9 . C h .1 5 2 , S e c . 44.
G e n e r a l Laws o f t h e Comaionwea 1 th o f M a s s a c h u s e t t s .
T e r c e n t e n a r y E d i t i o n 1 9 3 2 . T i t . X X II, Ch. 1 5 6 , S e c . 15
'109
o f s h a r e s when p a r t l y p a i d .
A t y p i c a l e x a m p le , a lt h o u g h n o t
a u n ifo r m p r o v i s i o n o f t h i s g r o u p , may be t a k e n from t h e
D ela w a re la w w h ich r e a d s a s f o l l o w s :
Any c o r p o r a t i o n may i s s u e th e w hole o r any p a r t o f i t s
s h a r e s a s p a r t l y p a id and s u b j e c t to c a l l f o r th e r e н
m a in d er o f t h e c o n s i d e r a t i o n to be p a id t h e r e f o r .
Upon
th e f a c e o r b a ck o f t h e c e r t i f i c a t e i s s u e d t o r e p r e s e n t
any su c h p a r t l y p a id sh a r e th e t o t a l amount o f t h e co n н
s i d e r a t i o n t o be p a id t h e r e f o r and t h e amount p a id t h e r e н
on s h a l l be s p e c i f i e d . 205
S e c t i o n D.
C o n s i d e r a t i o n to be R e c e iv e d f o r
S h a r e s w i t h o u t Par V alu e
C o n s i d e r a t i o n f o r s h a r e s w it h o u t par v a l u e .
Having
d e t e r m in e d th e v a l u e f o r w h ich par v a l u e s t o c k may be s o l d ,
i t now becom es n e c e s s a r y t o c o n s i d e r th e p ro b lem o f t h e i s s u н
a n ce o f s h a r e s w i t h o u t p ar v a l u e .
I t i s im p o r ta n t t h a t t h i s
be d e t e r m in e d ; f o r a l t h o u g h th e m ain p u r p o se o f s h a r e s w i t h н
o u t par v a lu e i s
to g i v e f l e x i b i l i t y
i n d e t e r m in in g t h e v a lu e
o f a s s e t s f o r w h ich su c h s h a r e s a r e t o be i s s u e d ,
th e c o r p o r н
a t i o n s h o u ld r e c e i v e f o r t h e s h a r e s so i s s u e d a s s e t v a l u e s
w h ich a r e n o t o u t o f p r o p o r t i o n t o t h e book v a l u e o f t h e
sh ares o u tsta n d in g , i f any.
The t h r e e p r i n c i p a l c l a s s i f i c a t i o n
205
G e n e r a l P r o v i s i o n s R e s p e c t i n g D o m e stic and F o r e ig n
C o r p o r a t io n s C o n ta in e d i n th e G e n e r a l C o r p o r a t io n Laws o f th e
S t a t e o f D e la w a r e , 1 9 3 7 . Ch. 6 5 , A r t . 1 , S e c . 1 4 .
110
t o be c o n s i d e r e d a r e :
1 . S t a t e s t h a t i n t h e f i r s t i n s t a n c e , s u b j e c t to
c h a r t e r , g r a n t th e power to d e t e r m in e th e c o n s i d e r a t i o n f o r
s h a r e s w i t h o u t par v a l u e to th e b o a rd o f d i r e c t o r s u n l e s s
o t h e r w i s e p r o v id e d and th e n i n d i c a t e t h e m ethod to be u s e d
if
th e power i s r e s e r v e d .
2 . S t a t e s t h a t i n th e f i r s t i n s t a n c e g r a n t the power
to d e t e r m in e t h e c o n s i d e r a t i o n f o r s h a r e s w it h o u t par v a l u e
to t h e i n c o r p o r a t o r s o r s h a r e h o l d e r s and. t h e n p e r m it th e
b oa rd o f d i r e c t o r s t o e x e r c i s e
th e power u n d er c e r t a i n c o n н
d itio n s .
3 . S t a t e s t h a t i n th e f i r s t i n s t a n c e p r o v id e t h a t th e
c o n s i d e r a t i o n f o r s h a r e s w it h o u t par v a l u e i s
to b e an a -
mount d e te r m in e d b y th e a r t i c l e s o f i n c o r p o r a t i o n and th e n
name th e v a r i o u s m ethod s o f d e t e r m in in g th e c o n s i d e r a t i o n i f
t h e a r t i c l e s do n o t so p r o v i d e .
I t s h o u ld b e . n o t e d t h a t some s t a t e s a l l o w th e s h a r e h o l d e r s ,
if
t h e y a r e g i v e n a u t h o r i t y i n any way t o d e t e r m in e th e c o n н
sid e r a tio n ,
to d e te r m in e th e v a l u e a t th e tim e o f i s s u e
r a t h e r th a n b y a b l a n k e t g r a n t t h a t o n ce g i v e n c o n t i n u e to
h ave f o r c e u n t i l amended.
Board o f d i r e c t o r s d e te r m in e t h e c o n s i d e r a t i o n f o r
s h a r e s w it h o u t par v a l u e .
The f i r s t c l a s s ,
in c lu d in g
I ll
C a l i f o r n i a , 2 0 о C o lo r a d o , 2 0 7 M a s s a c h u s e t t s , 2 0 о and Wyoming , 2 0 0
p r o v i d e s i n g e n e r a l t h a t s h a r e s o f s t o c k w i t h o u t par v a l u e
may be i s s u e d b y t h e c o r p o r a t i o n f o r su c h
c o n s id e r a tio n as
may be d e t e r m in e d by t h e b o ard o f d i r e c t o r s u n l e s s o t h e r w i s e
d e t e r m in e d i n th e c e r t i f i c a t e o f i n c o r p o r a t i o n . 2
1 0
. (C a lifo r н
n ia a l l o w s p r o v i s i o n s i n th e b y - la w s to m o d ify th e above
s t a t e m e n t . ) M a s s a c h u s e t t s seem s to change th e g e n e r a l i t y o f
th e p r o v i s i o n b y s e c t i o n 1 6 , w h ich p r o v id e s t h a t any p a r t o f
an u n i s s u e d b a la n c e o f a u t h o r i z e d c a p i t a l s t o c k may be i s s u н
ed s u b s e q u e n t to th e i s s u e o f s t o c k c e r t i f i e d by t h e a r t i н
c l e s b y v o t e o f t h e d i r e c t o r s und er a u t h o r i t y o f t h e b y - l a w s ,
or o f a g e n e r a l or s p e c i a l v o te o f th e in c o r p o r a to r s or
2(^о P e e r i n g *a C i v i l Code o f th e S t a t e o f C a l i f o r n i a ,
1 9 3 7 . D i v . 1 , P t . IV, T i t . 1 , Ch. I l l , S e c . 2 9 9 .
P07
C o r p o r a t io n Laws, as r e v i s e d and amended to
O cto b er 1 , 1 9 3 7 . Ch. 4 1 , A r t . 1 , S u b d iv . 1 , S e c . 12 ( e ) .
2 9 ^* G e n e r a l Laws o f t h e Commonwea1 t h o f M a s s a c h u s e t t s .
T e r c e n t e n a r y E d i t i o n , 1 9 3 2 . T i t . XXII, Ch. 1 5 6 , S e c . 1 4 .
S e s s i o n Laws o f Wyoming, 1 9 3 9 . Ch. 6 2 , S e c . 17
am ending Ch. 2 8 , A r t . 3 , S e c . 2 8 - 3 0 1 .
209
2 ^░ When d i s c u s s i n g t h e p r o v i s i o n s o f th e c e r t i f i c a t e
o f i n c o r p o r a t i o n i n t h e p a g e s im m e d ia te ly f o l l o w i n g , i t may
be assum ed t h a t t h e w ords im p ly th e o r i g i n a l c e r t i f i c a t e o r
amendments t h e r e t o .
112
s t o c k h o l d e r s .2 1 1
M aryland^l^ and West V i r g i n i a ^ - ^ p e r m it
t h e b o a rd o f d i r e c t o r s ,
i f empowered so to do by t h e c h a r t e r ,
to i s s u e s t o c k f o r t h e v a l u e w h ich t h e y may d e t e r m i n e , su b н
j e c t to th e lim it a t io n s
in th e ch a r te r or b y -la w s.
a b s e n c e o f su c h a p r o v i s i o n ,
In t h e
t h e s h a r e s may be i s s u e d i n a c н
c o r d a n c e w i t h th e b y - la w s o r r e s o l u t i o n o f t h e s h a r e h o l d e r s .
The se c o n d c l a s s
i n t h i s s u b d i v i s i o n p r o v i d e s f o r th e
g e n e r a l a u t h o r i t y o f t h e b o a rd o f d i r e c t o r s , b u t ta k e c o g n i н
zance o f th e c o n tin g e n c y o f th e a r t i c l e s n o t g r a n tin g th e
a u t h o r i t y to th e b o a rd o f d i r e c t o r s .
For e x a m p le , t h e A la н
bama la w p r o v i d e s :
S to c k w i t h o u t an y n o m in a l o r par v a l u e may be i s s u e d
b y t h e b o a rd o f d i r e c t o r s o f t h e c o r p o r a t i o n from tim e t o
tim e f o r s u c h c o n s i d e r a t i o n a s may be f i x e d from tim e to
tim e b y t h e b o a rd o f d i r e c t o r s t h e r e o f , p u r s u a n t to authorн
i t y c o n f e r r e d i n th e c e r t i f i c a t e o f i n c o r p o r a t i o n o r an y
amendment t h e r e o f o r j o i n t a g re em en t o f m erger o r c o n s o l н
i d a t i o n , o r i f su c h a u t h o r i t y i s n o t so c o n f e r r e d , th e n
p u r s u a n t t o a u t h o r i t y o f the h o l d e r s o f t w o - t h i r d s o f th e
2 H G e n e ra l Laws o f t h e Commonwea 1 t h o f M a s s a c h u s e t t s .
T e r c e n t e n a r y E d i t i o n , 1 9 3 2 . T i t . X X II, Ch. 1 5 6 , S e c . 1 6 .
212 Laws o f M aryland R e l a t i n g to B u s i n e s s C o r p o r a t io n s .
A n n o ta te d T w e lft h E d i t i o n , 1 9 3 7 . A r t . 2 3 , S e c . 4 5 .
215 C o r p o r a t io n Laws o f West V i r g i n i a , a d o p te d b y
L e g i s l a t u r e , S p e c i a l S e s s i o n , March 1 9 3 0 , w i t h amendments to
d a t e o f i s s u e , J u ly 1 , 1 9 3 5 . Ch. 3 1 , A r t . 1 , S e c . 2 7 . S e c t i o n s
28 and 29 o f t h i s la w seem to r e t a i n t o t h e s h a r e h o l d e r s some
what more power th an i s i n d i c a t e d a b o v e , f o r by t h e s e s e c t i o n s ,
i n th e a b s e n c e o f c h a r t e r p r o v i s i o n , t h e s h a r e s may be i s s u н
ed p u r s u a n t to t h e a u t h o r i t y g r a n t e d b y t h e b y - la w s o r b y
r e s o l u t i o n p a s s e d by t h e s h a r e h o l d e r s . N o th in g i s s t a t e d i n
th e s t a t u t e s t o I n d i c a t e w h ich i s th e r u l i n g s e c t i o n .
s t o c k t h e n o u t s t a n d i n g and e n t i t l e d to v o t e g i v e n a t a
m e e t in g c a l l e d f o r t h a t p u r p o se i n su c h manner as s h a l l
b e p r e s c r i b e d b y t h e b y - la w s . . . .2 1 4
A s i m i l a r p r o v i s i o n i s fou n d i n t h e s t a t u t e o f S o u th C a r o l i н
n a ; 2 1 ^ K entucky 2 1 6 and U tah 2 1 , 7 a l s o h av e e s s e n t i a l l y th e same
r e q u ir e m e n t e x c e p t t h a t th e v o t e d e t e r m in in g t h e c o n s i d e r a н
t i o n m ust be b y t w o - t h i r d s o f e a c h c l a s s o f s t o c k tbe n o u t н
s t a n d i n g and e n t i t l e d
to v o t e .
e x c e p t t h a t t h i s la w g i v e s
W is c o n s in 2 1 8
is very s im ila r
th ree a l t e r n a t i v e s :
( 1 ) th e p r ic e
f o r w hich s h a r e s w i t h o u t p ar v a l u e may be i s s u e d i s
d e t e r m in e d b y th e b o a r d o f d i r e c t o r s ,
(2 )
to be
i f a u th o r ity i s gran ted
o r b y th e o r g a n i z e r s p r i o r to t h e f i r s t m e e t i n g ;
( 3 ) or
i f t h e a r t i c l e s s h a l l n o t so a u t h o r i z e th e d i r e c t o r s , t h e n b y
c o n se n t o f tw o -th ir d s o f th e sh a r e h o ld e r s o f each c l a s s .
I Q
la w o f Rhode I sla n d ^P-1
-** i s
The
t h e same as Alabama e x c e p t t h a t an
2 "^ D o m e stic C o r p o r a t io n Laws o f A lab am a. 1 9 2 4 . Ch.
274, A rt. 5, S ec. 7011.
Code o f Laws o f S o u th C a r o l i n a . 1 9 3 2 . T i t . 3 7 , Ch.
153, A rt. 2 , S ec. 7731.
216
216 C a r r o l l 1s K entucky S t a t u t e s . A n n o ta te d B a ld w in ? s
1936 E d i t i o n . Ch. 3 2 , A r t . I , S e c . 5 6 4 - 2 .
R e v is e d S t a t u t e s o f U t a h . 1 9 3 3 . T i t . 1 8 , Ch. 2 ,
Sec. 1 8 -2 -3 4 .
217
S t a t u t e s o f W is c o n s in R e l a t i n g t o P r i v a t e C orporaн
tio n s . 1937. S e c . 1 8 2 .1 4 .
216
G e n e r a l C o r p o r a t io n Law o f t h e S t a t e o f Rhode
I s l a n d , as am ended, 1 9 3 2 . Ch. 2 4 8 , A r t . I I , S e c . 3 1 .
212
114
a f f ir m a t iv e v o te o f o n ly a m a jo r ity o f th e sh a r e h o ld e r s i s
n e c e s s a r y to d e t e r m in e th e c o n s i d e r a t i o n to be r e c e i v e d f o r
s h a r e s w i t h o u t par v a l u e .
poo
I n d ia n a ^ ^ lik e w is e r e q u ir e s th e
co n sen t o f o n ly a m a jo r ity o f s h a r e s ,
p ressed in w r itin g or
The n e x t c l a s s
sta te
th e c o n s e n t b e i n g e x н
by v o t e a t a m e e t i n g .
i n c l u d e s t h o s e j u r i s d i c t i o n s w hich
t h a t t h e b o a rd o f d i r e c t o r s s h a l l d e te r m in e t h e c o n s i d н
e r a t i o n u n l e s s t h a t power i s r e s e r v e d .
T h is d i f f e r s from the
fo rm er g ro u p w h ich g i v e s the b o a rd o f d i r e c t o r s a u t h o r i t y ,
if
th e a u t h o r i t y i s
c o n f e r r e d b y th e a r t i c l e s .
D elaw are
m ig h t be c o n s i d e r e d th e r e p r e s e n t a t i v e s t a t e o f t h i s g r o u p ;
f o r e x a m p le , n o t e th e
fo llo w in g :
. . . . s h a r e s o f c a p i t a l s t o c k w i t h o u t par v a l u e ,
w h e th e r common o r p r e f e r r e d o r s p e c i a l , may be i s s u e d by
t h e c o r p o r a t i o n from tim e to tim e f o r s u c h c o n s i d e r a t i o n
as may be f i x e d from time t o tim e b y th e Board o f D i r e c t н
o r s t h e r e o f , u n l e s s i n the C e r t i f i c a t e o f I n c o r p o r a t i o n
t h e power to f i x stich c o n s i d e r a t i o n s h a l l h a v e b e e n r e н
s e r v e d to t h e s t o c k h o l d e r s , i n w h ich e v e n t su c h power
s h a l l be e x e r c i s e d b y th e s t o c k h o l d e r s b y c o n s e n t i n
w r i t i n g o r b y v o t e o f th e h o l d e r s o f r e c o r d o f t w o - t h i r d s
o f t h e t o t a l number o f s h a r e s o f e a c h c l a s s o f s t o c k
t h e n o u t s t a n d i n g and e n t i t l e d to v o t e i n r e s p e c t t h e r e t o
s a i d v o t e b e i n g g i v e n a t a m e e t in g c a l l e d f o r th e purpos
i n su c h manner a s s h a l l be p r e s c r i b e d b y t h e b y - l a w s ;
p r o v id e d t h a t , a lt h o u g h su ch power h a s b e e n r e s e r v e d t o
th e s t o c k h o l d e r s , th e d i r e c t o r s s h a l l n e v e r t h e l e s s h av e
t h e power to f i x su c h c o n s i d e r a t i o n f o r th e f i r s t i s s u e
o f s t o c k , and su c h i s s u e s h a l l n o t e x c e e d t e n p er centum
o f t h e w hole amount o f su c h s t o c k a u t h o r i z e d b y th e
220
C e r t a i n Laws C o n c er n in g C o r p o r a t io n s f o r P r o f i t .
1 9 5 7 . Ch. 2 1 5 , P t . I I , A r t . I , S e c . 6 ( c ) .
115
C e r t i f i c a t e o f I n c o r p o r a t i o n . 2 2 -*K a n sa s 2 2 2 f o l l o w s t h i s la w i n i t s e n t i r e t y ; M ic h ig a n 2 2 3 l i k e н
w is e a d h e r e s t o t h i s law e x c e p t t h a t M ic h ig a n o m its t h e
s p e c i a l e x c e p t i o n c o n c e r n in g th e i s s u a n c e o f t h e f i r s t b l o c k
of sto ck .
One o t h e r s t a t e ,
I l l i n o i s , 2 2 ^ f o llo x v s c l o s e l y th e
M ic h ig a n p r o v i s i o n e x c e p t t h a t t h e c o n s e n t i s to be g i v e n b y
a v o te o f o n ly a m a jo r ity o f a l l sh ares o u ts ta n d in g ,
i f th e
power i s r e s e r v e d t o th e s t o c k h o l d e r s .
N o rth C a r o lin a h a s a p r o v i s i o n w h ich i s u n u s u a l i n
t h a t i t i s somewhat s i m i l a r to th e above b u t seems to o f f e r
two a l t e r n a t i v e s ; h o w e v e r , no r u l e i s g i v e n as to w h ic h o f
th e a l t e r n a t i v e s i s
to be u s e d .
T h is dilemma i s c l e a r l y
e v i d e n t i n th e s h o r t q u o t a t i o n g i v e n b e lo w :
. . . . su c h c o r p o r a t i o n may i s s u e and d i s p o s e o f i t s
a u t h o r i z e d s h a r e s w i t h o u t n o m in a l o r par v a l u e f o r su c h
c o n s i d e r a t i o n and on su ch term s and i n su ch manner as
may b e d e t e r m in e d o r a p p r o v ed from tim e to tim e b y t h e
2 2 ^- G e n e ra l P r o v i s i o n s R e s p e c t i n g D o m e stic and F o r e ig n
C o r p o r a t io n s C o n ta in e d i n t h e G en era l C o r p o r a t io n Laws o f t h e
S t a t e o f D e la w a r e , a s amended to 1 9 3 7 . Ch. 6 5 , A r t . I , S e c . 1 4 .
222
S t a t e o f K a n sa s, S e s s i o n Laws, 1 9 3 9 . C h .1 5 2 , Sac.42.
S t a t e o f M ic h ig a n , G e n e ra l C o r p o r a t io n Law, 1 9 3 8 .
1 9 . S e c t i o n 4 ( d ) p r o v i d e s , t h a t t h e book v a l u e o r p r i c e o f
s h a r e s w it h o u t par v a l u e s h a l l . b e s t a t e d i n t h e a r t i c l e s .
How t h i s i s t o be r e c o n c i l e d w it h S e c t i o n 19 i s n o t d e t e r m in н
a b le .
223
2 2 ^ The B u s i n e s s C o r p o r a t io n A c t , 1 9 3 7 . S e c . 1 7 .
116
b o a rd o f d i r e c t o r s , s u b j e c t t o su ch c o n d i t i o n s o r l i m i t н
a t i o n a s may be c o n t a i n e d i n t h e c e r t i f i c a t e o f i n c o r p o r н
a t i o n a r t i c l e s o f a s s o c i a t i o n , c h a r t e r , o r any amendment
t h e r e o f o r a s may be c o n t a i n e d i n any v o t e o f th e h o l d e r s
o f a m a jo r ity o f th e s to c k o f th e c o r p o r a tio n . . .
Under w hat c o n d i t i o n* s th e b o a rd o f d i r e c t o r s o r th e s h a r e h o l d e r s s h a l l d e t e r m in e t h e c o n s i d e r a t i o n , e s p e c i a l l y i f t h e
a r t i c l e s a r e s i l e n t on t h e p o i n t , i s n o t d e t e r m in a b l e from
the s t a t u t e .
I t s h o u ld be remembered, o f c o u r s e ,
a u t h o r i t y o f t h e b o a rd o f d i r e c t o r s i s
lim ita tio n s.
la w o f t h i s
t h a t the
s u b j e c t to c h a r t e r
M in n eso ta seem s to be somewhat s i m i l a r f o r th e
s t a t e p r o v id e s t h a t ,
A t th e tim e o f e a c h a l l o t m e n t o f s h a r e s , t h e s h a r e н
h o l d e r s o r d i r e c t o r s making su ch a l l o t m e n t s h a l l s t a t e
b y r e s o l u t i o n t h e i r d e t e r m i n a t i o n o f t h e f a i r v a l u e to
th e c o r p o r a t i o n i n m o n e ta r y term s o f any c o n s i d e r a t i o n
o t h e r th a n c a s h f o r w h ic h s h a r e s w it h o r w i t h o u t par
v a l u e a r e a l l o t t e d . ^26
S h a r e h o ld e r s d e t e r m in e t h e c o n s i d e r a t i o n f o r s h a r e s
w i t h o u t par v a l u e .
clu d es
The s e c o n d m ain s u b d i v i s i o n o f s t a t e s
in н
t h o s e t h a t e m p h a siz e th e r i g h t o f t h e i n c o r p o r a t o r s
or s h a r e h o l d e r s t o d e t e r m in e t h e c o n s i d e r a t i o n f o r th e s h a r e s ,
w it h o u t p ar v a l u e .
T h is ty p e o f l e g i s l a t i o n i s fo u n d i n th e
U n iform B u s in e s s ' C o r p o r a t io n A ct a s f o l l o w s :
225
S t a t e o f N orth C a r o l i n a , C o r p o r a t io n Laws, Ch. 22
o f C o n s o l i d a t e d S t a t u t e s o f 1 9 5 5 . Ch. 2 2 , A r t . 5 a , S e c .
1 167(b ).
226
M in n eso ta B u s i n e s s C o r p o r a t io n A c t , a s amended to
1 9 3 5 . Ch. 3 0 0 , S e c . 14 ( I I ) .
117
IV. S u b s c r i p t i o n f o r s h a r e s h a v i n g no par v a lu e s h a l l
be made p a y a b le a s f o l l o w s :
(a ) i f th e s u b s c r i p t i o n I s s ig n e d b e f o r e i n c o r н
a t i o n , w it h th e c o n s i d e r a t i o n o f t h e c h a r a c t e r and v a l u e
d e t e r m in e d b y t h e i n c o r p o r a t o r s ;
(b) i f t h e s u b s c r i p t i o n i s s i g n e d a f t e r th e i n н
c o r p o r a t i o n , w it h th e c o n s i d e r a t i o n o f th e c h a r a c t e r and
v a l u e d e te r m in e d b y th e s h a r e h o l d e r s a t any a n n u a l m e e t н
in g o r s p e c i a l m e e t i n g , d u l y c a l l e d and h e l d f o r t h a t
purpose-, or d e te r m in e d by th e b o a rd o f d i r e c t o r s a c t i n g
u n d er th e a u t h o r i t y c o n f e r r e d b y t h e s h a r e h o l d e r s o r b y
th e a r t i c l e s o f in c o r p o r a t io n . 2 2 7
T h is p a r t i c u l a r ty p e o f l a w ' i s ?fo u n d in th e s t a t u t e s
o f I d a h o , 2 2 о L o u i s i a n a , 2 оо P e n n s y l v a n i a , 2 ^0
W ash in g to n .о ^
I t s h o u ld be n o t e d t h a t ev e n thou gh t h e a u t h o r i t y r e s t s
t h e f i r s t I n s t a n c e w i t h th e s h a r e h o l d e r s ,
in
th e a u t h o r i t y to
d e t e r m in e th e c o n s i d e r a t i o n f o r s h a r e s o t h e r than th e o r i g i n н
a l i s s u e may be t r a n s f e r r e d to t h e b o a r d o f d i r e c t o r s b y th e
s h a r e h o l d e r s , o r i t may be g r a n t e d to' them b y th e a r t i c l e s .
In th e l a t t e r c a s e , i t
i s n e v e r r e a l l y a power t h a t t h e s h a r e н
h o l d e r s m ig h t e x e r c i s e u n l e s s
th e c h a r t e r i s amended.
Ohio P 3 2 r e q u i r e s , u n l e s s o t h e r w i s e p r o v id e d i n th e
^ U niform B u s i n e s s C o r p o r a t io n A c t . S e c . 15 ( I V ) .
228
Idaho Code, 1 9 3 2 . T i t . ?2 9 ,
Ch. 1 , S e c . 2 9 - 1 1 9
(4).
о2 о G e n e r a l C o r p o r a t io n Laws o f t h e S t a t e o f L o u i s i н
ana . 1 9 3 8 . S e c . 15 ( I V ) .
288
Purdon* s P e n n s y lv a n ia S t a t u t e s , A n n o ta te d Permanн
e n t E d i t i o n , 1 9 3 8 . T i t l e s 1 3 - 1 5 . T i t . 1 5 , Ch. 49B , A f t . V I,
S ec. 2 852-603.
2 8 ^* Laws C o n c er n in g P r i v a t e C o r p o r a t i o n s . S e c . 15 ( I V) .
о^о G e n e ra l and F o r e ig n C o r p o r a t io n A c ts o f t h e S t a t e
o f O h io , A n n o ta te d 1 9 3 9 . T i t . IX, D iv . 1 , Ch. 1 , S e c . 8 6 2 3 - 1 0 .
118
a r tic le s,
t h a t th e i n c o r p o r a t o r s o r a m a j o r i t y o f them f i x
th e amount o f c o n s i d e r a t i o n p er s h a r e f o r s h a r e s - w i t h o u t par
v a l u e , b u t i n a s u p p le m e n t a r y s e c t i o n i t
i s p r o v id e d t h a t ,
S h a res w i t h o u t par v a l u e may be i s s u e d p u r s u a n t to
s u b s c r i p t i o n ta k e n b y th e i n c o r p o r a t o r s a s h e r e i n b e f o r e
p r o v i d e d , and a l s o , u n l e s s o t h e r w i s e p r o v id e d i n t h e
a r t i c l e s , f o r su ch c o n s i d e r a t i o n a s may be f i x e d from
tim e t o tim e b y th e b oa rd o f d i r e c t o r s . . . .2 3 3
T h is seem s to g i v e th e i n c o r p o r a t o r s th e power to i s s u e th e
s h a r e s f o r an amount d e t e r m in e d by t h e m s e l v e s , b u t t h e r e a f t e r
th e d e t e r m i n a t i o n seem s t o r e s t i n th e h an d s o f th e b o a rd o f
d ir e c to r s.
S im ila r ily ,
th e i n c o r p o r a t o r s a t th e o r g a n i z a t i o n
m e e t in g h ave the power to d e t e r m in e t h e c o n s i d e r a t i o n f o r
s h a r e s w it h o u t par v a l u e w i t h i n th e j u r i s d i c t i o n o f New Hamps h i r e ^ 3 4 and th e s t o c k h o l d e r s o r d i r e c t o r s may d e t e r m in e i t
when s t o c k i s a u t h o r i z e d a f t e r i n c o r p o r a t i o n .
When s h a r e s ,
w h ich h a v e b e e n p r o v id e d f o r i n th e a r t i c l e s or amendments
t h e r e o f , are is s u e d su b seq u en t to
above,
th e i s s u a n c e p r o v id e d f o r
th e p r i c e p er s h a r e i s to be d e t e r m in e d b y m a j o r i t y
v o t e o f th e s t o c k p r e s e n t and r e p r e s e n t e d
( i f two k in d s o r
c l a s s e s o f s h a r e s , by a m a jo r ity v o te o f each c l a s s )
o r su ch
o t h e r v o t e o f t h e s t o c k h o l d e r s o r o f th e d i r e c t o r s a s may be
p ro v id ed .
233
I b id . , S ec. 8623-17.
2 3 ^ B u s i n e s s C o r p o r a t io n Law and R e g u l a t i o n o f F o r e ig n
C o r p o r a t i o n s , 1 9 3 7 . S e c . 33 and 3 4 .
C o n n e c tic u t on th e
su r fa c e
se e m s t o r e t a i n
to
th e
s h a r e h o l d e r s a somewhat g r e a t e r power i n th e d e t e r m i n a t i o n
o f t h e c o n s i d e r a t i o n th a n th e o t h e r s t a t e s
in t h i s group, fo r
i n t h is - s t a t e :
S u b j e c t to any l i m i t a t i o n s and r e s t r i c t i o n s s e t f o r t h
i n th e c e r t i f i c a t e o f i n c o r p o r a t i o n , an y c o r p o r a t i o n
. . . . may, a t any m e e t in g warned and h e l d f o r t h a t p u rн
p o s e , empower i t s d i r e c t o r s t o i s s u e s h a r e s o f i t s u n н
i s s u e d a u t h o r i z e d c a p i t a l s t o c k w i t h o u t par v a lu e and
may a u t h o r i z e i t 3 d i r e c t o r s to f i x th e amount o f money
o r th e a c t u a l v a l u e o f t h e c o n s i d e r a t i o n f o r w h ich su ch
s t o c k s h a l l be i s s u e d , p r o v id e d t h e c e r t i f i c a t e o f i n н
c o r p o r a t i o n . . . . may empower th e d i r e c t o r s t h e r e o f t o
i s s u e , from tim e to t i m e , s h a r e s o f su ch s t o c k w i t h o u t
par v a l u e f o r su c h c o n s i d a i r s t i o n a s t h e d i r e c t o r s may
deem a d v i s a b l e , s u b j e c t to su c h l i m i t a t i o n and r e s t r i c н
t i o n s a s may be s e t f o r t h t h e r e i n . 2 35
T h is s t a t u t e ^ 0 ? p l a c e s i n th e hands o f t h e s h a r e h o l d e r s th e
power t o a u t h o r i z e t h e i s s u a n c e o f s h a r e s w i t h o u t par v a l u e j
t h e y may g i v e t h e power t o t h e b o a r d o f d i r e c t o r s to d e t e r н
mine th e p r i c e a t w h ich i t
is
is s u e d i f th e a r t i c l e s
so p r o н
v i d e . H ow ever, t h e r e i s t h e f u r t h e r e x c e p t i o n t h a t th e c e r t i н
f i c a t e may g r a n t t h e power t o th e b o a rd o f d i r e c t o r s to i s s u e
th is
ty p e o f s h a r e w i t h o u t r e f e r e n c e to t h e s h a r e h o l d e r s .
235
C o r p o r a t io n Laws o f t h e S t a t e o f C o n n e c t i c u t . Reн
v i s e d 1 9 3 7 . Ch. 1 9 1 , P t . IP 3 , S e c . 8 9 .
236 j n a c o n t i n u a t i o n o f t h e a b ov e s e c t i o n ; i t i s p r o н
v i d e d t h a t a s p e c i a l l y c h a r t e r e d c o r p o r a t i o n , w h ich i s d e f i n н
ed i n P a rt I P3 , S e c . 83 a s any s p e c i a l l y c h a r t e r e d c o r p o r a н
t i o n h a v in g c a p i t a l s t o c k , e x c e p t f i n a n c i a l i n s t i t u t i o n s , may
by a tw o -th ir d s v o te o f each c l a s s o f sto c k o u tsta n d in g a u th o rн
i z e t h e d i r e c t o r s to f i x t h e a c t u a l amount o f c o n s i d e r a t i o n
f o r s h a r e s w it h o u t p ar v a l u e . I t i s n o t b e l i e v e d t h a t t h e
term ??s p e c i a l l y c h a r t e r e d c o r p o r a t i o n ?* i s o f g e n e r a l a p p l i c a н
tio n .
120
West V i r g i n ia ^ * ^ s t i p u l a t e s t h a t u n l e s s p r o v id e d
o t h e r w i s e i n th e c h a r t e r ,
th e s h a r e h o l d e r s may a u t h o r i z e th e
b o a rd o f d i r e c t o r s to i s s u e s h a r e s w it h o u t p ar v a l u e f o r th e
c o n s i d e r a t i o n d e t e r m in e d i n th e r e s o l u t i o n .
T h is s e c t i o n
a p p e a r s to be i n c o n f l i c t ' w i t h s e c t i o n 27 w h ich was c i t e d i n
fo o tn o te 213.
The s t a t u t e o f Vermont r e t a i n s to th e s h a r e h o l d e r s
c o n s i d e r a b l e a u t h o r i t y o v e r th e i s s u a n c e o f s h a r e s w i t h o u t
par v a l u e .
I f the s t o c k i s
is s u e d fo r ca sh ,
th e p r i c e i s
to
b e d e te r m in e d b y th e m eth o d s p r e s c r i b e d b y th e a r t i c l e s o f
in c o r p o r a tio n or b y -la w s , o r ,
i n th e a b s e n c e o f su ch p r o v i н
s i o n s , b y th e v o t e o f th e s h a r e h o l d e r s ; i f
th e s t o c k i s
be i s s u e d f o r p r o p e r t y , th e amount o f s t o c k i s s u e d i s
to
to be
e s t a b l i s h e d by v o t e o f th e i n c o r p o r a t o r s o r s h a r e h o l d e r s .
C h a r te r p r o v i s i o n s d e t e r m in e t h e c o n s i d e r a t i o n f o r
s h a r e s w i t h o u t par v a l u e .
The t h i r d and l a s t m a jo r group i n н
c l u d e s t h o s e s t a t e s w h i c h - h a v e , as t h e i r i n i t i a l p r o v i s i o n
f o r d e t e r m in in g th e c o n s i d e r a t i o n f o r s h a r e s w i t h o u t par
v a l u e , t h e s t a t e m e n t t h a t th e v a l u e i s
t o be d e te r m in e d b y
t h e a r t i c l e s o f i n c o r p o r a t i o n and t h e n , e x c e p t f o r one s t a t e ,
su p p le m e n t t h i s s t a t e m e n t w it h a d d i t i o n a l r e q u i r e m e n t s .
C o r p o r a t io n Laws o f West V i r g i n i a , a d o p te d b y
L e g i s l a t u r e , S p e c i a l S e s s i o n , March 1 9 3 0 , w it h amendments to
d a t e o f i s s u e , J u l y 1 , 1 9 3 5 . Ch. 3 1 , A r t . 1 , S e c . 2 9 .
121
Arizona^оо ijag p r o b a b ly t h e s i m p l e s t o f a l l la w s on t h i s
p o i n t , f o r t h i s s t a t e a l l o w s th e s h a r e s to be i s s u e d f o r th e
v a l u e p r e s c r i b e d b y th e c h a r t e r .
The r e m a in in g s t a t e s m o d ify
t h i s w i t h c e r t a i n a l t e r n a t i v e m ethods to be u s e d i n d e t e r m in н
in g t h e v a l u e .
The b a s i c p r o v i s i o n m ig h t be c o n s i d e r e d t h a t
o f T e n n e s s e e w h ich i s a s f o l l o w s :
S h a r e s o f s t o c k w it h o u t n o m in a l o r par v a l u e , e x c e p t
t h o s e i s s u e d a s a s h a r e d i v i d e n d , may be i s s u e d f o r su ch
c o n s i d e r a t i o n as may be p r e s c r i b e d i n t h e c e r t i f i c a t e o f
i n c o r p o r a t i o n , o r i n any amendment t h e r e t o , o r , i f no
c o n s i d e r a t i o n i s so p r e s c r i b e d , t h e n , f o r su ch c o n s i d e r н
a t i o n a s may h av e b e e n d e t e r m in e d b y t h e i n c o r p o r a t o r s ,
a n d , s u b s e q u e n t to i n c o r p o r a t i o n , f o r su c h c o n s i d e r a t i o n
a s may be d e te r m in e d b y th e s t o c k h o l d e r s , a t any a n n u a l
o r s p e c i a l m e e t in g t h e r e o f d u l y c a l l e d and h e l d , o r as
may be d e te r m in e d b y th e b o a rd o f d i r e c t o r s a c t i n g u n d er
a u t h o r i t y from s u c h s t o c k h o l d e r s .2 3 9
T h is s t a t u t e i s f o l l o w e d i n i t s m a jo r p r o v i s i o n s by
th e la w s o f th e s t a t e s o f M aine, 240 M i s s o u r i , ^ - * - New M e x ic o ,* ^
A r iz o n a C o r p o r a t io n C om m issio n . Laws o f A r iz o n a
R e l a t i n g t o . o r u n d er I t s J u r i s d i c t i o n . R e v i s e d S t a t u t e s o f
A r iz o n a , 1 9 2 8 . Ch. 1 4 , A r t . 2 , S e c . 5 8 7 .
D o m e stic and F o r e ig n C o r p o r a t io n Laws o f T e n n e s se e ,
1 9 3 6 . Ch. 5 , A r t . I , S e c . 3 7 2 5 .
S t a t e o f M a in e, P r o v i s i o n s o f Law i n F orce R e l a t н
in g to B u s i n e s s C o r p o r a t i o n s , 1950 a s amended. Ch. 5 6 , S e c . 1 9 .
G e n e r a l C o r p o r a t io n Laws and M i s c e l l a n e o u s P r o v iн
s i o n s o f t h e S t a t e o f M i s s o u r i . R e v is e d S t a t u t e s o f 1929 and
amendments th r o u g h 1 9 3 3 . Ch. 3 2 , A r t . 1 6 , S e c . 5 1 0 4 .
P4P
C o r p o r a t io n Laws o f t h e S t a t e o f New M e x ic o , 1 9 2 8 .
Ch. 4 7 , S e c . 3 1 7 (Laws o f 1 9 2 3 ) .
122
and O r e g o n .2 4 ^
in a d d it io n , th e s t a t e s o f A rk ansas, ^
44
F l o r i d a , 2 4 о G e o r g i a , 2 4 о and T ex a s2 4 ^ a d h e re r a t h e r c l o s e l y
to th e above p r o v i s i o n w it h t h e e x c e p t i o n t h a t the power to
d e t e r m in e th e c o n s i d e r a t i o n may be v e s t e d i n th e b o ard o f
d i r e c t o r s n o t o n l y by v o t e o f th e s t o c k h o l d e r s , b u t a l s o b y
a ch arter p r o v isio n .
Iowa ? 4R i s somewhat s i m i l a r t o th e
T e n n e s s e e s t a t u t e b u t i f th e p r i c e i s n o t d e t e r m in e d b y th e
a r t i c l e s o f in c o r p o r a tio n ,
i t may be d e t e r m in e d b y th e i n н
c o r p o r a to r s , s t o c k h o ld e r s , or b o a r d .o f d i r e c t o r s .
A c o r p o r a t i o n o r g a n i z e d i n New
J e r s e y 2 4 ^
o r Montana 2 8 8
Oregon C o r p o r a t io n Law s. 1 9 3 6 . T i t . XXV, Ch. I I ,
S ec. 25-227.
243
244
P o p e 1 a D i g e s t o f th e S t a t u t e s o f A r k a n s a s . 1 9 3 7 .
Ch. 3 7 , A r t . I I , S e c . 2 1 3 7 .
*^4 ^ C o r p o r a t io n Law, S t a t e o f F l o r i d a , 1925 a s amendн
ed to J u l y 1 , 1 9 3 4 . Ch. 1 0 0 9 6 , A r t . 4 , S e c . 1 0 .
246
Code o f G eo rg ia o f 1 9 3 3 . T i t . 2 2 , P t . I l l , S e c . 2 2 806 and a l s o A ct and R e s o l u t i o n s o f t h e G e n e ra l A ssem b ly o f
th e S t a t e o f G e o r g ia , 1 9 3 7 - 1 9 3 8 . P t. I , T i t . I , S e c . 12 amendн
in g S e c . 2 2 - 3 0 8 o f t h e Code o f G eo rg ia o f 1 9 3 3 .
2 4 7 V ern o n ?s Texas S t a t u t e s . 1 9 3 6 , C e n t e n n ia l E d i t i o n .
T i t . 3 2 , Ch. 19A, S e c . 1 5 3 8 c .
248
Code o f Io w a , 1 9 3 5 . T i t . XIX, Ch. 3 8 5 , S e c .8 4 1 9 C 4 .
'Ph.о G e n e r a l C o r p o r a t io n Law o f New J e r s e y , i n c l u d н
in g a l l su p p le m e n ts and amendments t h e r e t o to th e end o f th e
L e g i s l a t i v e S e s s i o n o f 1 9 3 8 . T i t . 1 4 , Ch. 8 , S e c . 1 4 : 8 - 6 .
2 50
5 9 7 1 .3 .
R e v is e d Codes o f M on tan a, 1 9 3 5 . Ch. 1 7 , S e c .
123
may I s s u e i t s
s t o c k w it h o u t par v a l u e f o r th e v a l u e p r e s c r i b н
ed i n th e a r t i c l e s o f i n c o r p o r a t i o n , o r i f so p r o v id e d i n th e
a r t i c l e s , a s may be d e t e r m in e d b y the b o a rd o f d i r e c t o r s , or
if
su ch a p r o v i s i o n i s n o t m ade, t h e n , w i t h th e c o n s e n t o f
t w o - t h i r d s o f e a c h c l a s s o f s h a r e h o l d e r s h a v in g v o t i n g r i g h t s .
M ississip p i^ -* - s t i p u l a t e s
b e d e t e r m in e d b y th e a r t i c l e s ,
t h a t th e c o n s i d e r a t i o n i s t o
or b y t h e b o a rd o f d i r e c t o r s
a c t i n g u n d er a u t h o r i t y g r a n t e d i n t h e c h a r t e r .
The
Nevada252
law i s e s s e n t i a l l y th e same e x c e p t t h a t no s p e c i f i c a u t h o r н
i t y n e e d b e c o n f e r r e d b y th e a r t i c l e s
to g i v e the b o a rd o f
d i r e c t o r s power to d e t e r m in e th e c o n s i d e r a t i o n .
p
Dakota^
S ou th
l i k e w i s e p r o v id e s f o r th e d e t e r m i n a t i o n o f th e
v a l u e f o r s h a r e s w i t h o u t par v a l u e b y c h a r t e r p r o v i s i o n , , b u t
i n th e a b s e n c e o f su c h a p r o v i s i o n ,
th e a u t h o r i t y d e v o l v e s
upon th e s h a r e h o l d e r s who may e s t a b l i s h th e p r i c e b y a tw o th ir d v o te o f each c l a s s o f sh a re s o u ts ta n d in g , p ro v id e d ,
t h a t i t may n o t be s o l d f o r l e s s
th a n a f a i r m ark et p r i c e .
New Y o rk , b eyon d a d o u b t, h a s the m o st l e n g t h y s e c t i o n
o f any o f th e s t a t e s ;
i t reads as fo llo w s :
25 1 C o r p o r a t i o n s . Ch. 100 M i s s i s s i p p i Code o f 1 9 50 as.
amended to 1 9 3 5 . Ch. 1 0 0 , A r t . I I , S e c . 4 1 3 2 .
2 5 2 S t a t e o f N evada, D o m e stic and F o r e ig n C o r p o r a t io n
Laws. a s amended to 1 9 3 7 . S e c . 1 3 .
253 C o r p o r a t io n Laws o f S o u th D a k o t a . 1 9 3 8 . P t . 1 7 ,
Ch. 9 2 , A r t . 2 , P ar. 8 7 7 7 -C , S e c . 3 .
124
. . . . su ch c o r p o r a t i o n may i s s u e and may s e l l i t s
a u t h o r i z e d s h a r e s w i t h o u t - p a r v a l u e . f r o m 't im e to t im e ,
(a ) f o r su c h c o n s i d e r a t i o n a s may be p r e s c r i b e d i n su ch
c e r t i f i c a t e o f i n c o r p o r a t i o n ; o r (b ) f o r su c h c o n s i d e r s t i o n a s s h a l l be th e f a i r m arket v a l u e o f su c h s h a r e s ,
a n d , i n t h e a b s e n c e o f f r a u d i n t h e t r a n s a c t i o n , th e
judgm ent o f t h e b o a rd o f d i r e c t o r s as to su ch v a l u e s h a l l
be c o n c l u s i v e ; or- ( c ) i n th e a b s e n c e o f f r a u d i n the
t r a n s a c t i o n , f o r su c h c o n s i d e r a t i o n a s , from tim e to tim e ,
may be f i x e d b y th e b o a rd o f d i r e c t o r s p u r s u a n t to a u th o r н
i t y c o n f e r r e d i n su c h c e r t i f i c a t e o f i n c o r p o r a t i o n ; or
(d) f o r su ch c o n s i d e r a t i o n a s s h a l l be c o n s e n t e d t o or
a p p rov ed b y th e h o l d e r s o f a m a j o r i t y o f t h e s h a r e s e n н
t i t l e d to v o t e
. . ,2 5 4
T h is a c t u a l l y r e d u c e s i t s e l f
to t h r e e a l t e r n a t i v e s :
d e t e r m in e d ( 1 ) b y th e c e r t i f i c a t e ;
ors,
th e v a l u e
( 2 ) b y th e b o a r d o f d i r e c t н
i f power i s g r a n t e d ; o r (3 ) b y a m a j o r i t y v o t e o f t h e
sto c k h o ld e r s.
S e c tio n
E.
Summary
Summary,
The m a t t e r o f t h e ty p e o f a s s e t s
to be r e н
c e i v e d b y a c o r p o r a t i o n f o r s h a r e s o f s t o c k h a s b e e n v ie w e d
i n n i n e t e e n s t a t e s ^ ^ as im p o r ta n t en ou gh to w a r r a n t c o n s t i н
t u t i o n a l en a ctm en t.
The m o st common p r o v i s i o n a l l o w s s h a r e s
E x t r a c t s from th e S to c k C o r p o r a t io n Law, G e n e r a l
.C o r p o r a tio n Law, Tax Law, E x e c u t i v e Law, and P e n a l . S to c k
C o r p o r a t io n Law, S e c . 12 ( b ) .
Alabam a, A r iz o n a , A r k a n s a s , C o lo r a d o , D e la w a r e ,
I d a h o , K e n tu c k y , L o u i s i a n a , M i s s o u r i , M ontana, N eb ra sk a ,
N orth D a k o ta , Oklahoma,- P e n n s y l v a n i a , S o u th C a r o l i n a , S o u th
D a k o ta , T e x a s , U ta h , and V i r g i n i a .
? 125
t o be i s s u e d f o r m oney, l a b o r d o n e , o r s e r v i c e s a c t u a l l y r e н
c e iv e d .
Those s t a t e s h a v in g c o n s t i t u t i o n a l p r o v i s i o n f r e н
q u e n t l y add more d e f i n i t e r e g u l a t i o n s i n th e c o r p o r a t i o n la w ,
and t h e s t a t e s n o t h a v in g c o n s t i t u t i o n a l p r o v i s i o n u s u a l l y
g o v e r n by c o r p o r a t e law t h e a s s e t s
to b e r e c e i v e d .
E v e ry
s t a t e h a s e i t h e r one ty p e o f p r o v i s i o n o r th e o t h e r , and
t h i r t e e n s t a t e s ^ о h a ve b o t h a c o n s t i t u t i o n a l p r o v i s i o n and
a s ta tu to r y p r o v isio n .
Among t h e s t a t e s h a v in g s t a t u t o r y p r o v i s i o n , numberн
in g f o r t y - t w o s t a t e s
in a l l ,
th e p red o m in a n t p r o v i s i o n p e r н
m its a c o r p o r a tio n to is s u e sh a res f o r c a s h , o th e r p ro p erty
(ta n g ib le or in t a n g ib le ) , or f o r n e c e ssa r y s e r v ic e s , a c t u a lly
rend ered to
th e c o r p o r a t i o n .
To t h i s g e n e r a l s t a t e m e n t some
o f th e s t a t e s name c e r t a i n s p e c i f i c
ty p e o f a s s e t s ;
su ch as
le a s e s , r i g h t s , f r a n c h is e s , g o o d w ill, p a te n ts , e t c .
One o f
th e s t a t e s , F lo r id a , p ro v id es t h a t , u n le s s s t a t e d o th e r w ise
i n th e c h a r t e r , c a s h o n l y may be a c c e p t e d f o r s h a r e s .
o f th e s t a t e s ,
E ig h t
C o n n e c t i c u t , Iow a, M ary lan d , O h io , Montana,
New M e x ic o , O regon, and U ta h , do n o t m e n tio n In th e c o r p o r a н
t i o n la w th e I s s u a n c e o f s h a r e s f o r l a b o r d o n e , a l t h o u g h o f
t h i s number, t h r e e s t a t e s , C o lo r a d o , M ontana, and U ta h , s a n c н
t i o n su c h an i s s u e b y c o n s t i t u t i o n a l e n a c t m e n t.
256 Alabama, C o lo r a d o , D e la w a r e , I d a h o , L o u i s i a n a ,
M i s s o u r i , M ontana, N o rth D a k o ta , P e n n s y l v a n i a , S o u th C a r o l i n a ,
T e x a s , U ta h , and V i r g i n i a .
126
When d e a l i n g w i t h a s s e t s o t h e r th a n c a s h w h ich a r e t o
be r e c e i v e d f o r s t o c k th e v a l u a t i o n p l a c e d on th e c o n s i d e r a н
t i o n so r e c e i v e d *
i n th e a b s e n c e o f f r a u d o r n e g l i g e n c e , w i l l
be u p h e ld i n th e c o u r t s .
H ow ever, i n many j u r i s d i c t i o n s th e
a u t h o r i z i n g g r o u p , t h e b o a rd o f d i r e c t o r s o r s t o c k h o l d e r s as
?th e c a s e may b e , a r e e n j o i n e d from i s s u i n g s h a r e s f o r p r o н
p e r t y o r s e r v i c e s t h a t a r e n o t v a l u e d i n a c e r t a i n m anner.
The u s u a l d e s c r i p t i v e a d j e c t i v e s u s e d t o s e t f o r t h th e m ethod
o f v a lu a t io n are: " f a ir v a l u e ," " f a ir cash v a lu e " , " a c tu a l
w o rth i n m oney*, ??r e a s o n a b l e w orth i n m oney*, ? j u s t v a l u a t i o n * ,
and one s t a t e p r o v id e s f o r "market v a l u e . " R e g a r d le s s o f th e
a c t u a l v a l u e , Montana p e r m it s an a r b i t r a r y v a l u e t o be u s e d
when v a l u i n g m i n e s .
M in n eso ta d o e s n o t p e r m it s h a r e s to b e
i s s u e d f o r a c o n s i d e r a t i o n w h ich i s u n f a i r to t h e th e n e x i s t н
in g s h a r e h o l d e r s .
F o u r te e n s t a t e s 2 5 ^ p r o v id e t h a t s h a r e s s h a l l n o t be
c o n s i d e r e d f u l l y p a id when n o t e s h a v e b e e n r e c e i v e d i n p a yн
m en t. Hew York and U tah make i t a m isdem eanor to r e c e i v e
n o t e s i n payment o f s u b s c r i p t i o n s , and Montana makes i t a
m isdem eanor to a c c e p t a n o t e i n payment o f s u b s c r i p t i o n i f
th e f a c t i s n o t i n d i c a t e d on th e f a c e o f t h e c e r t i f i c a t e .
Vermont b y s p e c i f i c p r o v i s i o n a l l o w s s h a r e s to b e i s s u e d f o r
part
^
Id ah o, I l l i n o i s , In d ia n a , L o u isia n a , M a ssa c h u se tts,
M ic h ig a n , M in n e s o t a , M i s s i s s i p p i , M i s s o u r i , N orth D a k o ta ,
P e n n s y l v a n i a , Rhode I s l a n d , T e n n e s s e e , and W a sh in g to n .
127
b i l l s r e c e iv a b le .
Illin o is,
E i g h t s t a t e s , n a m e ly , C o n n e c t i c u t , I d a h o ,
L o u i s i a n a , M in n e s o t a , New H am p sh ire, O h io , and
W a sh in g to n , do n o t p e r m it c e r t i f i c a t e s
th e s h a r e s a re f u l l y p a i d . 2 5 8
to b e i s s u e d u n t i l
C a l i f o r n i a , F l o r i d a , New Y ork ,
N orth D a k o ta , S o u th D a k o ta , and T e n n e s s e e p e r m it t h e c e r t i f i н
c a t e to be i s s u e d p r i o r to f u l l payment i f a p r o v i s i o n so
p e r m i t t i n g i s c o n t a in e d - i n th e c e r t i f i c a t e o f i n c o r p o r a t i o n
- - i n some s t a t e s
la w s.
t h e p r o v i s i o n may be c o n t a i n e d i n th e b y -
In a d d it io n ,
six sta tes
p G jQ
a l l o w s h a r e s t o be i s s u e d
p r i o r to f u l l payment w i t h o u t s p e c i a l p r o v i s i o n .
D e s p i t e th e f a c t t h a t o n l y t w e n t y - o n e s t a t e s ,
260
e i t h e r b y c o n s t i t u t i o n a l o r s t a t u t o r y e n a c t m e n t , r e q u i r e that
par v a l u e s h a r e s b e i s s u e d o n l y f o r p a r , su c h a r e g u l a t i o n
i s p r o b a b ly assum ed i n a l l th e s t a t e s , e x c e p t t h o s e m e n tio n н
ed b e lo w .
C a l i f o r n i a , I n d i a n a , K a n sa s, M arylan d, New M ex ico ,
O h io , Rhode I s l a n d , and West V i r g i n i a p e r m i t , u n d er s p e c i f i c
and named c i r c u m s t a n c e s , a c o r p o r a t i o n t o i s s u e par v a l u e
shares fo r le s s
F in a lly ,
th a n p a r .
t h e r e r e m a in s to be c o n s i d e r e d th e problem
o f t h e d e t e r m i n a t i o n o f t h e v a l u e t o be r e c e i v e d f o r s h a r e s
2 5 8 See th e d i s c u s s i o n i n
th e c h a p t e r c o n c e r n in g th e
la w o f Iow a.
259 A r k a n s a s , D e la w a r e , G e o r g ia , I n d i a n a , Kansas and
M a ssa ch u setts.
2 6 0 A rkansas,
F l o r i d a , G e o r g ia , I d a h o , I l l i n o i s . Iow a,
L o u i s i a n a , M a s s a c h u s e t t s , M ic h ig a n , M in n e s o t a , M i s s o u r i , New
H a m p sh ire, New J e r s e y , New Y ork, Oklahoma, P e n n s y l v a n i a , Tenн
n e s s e e , Verm ont, W a sh in g to n , West V i r g i n i a , and W is c o n s in .
128
w i t h o u t par v a l u e .
In t h i s a n a l y s i s t h r e e m ain c l a s s e s were
used:
(1 ) S t a t e s t h a t , i n th e f i r s t
in sta n c e ,
s u b j e c t to
c h a r t e r , g r a n t t h e power t o d e t e r m in e th e c o n s i d e r a t i o n f o r
s h a r e s w i t h o u t p a r v a l u e to the b oa rd o f d i r e c t o r s u n l e s s
o t h e r w i s e p r o v id e d and t h e n i n d i c a t e
th e m ethod to b e u s e d
i f t h e power i s r e s e r v e d .
(2 ) S t a t e s t h a t , i n t h e f i r s t i n s t a n c e , g r a n t t h e
power t o d e t e r m in e t h e c o n s i d e r a t i o n f o r s h a r e s w i t h o u t par
v a l u e to t h e I n c o r p o r a t o r s or s h a r e h o l d e r s and t h e n ' p e r m i t
th e b o a rd o f d i r e c t o r s to e x e r c i s e
the power u n d er c e r t a i n
condi t io n s .
(3)
S t a t e s t h a t , i n t h e f i r s t I n s t a n c e , p r o v id e t h a t
t h e c o n s i d e r a t i o n f o r s h a r e s w i t h o u t p ar v a l u e s h a l l be d e t e r н
m ined b y th e a r t i c l e s o f i n c o r p o r a t i o n and t h e n name th e v a r н
i o u s m eth od s o f d e t e r m in in g t h e c o n s i d e r a t i o n ,
if
th e a r t i н
c l e s do n o t so p r o v i d e .
S e v e n t e e n s t a t e s 2 о! b e l o n g i n th e f i r s t c l a s s ;
a r e i n c l u d e d i n th e s e c o n d c l a s s ;
s e v e n s t a t e s 2 о2
and s e v e n t e e n s t a t e s 2 о*^
2 6 1 Alabama,
C a l i f o r n i a , C o lo r a d o , D e la w a r e , I l l i n o i s ,
K a n s a s , K e n tu c k y , M a s s a c h u s e t t s , M ary la n d , M ic h ig a n , M inneн
s o t a , N orth C a r o lin a * S o u th C a r o l i n a , ' U t a h , West V i r g i n i a ,
W i s c o n s i n , and Wyoming.
262
C o n n e c t i c u t , I d a h o , L o u is ia n a ., O h io , P e n n s y l v a n i a ,
V erm ont, and W a sh in g to n .
2 оо A r iz o n a , A r k a n s a s , F l o r i d a , G e o r g ia , Iow a, M aine.
M i s s i s s i p p i , M i s s o u r i , M ontana, N evada, New J e r s e y , New M e x ic o ,
New Y ork , O regon, S o u th D a k o ta , T e n n e s s e e , and T e x a s.
b e lo n g in
th e t h i r d c l a s s .
I t i s e v i d e n t t h a t i n m o st o f t h e s t a t e s
th e b o a rd o f
d i r e c t o r s may be g i v e n th e a u t h o r i t y to d e t e r m in e t h e p r i c e
o r c o n s i d e r a t i o n o t h e r th a n money to be r e c e i v e d f o r s h a r e s
w i t h o u t par v a l u e .
In p r a c t i c a l l y a ll, o f th e s t a t e s
th e
a u t h o r i t y m ig h t , b y c h a r t e r l i m i t a t i o n , b e w i t h h e l d from th e
b o a rd o f d i r e c t o r s .
In some I n s t a n c e s th e f a i l u r e
to g r a n t
p o s i t i v e a u t h o r i t y i s assum ed to be a d e n i a l o f t h e power
and an i n d i c a t i o n o f th e r e t e n t i o n o f th e r i g h t b y th e s h a r e н
h o ld e r s .
I f t h e s h a r e h o l d e r s do e x e r c i s e t h e r i g h t o f d e t e r н
m in in g th e c o n s i d e r a t i o n f o r w h ich s h a r e s w i t h o u t par v a lu e
a r e i s s u e d , th e m ost common v o t i n g r e q u ir e m e n t i s
th e a f f i r m a н
t i v e c o n se n t o f tw o -th ir d s o f th e sh a r e h o ld e r s o f each c l a s s
o r k in d o f o u t s t a n d i n g s h a r e s .
tio n s to t h is g e n e r a liz a t io n .
There a r e , o f c o u r s e , e x c e p н
H ow ever, w h i l e i t
i s tru e th a t
i n c e r t a i n i n s t a n c e s t h e s t o c k h o l d e r s may h a ve th e power to
d e t e r m in e th e v a l u e to be r e c e i v e d f o r su ch s t o c k i t u s u a l l y
d e v o l v e s on th e b o a r d o f d i r e c t o r s , and a l l s t o c k i s s u e d
u n d er t h e v a r i o u s . r u l e s o u t l i n e d i s deemed f u l l y p a id s t o c k
and n o t l i a b l e
to a s s e s s m e n t .
CHAPTER IV
CORPORATE LAVsf
AND THE PAYMENT OF CASH DIVIDENDS
In tr o d u c tio n .
The p rim a ry p u r p o se o f b u s i n e s s c o r н
p o r a t i o n s i s t o p r o d u c e , m a n u f a c t u r e , a n d /o r s e l l a p r o d u c t
o r s e r v i c e to s o c i e t y and i n so d o in g y i e l d t o
th e c o r p o r a н
t i o n a p r o f i t , w h ich p r o f i t i s t o b e t r a n s f e r r e d t o th e
owners o f th e b u s i n e s s , th e s h a r e h o l d e r s ,
i n th e form o f a
d iv id e n d in c a s h , s h a r e s , or o th e r p r o p e r ty .
In m aking t h i s
d is b u r s e m e n t to t h e s h a r e h o l d e r s i t i s n e c e s s a r y t h a t o t h e r
i n d i v i d u a l s i n t e r e s t e d i n t h e b u s i n e s s , p a r t i c u l a r l y th e
c r e d i t o r s , be p r o t e c t e d ,
and t h a t an e q u i t a b l e r e l a t i o n be
m a in t a in e d among t h e v a r i o u s c l a s s e s o f s h a r e h o l d e r s .
For
t h e s e r e a s o n s th e i n c o r p o r a t i o n la w s o f t h e s t a t e s h a v e , i n
some c a s e s v e r y p r e c i s e l y and d e f i n i t e l y and i n o t h e r c a s e s
v e r y l o o s e l y , p la c e d l i m i t a t i o n and r e s t r i c t i o n s on th e p a yн
m ent o f d i v i d e n d s .
P r im a r ily th e l e g i s l a t o r s have b een in н
t e r e s t e d i n p r e v e n t i n g t h e paym ent o f d i v i d e n d s from th e
s t a tu t o r y c a p it a l o f th e c o r p o r a tio n .
(i.e.,
The s t a t u t o r y c a p i t a l
th e amount o f th e o r i g i n a l c o n t r i b u t i o n o f t h e s h a r e н
h o l d e r s a l l o c a t e d to th e s t a t u t o r y c a p i t a l , p lu s amounts
t h a t h a v e b e e n l e g a l l y t r a n s f e r r e d t h e r e t o and t h a t a r e c o n н
s i d e r e d b y v a r i o u s l e g a l r u l e s t o be a sum o f money i n v e s t e d
131
In v a r i o u s a s s e ts )'* ' s h o u ld be r e t a i n e d f o r th e b e n e f i t o f
th e c r e d i t o r s o f t h e c o r p o r a t i o n , f o r t h i s
i n v e s t e d fu n d in
th e o r y i s t o . t a k e th e p la c e o f the in d i v id u a l l i a b i l i t y o f
t h e i n d i v i d u a l e n t r e p r e n e u r o r p a r t n e r s h i p ty p e o f o r g a n i z a н
tio n .2
P urpose o f t h e c h a n t e r .
T h is c h a p t e r and t h e two
f o l l o w i n g h ave a s t h e i r p u r p o se a c r i t i c a l e x a m in a t io n o f
t h e la w s o f t h e v a r i o u s s t a t e s r e g a r d i n g t h e payment o f
d iv id e n d s.
As w i l l be shown t h e r e i s a d e c i d e d l a c k o f u n i н
f o r m i t y i n th e s t a t u t o r y p r o v i s i o n s .
In t h i s ch a p te r th e
g e n e r a l p h a s e s o f t h e p rob lem d e a l i n g w i t h c a s h d i v i d e n d s
w i l l be c o n s id e r e d as f o llo w s :
S e c t i o n A.
The C a p i t a l Im p airm en t a n d /o r th e I n s o l н
v e n c y T e s t and Cash D i v i d e n d s .
S e c t i o n B.
G e n e r a l S ta t e m e n t R e g a r d in g S o u r ce o f
Cash D i v i d e n d s .
S e c t i o n G.
Summary.
I n t h e c h a p t e r im m e d ia t e ly f o l l o w i n g c o n s i d e r a t i o n
w i l l be g i v e n to th e payment o f s h a r e d i v i d e n d s and t h e n e x t
c h a p t e r , C h a p ter V I, w i l l d i s c u s s c e r t a i n s p e c i a l f e a t u r e s
1 For a d e t a i l e d c o n s i d e r a t i o n s e e C h ap ter I I .
2 T h is c o n c e p t i s d e f i n i t e l y s t a t e d i n t h e la w o f
Maine w h ich p r o v i d e s t h a t n The c a p i t a l s t o c k s u b s c r i b e d f o r
any c o r p o r a t i o n i s d e c l a r e d t o be and s t a n d s f o r . t h e s e c u r н
it y o f a l l c r e d ito r s th e r e o f, . . . .
S t a t e o f M aine, P roн
v i s i o n s o f Law i n F o rc e R e l a t i n g t o B u s i n e s s C o r p o r a t i o n s ,
1930 a s am ended.
CTTT 5 S , S e c . 101.
132
t h a t govern d iv id e n d s such as th e a v a i l a b i l i t y o f u n r e a l i z e d
a p p r e c i a t i o n f o r d i v i d e n d s , p a i d - i n s u r p l u s and d i v i d e n d s ,
d e p l e t i o n and d i v i d e n d s , e t c .
S e c t i o n A.
The C a p i t a l Im pairment
a n d / o r t h e I n s o l v e n c y T e s t and Cash D i v i d e n d s .
O u t l i n e o f common l i m i t a t i o n s on d i v i d e n d p a y m e n t s .
The two m o st common l i m i t a t i o n s p l a c e d upon t h e payment o f
d i v i d e n d s i s t h a t o f c a p i t a l Im pairm ent a n d / o r i n s o l v e n c y .
Many o f t h e s t a t e s p r o v i d e t h a t no d i v i d e n d s h a l l be d e c l a r н
ed when t h e c a p i t a l o f t h e c o r p o r a t i o n i s i m p a i r e d o r when
the d iv id e n d w i l l render th e c a p i t a l im paired.
Other s t a t e s
p ro v id e t h a t the d i r e c t o r s o f a c o r p o r a t i o n s h a l l n o t d e c la r e
d i v i d e n d s when t h e c o r p o r a t i o n i s
i n s o l v e n t o r when t h e p a y н
ment o f t h e d i v i d e n d would r e n d e r t h e c o r p o r a t i o n i n s o l v e n t .
T h is p r o v i s i o n i s v e r y common i n t h e s o - c a l l e d o l d e r s t a t н
u t e s a n d , i n f a c t , some s t a t e s h a v e t h i s p r o v i s i o n a s t h e
s o l e l i m i t a t i o n on t h e payment o f d i v i d e n d s .
A few s t a t e s
use b o th types o f r e g u l a t i o n in c o n t r o l l i n g d iv id en d payн
ments .
These two l i m i t a t i o n s a r e d i s t i n c t l y d i f f e r e n t i n
m ea n in g and r e s u l t .
The r u l e t h a t a d i v i d e n d must n o t be
p a i d o u t o f c a p i t a l i s n o t the same a s the r u l e t h a t d i v i -
135
denda m u st n o t be p a i d b y an i n s o l v e n t company, f o r an i n н
s o l v e n t company may e a r n p r o f i t s , b u t t h e a s s e t s r e s u l t i n g
from t h e p r o f i t s e a r n e d s h o u l d be u s e d t o pay d e b t s .
v ersely ,
Conн
a c o r p o r a t i o n may be q u i t e s o l v e n t b u t may h a v e d e н
p l e t e d t h e c a p i t a l a c c o u n t and, t h e r e f o r e , b e u n a b l e to pay
d ivid en d s.
In th e f o llo w in g d i s c u s s i o n ,
the v a r io u s p r o v i н
s i o n s w i l l be c o n s i d e r e d u n d e r the f o l l o w i n g h e a d i n g s :
I . S ta t e s h aving p r o v is io n s re g a rd in g c a p i t a l im p airн
ment and d i v i d e n d payment:
(a) D ivid en ds a re p r o h ib i t e d i f c a p i t a l i s
imн
p a i r e d o r i f th e ' payment o f t h e d i v i d e n d s
would r e n d e r t h e c a p i t a l i m p a i r e d , and t h e
d ir e c t o r s are l i a b l e
i f d iv id e n d s are paid
c o n t r a r y to the p r o v i s i o n .
(b) D i r e c t o r s a r e l i a b l e
when t h e c a p i t a l i s
i f d iv id en d s a r e p aid
im paired or i f
the
d i v i d e n d s w ould r e n d e r t h e c a p i t a l i m p a i r н
ed.
II.
S ta t e s a llo w in g d iv id en d s d e s p it e c a p i t a l im pairн
ment w i t h c e r t a i n l i m i t a t i o n s .
III.
S t a t e s h a v i n g p r o v i s i o n s r e g a r d i n g i n s o l v e n c y and
d i v i d e n d payment.
(a) D iv id en d s are p r o h i b i t e d i f
the c o r p o r a tio n
I s i n s o l v e n t or i f t h e payment o f t h e d i v i н
dend w o u l d r e n d e r t h e c o r p o r a t i o n i n s o l v e n t ,
134
and t h e d i r e c t o r s a r e l i a b l e
if* d i v i d e n d s
are paid co n tr a r y to th e p r o v i s i o n s .
(b) D i r e c t o r s a r e l i a b l e if* d i v i d e n d s a r e p a i d
when the c o r p o r a t i o n i s
i n s o l v e n t o r if*
t h e payment o f t h e d i v i d e n d would r e n d e r
t h e company i n s o l v e n t .
IV . S t a t e s h a v i n g p r o v i s i o n s r e g a r d i n g c a p i t a l i m p a i r н
ment and i n s o l v e n c y and d i v i d e n d p a y m e n t s .
(a) D ivid en d s are p r o h i b i t e d i f
th e c o r p o r a t i o n i s
im paired or i f
dend would r e n d e r i t
corporation i s
the c a p i t a l o f
the d i v i н
im p aired , or i f
the
i n s o l v e n t o r th e payment o f
a d i v i d e n d would r e n d e r i t
i n s o l v e n t , and
i f p a i d c o n t r a r y to the p r o v i s i o n s ,
the
d ir e c t o r s are l i a b l e .
(b ) D i r e c t o r s a r e l i a b l e
i f d iv id e n d s are p aid
when t h e c a p i t a l o f a c o r p o r a t i o n i s
p aired or i f
imн
the payment o f t h e d i v i d e n d
would r e n d e r t h e c a p i t a l i m p a i r e d , o r i f
the c o r p o r a tio n i s
i n s o l v e n t or i f
d i v i d e n d would r e n d e r i t
the
im paired.
V. S t a t e s h a v i n g a m o d i f i e d t y p e o f i n s o l v e n c y t e s t .
V I . S t a t e s h a v i n g . c a p i t a l im p a ir m e n t a n d / o r i n s o l v e n c y
t e s t a s the o n l y l i m i t a t i o n on t h e payment o f
d iv id en d s.
135
V I I . S t a t e s h a v i n g no p r o v i s i o n r e g a r d i n g c a p i t a l imн
p a ir m e n t a n d / o r i n s o l v e n c y l i m i t a t i o n on d i v i н
dend payment.
C a p i t a l im pairm en t and d i v i d e n d p a y m e n t s .
The l e g i s н
l a t u r e s o f n i n e t e e n s t a t e s h ave p r o v i d e d s p e c i f i c a l l y f o r
some t y p e o f c a p i t a l im p airm en t t e s t b e f o r e d i v i d e n d s a r e
p erm itted .
There a r e two p r i n c i p a l s u b d i v i s i o n s o f t h e c a p i н
t a l im pairm en t t e s t :
one d i v i s i o n p r o h i b i t s
t h e payment o f
s u c h a d i v i d e n d and makes t h e d i r e c t o r s l i a b l e
i f the d iv iн
dend i s . p a i d , and t h e o t h e r s u b d i v i s i o n p r o v i d e s t h a t t h e
d i r e c t o r s are l i a b l e
i f such a d iv id e n d i s p a id .
W h ile i t
w ould h a v e b e e n p r e f e r a b l e t o h ave i g n o r e d t h e l i a b i l i t y o f
d i r e c t o r s and to d e t e r m i n e o n l y t h e s t a t e s p r o h i b i t i n g d i v i н
dend payment when c a p i t a l i s
be r e n d e r e d i m p a i r e d ,
i m p a i r e d or t h e c a p i t a l w ould
t h i s a r t i f i c i a l s e p a r a t i o n would h a v e
l e d t o d i f f i c u l t y and e r r o r s ,
f o r i n many s t a t e s
the c a p i t a l
im p a irm en t l i m i t a t i o n o r i n s o l v e n c y t e s t a p p e a r s o n l y i n
c n n n e c t i o n w i t h the l i a b i l i t y
an i l l e g a l d i v i d e n d .
In f a c t ,
im posed on t h e d i r e c t o r s f o r
the s e c t i o n i s f r e q u e n t ly not
i n t h e g e n e r a l c o r p o r a t i o n la w b u t i n t h e p e n a l co d e .o f t h e
state.
C onsequently,
d irectors*
lia b ility ,
i t w i l l be n e c e s s a r y t o d i s c u s s the'
b u t i t w i l l b e done o n l y i n c i d e n t a l t o
t h e main p u r p o s e .
C o n s i d e r a t i o n w i l l be d i r e c t e d t o the f i r s t s u b d i v i -
136
s i o n w h i c h p r o v i d e s t h a t d i v i d e n d s a r e p r o h i b i t e d when p a i d
from c a p i t a l o r when t h e i r payment would d i m i n i s h t h e c a p i н
t a l o f t h e c o r p o r a t i o n , an d t h a t i f d i v i d e n d s a r e p a i d d e н
s p i t e t h e p r o h i b i t i o n t h e d i r e c t o r s are l i a b l e .
s t a t e s are in c lu d e d i n t h i s s u b d i v i s i o n ;
F ifteen
A r k a n s a s , M ain e ,
Montana,- N e b r a s k a , N evada, New J e r s e y , New M e x ic o , New Y ork ,
North C a r o l i n a , N orth D a k o ta , -Oklahoma, Rhode I s l a n d , S o u t h
D a k o t a , T e n n e s s e e , and U t a h .
The s t a t u t e o f New J e r s e y ,
w h i c h i s r e p r e s e n t a t i v e o f some s t a t e s
i n the group, p r o v id e s
that:
The d i r e c t o r s o f a c o r p o r a t i o n s h a l l n o t pay d i v i d e n d s
e x c e p t from i t s s u r p l u s , i n c l u d i n g s u r p l u s a s d e t e r m i n e d
b y s e c t i o n 1 4 : 8 - 6 o f t h i s t i t l e , o r from t h e n e t p r o f i t s
a r i s i n g from t h e b u s i n e s s o f t h e c o r p o r a t i o n , n o r s h a l l
t h e y d i v i d e , w ith d r a w o r i n anyway pay to the s t o c k h o l d н
e r s ' o r any o f them , any p a r t o f t h e c a p i t a l s t o c k o f t h e
c o r p o r a tio n or reduce i t s c a p i t a l s t o c k e x c e p t as a u th o r н
i z e d by law .
In c a s e o f a n y w i l l f u l o r n e g l i g e n t v i o l a t i o n o f t h e
p r o v i s i o n s o f t h i s s e c t i o n , t h e d i r e c t o r s u nd er whose
a d m i n i s t r a t i o n t h e same may have h a p p e n e d , e x c e p t t h o s e
who may h a v e c a u s e d t h e i r d i s s e n t t h e r e f r o m to be e n t e r н
ed a t l a r g e upon the m i n u t e s a t t h e t i m e , o r who, n o t
t h e n b e i n g p r e s e n t , s h a l l have c a u s e d t h e i r d i s s e n t
t h e r e f r o m t o b e s o e n t e r e d upon l e a r n i n g o f s u c h a c t i o n ,
s h a l l j o i n t l y and s e v e r a l l y be l i a b l e a t any time w i t h н
i n s i x y e a r s a f t e r the p a y i n g o f s u c h d i v i d e n d s , t o t h e
s t o c k h o l d e r s , s e v e r a l l y and r e s p e c t i v e l y , , to t h e f u l l
amount o f any l o s s s u s t a i n e d by s u c h s t o c k h o l d e r , o r i n
c a s e o f i n s o l v e n c y , to t h e c o r p o r a t i o n o r i t s r e c e i v e r
t o t h e f u l l amount o f any l o s s s u s t a i n e d b y the c o r p o r a н
t i o n , by re a so n o f such w ith d ra w a ls, d i v i s i o n s or re d u cн
tio n .3
3 The G e n e r a l C o r p o r a t i o n Law o f New J e r s e y , i n c l u d н
i n g a l l s u p p l e m e n t s and amendments t h e r e t o t o t h e e n d o f t h e
L e g is la tiv e S ession o f 1958.
T i t . 1 4 , Ch. 8 , S e c . 1 4 : 8 - 1 9 .
137
The New J e r s e y s e c t i o n i s f o l l o w e d t o a c o n s i d e r a b l e d e g r e e
b y ? ? A r k a n s a s , 4 Montana,о Nevada,о New M e x i c o , ^ N orth Caroн
l i n a , о N orth D a k o t a ,^ Oklahoma,-*-о Rhode I s l a n d , S o u t h Dakн
ota,-*-о and Tennessee-*-о*
T h is d o e s n o t mean t h a t a l l
the
s t a t u t e s o f t h e s e s t a t e s h a v e t h e same w o r d in g ; bn t h e c o n - ,
trary,
th e re i s a v a r i a t i o n i n the so u rc e o f the d iv i d e n d s ,
4 Pope *s D i g e s t o f t h e S t a t u t e s o f A r k a n s a s . 1 9 3 7 .
Ch. 3 1 , A r t . IV, S e c . 2 1 8 4 .
5 The R e v i s e d Godes o f Montana o f 1 9 5 5 . A n n o t a t e d .
Ch. 1 5 , S e c . 5 9 3 9 .
о S t a t e o f N evada, D o m e s t ic and F o r e i g n C o r p o r a t i o n
Laws, a s amended to 1 9 3 7 . S e c . 7 5 .
7 C o r p o r a t i o n Laws o f the S t a t e o f New M e x ic o , 1 9 2 8 .
Ch. I I , A r t . 1 , S e c . 60 and Laws o f 1925 Ch. 7 4 , S e c . 3 2 0 .
R
The S t a t e o f N orth C a r o l i n a , C o r p o r a t i o n Laws,
Ch. 22 o f t h e C o n s o l i d a t e d S t a t u t e s , 1 9 3 5 . Ch. 2 2 , A r t . 6 ,
S e c . 1 1 7 9 . T h is s t a t e d o e s n o t a l l o w d i v i d e n d s i f t h e d e b t s ,
w h e t h e r due o r n o t , e x c e e d t w o - t h i r d s o f i t s a s s e t s .
о C o r p o r a t i o n Laws o f t h e S t a t e o f N orth D a k o t a ;
G e n e r a l and C o o p e r a t i v e . R e v i s e d t o J u l y 1 , 1 9 2 5 w i t h s u p p l e н
m ents to 1 9 3 7 . S e c . 4 5 4 3 and 4 5 4 4 .
^ C ompiled S t a t u t e s o f Oklahoma. 1921 A n n o t a t e d .
Ch. 3 4 , A r t . I l l , S e c . 5 3 3 6 .
G e n e r a l C o r p o r a t i o n Laws o f , t h e S t a t e o f Rhode
I s l a n d a s amended 1 9 3 2 . Ch. 2 4 8 , A r t . I I , S e c . 4 1 .
12 C o r p o r a t i o n Laws o f S o u t h D a k o t a . 1 9 3 8 . P t . 1 7 ,
Ch. 1 5 9 , A r t . 4 , S e c . 8 7 8 9 , and Ch. 9 2 , A r t . 2 , S e c . 8 7 7 7 - F .
13
D o m e s t ic and F o r e i g n C o r p o r a t i o n Laws o f T e n n e s s e e .
1 9 3 6 . Ch. 5 , A r t . I , S e c . 3 7 5 9 .
138
and a l s o a d i f f e r e n c e i n the number o f y e a r s o f l i a b i l i t y
is
to run and t h e p e r s o n or p e r s o n s t o whom t h e d i r e c t o r s a r e
l i a b l e , b u t on t h e p o i n t u n d e r c o n s i d e r a t i o n ,
the p r o h i b i t i o n
on d i v i d e n d s from c a p i t a l s t o c k and t h e l i a b i l i t y o f d i r e c t н
ors,
there i s a v er y c l o s e agreem ent.
Pour s t a t e s , M a ine, N e b r a s k a , New Y ork , and U ta h ,
l i k e w i s e h a v e p r o v i s i o n s p r o h i b i t i n g d i v i d e n d s from c a p i t a l
and making t h e d i r e c t o r s l i a b l e , b u t t h e law s o f t h e s e s t a t e s
v a r y s l i g h t l y from t h a t o f t h e g r o u p m e n t i o n e d a b o v e .
For
e x a m p l e , Maine1-4 p r o v i d e s t h a t t h e c a p i t a l s h a l l n o t b e r e н
d u c e d u n t i l a l l d e b t s due from th e c o r p o r a t i o n h a v e b e e n
p a i d , and t h a t any o f f i c e r o r member who v o t e s t o make a
d i v i d e n d i n v i o l a t i o n s h a l l be p u n i s h e d b y a f i n e o f n o t more
t h a n two th o u s a n d d o l l a r s and b y im p r is o n m e n t f o r n o t l o n g e r
t h a n one y e a r .
A l s o no d i v i d e n d d e c l a r e d from c a p i t a l s t o c k
i s v a l i d a s a g a i n s t any p e r s o n who h as a v a l i d and bona f i d e
judgment a g a i n s t the c o r p o r a t i o n .
The c o r p o r a t i o n la w o f Nebraska i s r a t h e r u n u s u a l i n
t h a t th e re are c e r t a i n g e n e r a l p r o v is i o n s f o r the in c o r p o r a н
t i o n o f a l l t y p e s o f com p anies and i n a d d i t i o n t h e r e a r e
c e r t a i n p r o v is io n s d e a lin g w it h m anufacturing concerns o n ly .
In th e s e c t i o n d e a l i n g w i t h t h i s l i m i t e d - f i e l d o f corporations
14 S t a t e o f M aine, P r o v i s i o n s o f Law i n F orce R e l a t н
i n g to B u s i n e s s C o r p o r a t i o n s . 1930 as Amended. Ch. 5 6 ,
S e c . 37 and S e c . 1 0 2 .
139
t h e r e i s a s e c t i o n t h a t s p e c i f i c a l l y p r o v i d e s t h a t the d i r e c t н
o r s s h a l l n o t pay d i v i d e n d s r e d u c i n g t h e c a p i t a l s t o c k w h i i e
-
t h e company h a s o u t s t a n d i n g l i a b i l i t i e s ,
-
and a su p p le m e n н
t a r y p r o v i s i o n i s worded a s i n d i c a t e d b e lo w :
A d i v i s i o n o f the funds o f a co rp o ra tio n fo r oth er
p u r p o s e s t h a n t h o s e m e n t i o n e d i n t h e law g r a n t i n g t h e
c h a r t e r a n d t h e payment o f d i v i d e n d s b y a c o r p o r a t i o n ,
w h ic h h a s i n s u f f i c i e n t f u n d s to m e e t t h e l i a b i l i t i e s o f
th e c o r p o r a t i o n , s h a l l b e deemed a v i o l a t i o n o f t h e p r o н
v i s i o n s o f t h i s a r t i c l e and s u b j e c t t h o s e en g a g ed t h e r e н
i n to t h e p e n a l i t i e s h e r e i n p r e s c r i b e d .
New York v a r i e s
th e s t a t u t o r y s e c t i o n b y p r o v i d i n g
tha t :
No s t o c k c o r p o r a t i o n s h a l l d e c l a r e o r pay any d i v i d e n d
w h ic h s h a l l i m p a i r i t s c a p i t a l , n o r w h i l e i t s c a p i t a l i s
i m p a i r e d , n o r s h a l l any su c h c o r p o r a t i o n d e c l a r e o r pay
any d i v i d e n d or make a n y d i s t r i b u t i o n o f a s s e t s t o any
o f i t s s t o c k h o l d e r s , w h e th e r upon a r e d u c t i o n o f t h e
number or par v a l u e o f i t s s h a r e s o r o f i t s c a p i t a l , unн
l e s s t h e v a l u e o f i t s a s s e t s r e m a i n i n g a f t e f t h e payment
o f su ch d i v i d e n d s , or a f t e r s u c h d i s t r i b u t i o n o f a s s e t s ,
a s t h e c a s e may b e , s h a l l be a t l e a s t e q u a l t o the a g g r e н
g a t e amount o f i t s d e b t s a n d l i a b i l i t i e s , i n c l u d i n g c a p i н
ta l.
I n c a s e any s u c h d i v i d e n d s h a l l be p a i d , o r any
su c h d i s t r i b u t i o n o f a s s e t s made, t h e d i r e c t o r s i n whose
a d m i n i s t r a t i o n t h e same s h a l l h ave b e e n d e c l a r e d e x c e p t
t h o s e ( 1 ) who may h a v e c a u s e d t h e i r d i s s e n t t h e r e f r o m to
be e n t e r e d upon th e m i n u t e s o f t h e m e e t i n g o f t h e d i r e c t н
o r s a t t h e t i m e , o r ( 2 ) who h a v i n g b e e n a b s e n t when s\ich
a c t i o n was t a k e n may h a v e c a u s e d t h e i r d i s s e n t t o be
e n t e r e d on t h e m i n u t e s w i t h i n a r e a s o n a b l e tim e a f t e r
h e a r i n g o f s u c h a c t i o n , o r ( 3 ) who a f f i r m a t i v e l y show
t h a t t h e y had r e a s o n a b l e grounds t o b e l i e v e and d i d b e н
l i e v e t h a t s u c h d i v i d e n d s o r d i s t r i b u t i o n would n o t imн
p a i r t h e c a p i t a l o f s u c h c o r p o r a t i o n , s h a l l be l i a b l e ,
Ill,
15 C om piled S t a t u t e s o f N e b r a s k a . 1 9 2 9 . Ch. 2 4 , A r t .
Sec. 24-302.
16 I t i d . , Ch. 2 4 , S e c . 2 4 - 2 1 8 .
140
j o i n t l y and s e v e r a l l y , to s u c h c o r p o r a t i o n and t o t h e
c r e d i t o r s t h e r e o f t o t h e f u l l amount o f any l o s s s u s t a i n н
ed b y s u c h c o r p o r a t i o n o r b y i t s c r e d i t o r s r e s p e c t i v e l y ,
b y r e a s o n o f s u c h d i v i d e n d o r d i s t r i b u t i o n . 1*7
This l a w seems t o p l a c e an a d d i t i o n a l r e s t r i c t i o n on the
payment o f d i v i d e n d s and a l s o r e n d e r s t h e d i r e c t o r s l i a b l e .
The c o r p o r a t i o n la w . o f Utah-*-о p r o v i d e s tha t t h e
d i r e c t o r s s h a l l n o t d e c l a r e a d i v i d e n d from c a p i t a l , and
d i r e c t o r s a s s e n t i n g t o t h e payment o f s u c h a d i v i d e n d or
n ot ta k in g c e r t a i n a c t i o n w ith in a s t a t e d p er io d are l i a b l e .
In t h i s s t a t e
the l i a b i l i t y
is a crim in al l i a b i l i t y .
The s e c o n d s u b - d i v i s i o n , w hich p r o v i d e s f o r d i r e c t н
ors? lia b ility
f o r c a p i t a l im p a ir m e n t,
gro u p o f f o u r s t a t e s .
is
composed o f a
There i s no u n i f o r m i t y i n t h e p r o v i н
s i o n s , b u t th e g e n e r a l f e a t u r e s are i n d i c a t e d b y the la w o f
V irg in ia :
I f t h e b o a r d o f d i r e c t o r s d e c l a r e and pay a d i v i d e n d
out o f any p a rt o f t h e c a p i t a l , as h e r e in b e f o r e d e f i n e d ,
a l l members o f t h e b o a r d who s h a l l b e p r e s e n t and know
su ch d i v i d e n d i s d e c l a r e d i n v i o l a t i o n o f this seetiohjand
s h a l l not d is s e n t therefrom , s h a l l , in t h e i r in d iv id u a l
c a p a c i t y , b e j o i n t l y and s e v e r a l l y l i a b l e to t h e c o r p o r н
a t i o n ? s c r e d i t o r s f o r t h e amount o f s u c h d i v i d e n d so unн
l a w f u l l y p a i d and may be p r o c e e d e d a g a i n s t t h e r e f o r on
17 Laws o f t h e S t a t e o f Hew Y o r k . 1 9 3 9 . V o l . 2 , Ch.
364 amending Ch. 6 0 , A r t . 6 , S e c . 58 o f t h e S t o c k C o r p o r a н
t i o n Law.
18 R e v i s e d S t a t u t e s o f U t a h . 1 9 3 3 . T i t . 1 8 , Ch. 2 ,
S e c . 1 8 - 2 - 1 7 . I t i s n o t d e s i r e d to t a k e up i n d e t a i l - the"
c i v i l and c r i m i n a l l i a b i l i t y o f d i r e c t o r s f o r i l l e g a l a c t s ,
b u t t h i s p o i n t had t o b e c o n s i d e r e d to i n d i c a t e the d i f f e r н
e n c e i n l i a b i l i t y . See T i t . 1 0 3 , Ch. 1 2 , S e c . 1 0 3 - 1 2 - 4 .
141
a b i l l o f e q u i t y f i l e d i n b e h a l f o f su c h c r e d i t o r s
.1 9
?
?
?
?
A r i z o n a , 20 I d a h o , 21 and Vermont22 a l s o p r o v i d e t h a t th e
d i r e c t o r s a r e l i a b l e f o r t h e payment o f d i v i d e n d s from c a p i н
ta l.
In t h e s e th ree s t a t e s a c r im in a l l i a b i l i t y
is
im p o s ed .
Vermont p r o v i d e s t h a t t h e d i r e c t o r s a s s e n t i n g t o a d i v i d e n d p a i d o u t o f c a p i t a l and knowin g i t
to be so s h a l l be f i n e d
n o t more t h a n one t h o u s a n d d o l l a r s n o r l e s s
t h a n f i v e hunн
d r e d d o l l a r s , or I m p r is o n e d f o r n o t more tha n t w e l v e months
nor l e s s
t h a n s i x m o n t h s , o r b o t h . 2о
A r iz o n a and Idaho make
th e d i r e c t o r s g u i l t y o f a m isd em ea n o r.
D i v i d e n d payments d e s p i t e t h e im p airm en t o f c a p i t a l .
The s t a t u t e s o f f i v e
tio n s,
s t a t e s p r o v id e , under c e r t a i n c o n d iн
t h a t a d i v i d e n d may be p a i d e v e n thou gh t h e c a p i t a l
o f the c o r p o r a tio n i s
im paired .
C a l i f o r n i a has the f o l l o w н
ing p r o v is io n :
A c o r p o r a t i o n may d e c l a r e d i v i d e n d s p a y a b l e i n c a s h
or p ro p e r ty o n ly as f o l l o w s :
19 V i r g i n i a C o r p o r a t i o n Law w i t h amendments t o June
2 1 , 1 9 3 8 . Ch. 1 4 7 , S e c . 3 8 4 0 .
20 R e v i s e d Code o f A r i z o n a . 1 9 2 8 . A n n o t a t e d . Ch. 1 0 8 ,
A rt. 9 , Sec. 4804.'
21 Idaho Code, 1 9 3 2 . T i t . 1 7 , Ch. 1 4 0 , S e c . 1 7 - 4 0 0 4 .
22 P u b l i c Laws o f t h e S t a t e o f Vermont R e l a t i n g t o
C o r p o r a t i o n s . 1 9 3 4 . Ch. 2 3 9 , S e c . 5 8 5 0 .
23 L o c . c i t .
142
(2) D e s p it e the f a c t t h a t the n e t a s s e t s o f th e co r p o r a н
t i o n amounts t o l e s s th a n t h e s t a t e d c a p i t a l , o u t o f n e t
p r o f i t s e a r n e d d u r i n g the p r e c e e d i n g a c c o u n t i n g p e r i o d
w h i c h s h a l l n o t be l e s s than s i x months n o r more than
one y e a r i n d u r a t i o n ; or
I f t h e v a l u e o f t h e n e t a s s e t s amounts to l e s s t h r o u g h
d e p r e c i a t i o n , d e p l e t i o n , l o s s e s or o t h e r w i s e , than the
a g g r e g a t e amount o f s t a t e d c a p i t a l a t t r i b u t e d to s h a r e s
h a v i n g l i q u i d a t i o n p r e f e r e n c e s , the c o r p o r a t i o n s h a l l
n o t d e c l a r e d i v i d e n d s o u t o f n e t p r o f i t s p u r s u a n t to s u b н
d i v i s i o n ( 2 ) o f t h i s s e c t i o n , e x c e p t upon s u c h s h a r e s ,
u n t i l t h e v a l u e o f the n e t a s s e t s h a s b e e n r e s t o r e d to
s u c h a g g r e g a t e amount o f t h e s t a t e d c a p i t a l a t t r i b u t e d
to o u t s t a n d i n g s h a r e s h a v i n g l i q u i d a t i o n p r e f e r e n c e s . 2 ^
D e l a w a r e , 2 ^ G e o r g i a , 2 о and K an sa s2 *^ a r e i n s u b s t a n t i a l a g r e e н
ment i n r e g a r d t o c e r t a i n p r o v i s i o n s on t h i s p o i n t . D e l a н
ware p r o v i d e s :
. . . .; (to), i n c a s e t h e r e s h a l l be no s u c h e x c e s s , o u t
o f i t s n e t p r o f i t s f o r the f i s c a l y e a r t h e n c u r r e n t
an d/or the p reced in g f i s c a l year; p rov id ed , however,
t h a t i f t h e c a p i t a l o f t h e c o r p o r a t i o n computed a s a f o r e н
s a i d s h a l l h a ve b e e n d i m i n i s h e d by d e p r e c i a t i o n i n t h e
v a l u e o f i t s p r o p e r t y , o r by l o s s e s , o r o t h e r w i s e , t o
an amount l e s s t h a n t h e a g g r e g a t e amount o f t h e c a p i t a l
P e e r i n g 1s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a ,
1 9 3 7 . D i v . I , P t . IV, T i t . 1 , Ch. X I, S e c . 3 4 6 .
25 G e n e r a l P r o v i s i o n s R e s p e c t i n g D o m e s t i c and F o r e i g n
C o r p o r a t i o n s c o n t a i n e d i n t h e G e n e r a l C o r p o r a t i o n Law o f t h e
S t a t e o f D e l a w a r e .1 9 3 7 . Ch. 65 ,- A r t .
1, Sec. 34.
25 A c t s and
R e s o l u t i o n s o f t h e G e n e r a l A s s e m b ly o f
t h e S t a t e o f G e o r g i a л .1 9 3 7 - 3 8 . P t . 1 , T i t . .1, Sec,. 16 amendн
ing S ec . 2 2 -308 o f
the Code o f G e o r g i a . 1 9 3 5 .
2 7 S t a t e o f K a n s a s , S e s s i o n Laws. 1 9 3 9 . Ch. 1 5 2 , S e c .
80 and 8 1 .
145
r e p r e s e n t e d , b y t h e i s s u e d and o u t s t a n d i n g s t o c k o f a l l
c l a s s e s h a v i n g a p r e f e r e n c e upon t h e d i s t r i b u t i o n o f
a s s e t s , t h e d i r e c t o r s o f su ch c o r p o r a t i o n s h a l l n o t d e н
c l a r e o r pay o u t o f s u c h n e t p r o f i t s any d i v i d e n d s upon
any s h a r e s o f any c l a s s e s o f i t s c a p i t a l s t o c k u n t i l
t h e d e f i c i e n c y i n t h e amount o f c a p i t a l r e p r e s e n t e d b y
t h e i s s u e d and o u t s t a n d i n g s t o c k o f a l l c l a s s e s h a v i n g
a p r e f e r e n c e upon t h e d i s t r i b u t i o n o f a s s e t s s h a l l h a v e
been r e p a i r e d . 28
The la w o f Kansas i s t h e same a s a b o v e , b u t t h e la w o f
G e o rg ia w h i l e somewhat - s i m i l a r h a s c e r t a i n d i f f e r e n c e s as
fo llo w s:
. . . .
i n c a s e t h e r e s h a l l be no s u c h e x c e s s , o u t o f
t h e n e t p r o f i t s f o r the f i s c a l y e a r t h e n c u r r e n t a n d / o r
the p reced in g f i s c a l year; p ro vid ed , however, the d i r e c t н
o r s s h a l l n o t d e c l a r e or pay o u t o f s u c h n e t p r o f i t s any
d i v i d e n d upon s h a r e s o f any c l a s s o f c a p i t a l s t o c k so
l o n g a s a d e f i c i e n c y e x i s t s i n the amount o f c a p i t a l r e н
p r e s e n t e d b y s h a r e s i s s u e d and o u t s t a n d i n g o f any o t h e r
c l a s s h a v i n g a s u p e r i o r p r e f e r e n c e to su c h c l a s s upon a
d istrib u tio n of a sse ts.2 ╗
Minnesota has a p r o v i s i o n which has s u f f i c i e n t v a r i a н
t i o n to w a r r a n t c i t i n g
i n o r d e r to show t h e a d d i t i o n a l l i m i t н
a t i o n s im p o s ed ; t h e la w i s a s f o l l o w s :
Out o f i t s n e t e a r n i n g s f o r i t s c u r r e n t o r f o r p r e c e d i n g
f i s c a l y e a r , whether or n o t i t then has a p a i d - i n or
earned su r p lu s, p rovid ed , th a t i f there are o u tsta n d in g
s h a r e s e n t i t l e d to a p r e f e r e n c e upon l i q u i d a t i o n , such
d i v i d e n d s s h a l l n o t be p a i d upon any o t h e r s h a r e s e x c e p t
^ G e n e r a l P r o v i s i o n s R e s p e c t i n g D o m e s t i c and F o r e i g n
C o r p o r a t i o n s C o n t a in e d i n t h e G e n e r a l C o r p o r a t i o n : Laws o f
S ta t e o f D e l a w a r e , 1 9 3 7 . Ch. 6 5 , A r t . 1 , S e c . 3 4 .
^ A cta and R e s o l u t i o n s o f t h e G e n e r a l A sse m b ly o f
t h e S ta t e o f G e o r g i a . 1 9 3 7 - 1 9 3 8 . P t . 1 , T i t . 1 , S e c . 16
Amending S e c . 2 2 - 3 0 8 o f the Code o f G e o r g i a . 1 9 3 5 .
144
t o t h e e x t e n t t h a t the. f a i r v a l u e o f i t s a s s e t s , d e t e r н
m in e d a s s e t f o r t h i n s u b d i v i s i o n 1 o f t h i s s e c t i o n ,
e x c e e d s t h e a g g r e g a t e o f i t s l i a b i l i t i e s and i t s s t a t e d
c a p i t a l r e p r e s e n t e d b y a l l s h a r e s e n t i t l e d to a p r e f e r н
e n c e upon l i q u i d a t i o n ; p r o v i d e d , f u r t h e r , t h a t no s u c h
d i v i d e n d s h a l l be d e c l a r e d i f t h e f a i r v a l u e o f the
a s s e t s o f t h e c o r p o r a t i o n i s l e s s t h a n the a g g r e g a t e o f
i t s l i a b i l i t i e s , - i n c l u d i n g su c h p r o p o s e d d i v i d e n d a s a
l i a b i l i t y . 30
I t w i l l be n o t e d t h a t i n C a l i f o r n i a and M i n n e s o t a e v e n though
the s t a t e d c a p i t a l i s
i m p a i r e d to s u c h a d e g r e e as t o make
the rem aining c a p i t a l l e s s
than t h e l i q u i d a t i o n p r e f e r e n c e
o f t h e p r e f e r r e d s h a r e s , a d i v i d e n d may s t i l l be d e c l a r e d on
the p r e f e r r e d s t o c k .
M innesota does e n j o i n such a d iv id e n d
i f t h e f a i r v a l u e o f the
assets
is . l e s s than the e x i s t i n g
l i a b i l i t i e s and the p r o p o s e d d i v i d e n d s .
D e la w a r e , Georgia*
and K an sas p r o h i b i t d i v i d e n d s on any c l a s s o f s t o c k , p r e f e r н
r e d o r common, when t h e c a p i t a l h a s b e e n d e p l e t e d to an
amount l e s s t h a n t h e a g g r e g a t e l i q u i d a t i o n p r e f e r e n c e o f
sto ck h avin g such a p r e f e r e n c e .
A ls o , D elaw are, G eorgia,
K a n s a s , and M i n n e s o t a s a n c t i o n d i v i d e n d s d e s p i t e c a p i t a l imн
p a irm en t n o t o n ly out o f the n e t p r o f i t o f the c u r r e n t p e r io d ,
b u t a l s o ou t o f the p r o f i t s o f th e p r e c e d in g a c c o u n tin g p e r н
iod.
I n s o l v e n c y and d i v i d e n d p a y m e n t s .
A n o th er ty p e o f r e н
s t r i c t i o n th at i s fr e q u e n tly in clu d ed in the s t a t u t e s
I s one
^ M i n n e s o t a B u s i n e s s C o r p o r a t i o n A c t , a s amended t o
1 9 3 5 . Ch. 3 0 0 , S e c . 2 1 ( l l c ) .
r e s t r i c t i n g d i v i d e n d s when t h e c o r p o r a t i o n i s
i n s o l v e n t or
when t h e payment o f t h e d i v i d e n d w ou ld r e n d e r the c o r p o r a н
tio n in so lv e n t.
th is r e s tr ic tio n :
There a r e two p r i n c i p a l s u b d i v i s i o n s o f
the f i r s t s u b d iv is io n p r o h ib i t s d iv id e n d s
when t h e c o r p o r a t i o n i s i n s o l v e n t o r t h e payment o f the d i v i н
dend would r e n d e r t h e c o r p o r a t i o n i n s o l v e n t , and makes the
d i r e c t o r s l i a b l e f o r t h e d i s t r i b u t i o n made c o n t r a r y to t h e
p rovision ;
the second s u b d i v i s i o n does n o t s p e c i f i c a l l y proн
h i b i t t h e d e c l a r a t i o n o f a d i v i d e n d when t h e c o r p o r a t i o n i s
i n s o l v e n t o r when t h e d i v i d e n d w ould r e n d e r t h e c o r p o r a t i o n
i n s o l v e n t , b u t i t d o e s make the d i r e d t o r s l i a b l e
d ivid en d is p aid .
O bviously there i s
i n t h e s e two s u b d i v i s i o n s , f o r i f
to a c c e p t the r e s p o n s i b i l i t y ,
i f such a
con sid erab le d ifferen ce
the d i r e c t o r s are w i l l i n g
th ey m ight c o n c e iv a b ly d e c l a r e
and pay d i v i d e n d s u n d er t h e s e c o n d c l a s s o f r e s t r i c t i o n s .
I t is true, of course,
t h a t the
p r o h ib itio n in the f i r s t subн
d i v i s i o n m i g h t be i g n o r e d , and u n d er su c h c i r c u m s t a n c e s t h e
d i r e c t o r s w o u ld s t a n d i n t h e same p o s i t i o n a s d i r e c t o r s o f
a c o r p o r a t i o n i n c o r p o r a t e d u n d e r the l a w s o f a s t a t e h a v i n g
t h e s e c o n d ty p e o f p r o v i s i o n .
The p r o h i b i t i o n seems to
p l a c e a s l i g h t a d d i t i o n a l r e s t r i c t i o n on t h e d e c l a r a t i o n o f
d ivid en d s.
S i x s t a t e s a r e i n c l u d e d i n t h e two s u b d i v i s i o n s w h ich
r e s t r i c t d i v i d e n d s b y im p o s in g an i n s o l v e n c y - t e s t .
T h is c a l н
c u l a t i o n does n ot in c lu d e s t a t e s t h a t a p p ly both the c a p i t a l
146
Impairment and i n s o l v e n c y t e s t , w h ic h grou p w i l l be d i s c u s н
sed below as a se p a r a te d i v i s i o n .
Illin o is,
i s one o f t h e
s t a t e s h a v i n g a p r o h i b i t i o n a g a i n s t t h e payment o f d i v i d e n d s
when t h e c o r p o r a t i o n i s
in so lv en t;
t h e la w i s worded as f o l н
lo w s :
( a ) No d i v i d e n d s h a l l be d e c l a r e d o r p a i d a t a tim e
when t h e c o r p o r a t i o n i s i n s o l v e n t o r i t s n e t a s s e t s a r e
l e s s th a n i t s s t a t e d c a p i t a l , o r when t h e payment t h e r e н
o f would r e n d e r t h e c o r p o r a t i o n i n s o l v e n t o r r e d u c e i t s
a s s e t s below i t s s t a t e d c a p i t a l . ^1
In a n o t h e r s e c t i o n ^
lia b ilit y is
im posed upon t h e d i r e c t o r s
o f any c o r p o r a t i o n who d e c l a r e a d i v i d e n d c o n t r a r y t o t h e
above q u o t e d p r o v i s i o n .
The s e c t i o n q u o t e d ab ove h a s ,
a d d it io n to the in s o lv e n c y t e s t ,
the s u p p l e m e n t a r y p r o v i s i o n
l i m i t i n g d i v i d e n d s when t h e n e t a s s e t s - - t h a t i s ,
minus t h e l i a b i l i t i e s - - a r e
le ss
in
the a s s e t s
th a n t h e s t a t e d c a p i t a l .
T h is p r o v i s i o n m i g h t be i n t e r p r e t e d a s a means o f i n s u r i n g
the r e t e n t i o n o f t h e s t a t e d c a p i t a l o f the c o n c e r n . However,
t h i s s t a t e xvas n o t c l a s s i f i e d as h a v i n g a c a p i t a l im pairm en t
p r o v i s i o n b e c a u s e the s t a t u t e d o e s n o t p r o v i d e f o r i t s p e c i f н
i c a l l y a s d o e s t h e s t a t e s c i t e d i n t h e p r e v i o u s main g r o u p .
^ The B u s i n e s s C o r p o r a t i o n A c t . 1 9 3 7 . S e c . 4 1 and
O f S e c . 60.
^
Ib id . . Sec. 4 2 (h ).
147
M a s s a c h u s e t t s , 3 3 O r e g o n , ^4 T e x a s , ^ and Wyoming,*^о
c l a s s i f i e d i n the s e c o n d s u b - d i v i s i o n , h ave p r o v i s i o n s r e н
g a r d i n g t h e d i r e c t o r s ? l i a b i l i t y f o r d i v i d e n d s p a i d when t h e
corporation is in s o lv e n t.
T y p i c a l o f t h e group i s
the s t a t н
u t e o f Wyoming:
I f t h e d i r e c t o r s o f any c o r p o r a t i o n s h a l l k n o w i n g l y
and n e g l i g e n t l y d e c l a r e and pay any d i v i d e n d when t h e
c o r p o r a t i o n i s i n s o l v e n t or any d i v i d e n d , t h e payment o f
w h ic h would render- i t i n s o l v e n t , t h e y s h a l l be j o i n t l y
and s e v e r a l l y l i a b l e f o r a l l d e b t s o f t h e c o r p o r a t i o n
. . .
.37
A lso,
C onnecticut
the d i r e c t o r s ;
it,
h a s a p r o v i s i o n im p o s i n g a l i a b i l i t y on
h o w e v e r , v a r i e s s l i g h t l y from t h e above
in th a t i t provides on ly fo r d i r e c t o r s ? l i a b i l i t y
payment r e n d e r s t h e company i n s o l v e n t .
fo r a l l p r a c t ic a l purposes,
sin ce
th e d a n g e r l i e s
i f the
T h is v a r i a t i o n i s ,
j u s t a s s t r i g e n t a s the ab ov e
i n the d e c l a r a t i o n o f a d i v i d e n d t h a t
33 !jhe G e n e r a l Laws o f the Commonwea 1 t h o f M assach u н
s e t t s , T e r c e n t e n a r y E d i t i o n , 1 9 3 2 . T i t . X X II, C h .1 5 6 , S e c . 3 7 .
54 -.Oregon C o r p o r a t i o n Laws, 1 9 3 6 . T i t . XXV, Ch. I I ,
S ec. 25-219.
^ V e r n o n ? s Texas S t a t u t e s , 1 9 3 6 , C e n t e n n i a l E d i t i o n .
T i t . 3 2 , Ch. 3 , S e c . 1 3 4 7 .
^
Wyoming R e v i s e d S t a t u t e s , 1 9 3 1 . Ch. 2 8 , S e c . 2 8 1 3 1 , as amended by Ch. 6 2 , S e c . 1 2 . S e s s i o n Laws t 1 9 3 9 .
^
Loc-.- c i t .
C o r p o r a t i o n Laws o f t h e S t a t e o f C o n n e c t i c u t , R eн
v i s e d 1 9 3 7 . Ch. 1 9 1 , P t . IB , S e c . 1 9 , p r o v i d e s f o r b o t h
c i v i l l i a b i l i t y and a f i n e .
148
would r e n d e r t h e c o r p o r a t i o n i n s o l v e n t , r a t h e r th a n when t h e
corporation is in s o lv e n t .
I t would he an u n u s u a l grou p of*
d i r e c t o r s who would d e c l a r e a d i v i d e n d when t h e c o r p o r a t i o n
is a c tu a lly in so lv e n t.
I n s o l v e n c y and c a p i t a l impa i r m e n t and t h e payment o f
d ivid en d s.
Many o f t h e s t a t e s have a p r o v i s i o n r e s t r i c t i n g
t h e payment o f d i v i d e n d s when t h e c a p i t a l o f the c o r p o r a н
tion is
im p a i r e d o r w h ich would r e n d e r the c a p i t a l i m p a i r e d ,
a n d / o r when t h e c o r p o r a t i o n i s
i n s o l v e n t , o r t h e payment o f
a d i v i d e n d t h a t w ould r e n d e r t h e c o r p o r a t i o n i n s o l v e n t .
In
o t h e r w o r d s , some s t a t e s u s e b o t h o f t h e p r e v i o u s l y d i s c u s н
s e d r e s t r i c t i o n s , c a p i t a l Impairment and i n s o l v e n c y , i n an
a t t e m p t t o curb u n w a r r a n t e d d i v i d e n d s .
T his c l a s s i f i c a t i o n ,
i n a manner s i m i l a r t o the o t h e r c l a s s i f i c a t i o n s , h a s two
su b d iv isio n s;
(1)
t h e d i r e c t o r s a r e p r o h i b i t e d from making
d i v i d e n d s u n d e r t h e c o n d i t i o n s named and a r e l i a b l e f o r n o n c o m p l i a n c e w i t h t h e l a w , and ( 2 ) no p r o h i b i t i o n i s p r o v i d e d
but the d i r e c t o r s are l i a b l e
i f d iv id e n d s are p a id under
t h e c i r c u m s t a n c e s named.
Under t h e f i r s t s u b d i v i s i o n i s f o u n d t h e s t a t e s o f
149
F l o r i d a , 3 о I n d i a n a , 40 and M i s s i s s i p p i . 41
For e x a m p l e ,
the -
d i r e c t o r s o f a c o r p o r a t i o n o r g a n i z e d u n d e r the law s o f the
s t a t e o f I n d i a n a a r e e n j o i n e d from d e c l a r i n g a d i v i d e n d i n
t h e f o l l o w i n g w ords: "No d i v i d e n d s s h a l l be p a i d i f t h e c o r н
p oration i s ,
or i s
thereby rendered,
c a p i t a l i s or thereb y becomes,
i
m
p
in s o lv e n t or i f i t s
a
i
r
e
d
.
j n a subsequent
s e c t i o n t h e d i r e c t o r s a r e made l i a b l e f o r a d i v i d e n d p a i d
contrary to
th e a b o v e .
In t h e s e c o n d s u b d i v i s i o n , w h i c h i n c l u d e s t h o s e
s t a t e s making d i r e c t o r s l i a b l e f o r d i v i d e n d s p a i d when s u c h
d i v i d e n d s would r e d u c e t h e c a p i t a l o r when t h e c o r p o r a t i o n
is
i n s o l v e n t , a r e f o u n d t h e s t a t e s o f C o l o r a d o , 43 I o w a , 44
3 0 C o r p o r a t i o n Law. S t a t e o f F l o r i d a . 1 9 2 5 , a s amendн
e d t o J u l y 1 , 1 9 3 4 . Ch. 1 0 0 9 6 , A r t . XIV, S e c . 55 arri t h e
C om p iled G e n e r a l Laws o f F l o r i d a . 1 9 2 7 . T i t . I l l , Ch. I I ,
A rt. 14, S ec. 6050.
4 0 C e r t a i n Laws C o n c e r n in g C o r p o r a t i o n s f o r P r o f i t ,
1 9 3 7 . Ch. 2 1 5 , P t . I I , A r t . 1 , S e c . 12 and s e e Ch. 2 1 5 ,
Pt. I I , A rt. 9 , Sec. 52.
4 1 C o r p o r a t i o n s , C ha p ter 100 o f M i s s i s s i p p i Code o f
1930 a s amended t o 1 9 3 5 .
A rt. I , S ec. 4149.
1937.
4 о C e r t a i n Laws C o n c e r n in g C o r p o r a t i o n s f o r P r o f i t ,
Ch. 2 1 5 , P t . I I , A r t . 1 , S e c . 1 2 .
43 C o r p o r a t i o n Laws a s r e v i s e d and amended to O c to b e r
1, 1937.
Ch. 4 1 , A r t . 1 , S u b d i v . 2 , S e c . 3 4 .
44 Code o f I o w a . 1 9 3 5 .
T i t . XIX, Ch. 3 8 4 , S e c . 8 3 7 8 .
150
K e n t u c k y , 45
M a r y l a n d , 46
Mis so u r 5,4^ West V i r g i n i a , 48 an(j -f^e
D i s t r i c t o f Columbia.4 9 The p r o v i s i o n i s u s u a l l y worded a s
fo llo w s:
F i r s t : I f any o f t h e t r u s t e e s , m anagers o r d i r e c t o r s
o f any s u c h c o r p o r a t i o n s h a l l , k n o w i n g l y o r w i t h o u t
making r e a s o n a b l e i n q u i r y , v o t e f o r , o r a s s e n t t o , the
d e c l a r a t i o n o f any d i v i d e n d when th e c o r p o r a t i o n i s i n н
s o l v e n t , o r any d i v i d e n d , t h e payment o f w h ic h would
ren d er the c o r p o r a t i o n i n s o l v e n t , or would d im i n is h the
amount o f t h e c a p i t a l s t o c k , and s u c h d i v i d e n d o r any
p a r t t h e r e o f s h a l l be p a i d , t h e y s h a l l be j o i n t l y and
s e v e r a l l y l i a b l e t o the e x t e n t o f su c h payment . . . . 50
M i s s o u r i p r o h i b i t s and makes t h e d i r e c t o r s l i a b l e
d en d s a r e p a i d w h e n - t h e company i s
if d iv iн
i n s o l v e n t or the d iv id e n d
w ou ld r e n d e r i t i n s o l v e n t , and t h e law makes t h e d i r e c t o r s
l i a b l e f o r c a p i t a l im p a i r m e n t .
W isconsin, i f a c e r t a i n l a t i н
t u d e i s a l l o w e d , may be i n c l u d e d i n t h i s s u b d i v i s i o n .
state
T h is
i s r a t h e r u n u s u a l i n t h e p r o v i s i o n on t h i s p o i n t a s i s
e v i d e n t from t h e f o l l o w i n g :
C a r r o l l ? s K e n tu c k y S t a t u t e s , A n n o t a te d B a l d w i n ? s
1936 E d i t i o n .
Ch. 3 2 , A r t . 1 , S e c . 5 4 8 .
^
Lawa o f Maryland R e l a t i n g t o B u s i n e s s C o r p o r a t i o n s .
A nnotated T w e lfth E d it io n ,' 1937.
A rt. 23, Sec.
.87.
47
G e n e r a l C o r p o r a t i o n Laws and M i s c e l l a n e o u s P r o v i н
s i o n s o f th e S t a t e o f M i s s o u r i . R e v i s e d S t a t u t e s . 1 9 2 9 .
Amended t h r o u g h 1 9 3 3 . Ch. 3 2 , A r t . 1 , S e c . 4 5 6 9 and A r t . 7 ,
Sec. 4942.
4 8 C o r p o r a t i o n Laws o f West V i r g i n i a . w i t h amendments
t o J u l y 1 , 1 9 3 5 . Ch. 3 1 , A r t . 1 , S e c . 7 8 .
49
5 , Ch. 9 ,
50
Annotated
Code o f Laws f o r D i s t r i c t o f C o lu m b ia . 1 9 2 8 . T i t .
Sec. 278.
Laws o f Maryland R e l a t i n g t o B u s i n e s s C o r p o r a t i o n s .
T w elfth E d i t i o n , 1937. A rt. 2 3 , S ec. 8 7 .
151
( 1 ) No d i v i d e n d s h a l l be p a i d b y any c o r p o r a t i o n
u n t i l a t l e a s t f i f t y p e r c e n t o f the a u t h o r i z e d c a p i t a l
s t o c k h a s b e e n f u l l y p a i d i n , and t h e n o n l y o u t o f n e t
p r o f i t s p r o p e r l y a p p l i c a b l e t h e r e t o , and w h ic h s h a l l
n o t i n any way im p a i r o r d i m i n i s h t h e c a p i t a l ; and i f
any d i v i d e n d s h a l l be p a i d c o n t r a r y t o t h i s p r o v i s i o n ,
e v e r y s t o c k h o l d e r r e c e i v i n g t h e same s h a l l b e l i a b l e t o
r e s t o r e t h e f u l l amount t h e r e o f u n l e s s t h e c a p i t a l be
s u b s e q u e n t l y made go o d ; and i f the d i r e c t o r s s h a l l pay
an y d i v i d e n d b e f o r e the s a i d p o r t i o n o f s u c h c a p i t a l
s t o c k i s f u l l y p a i d i n , o r when t h e c o r p o r a t i o n i s i n н
s o l v e n t o r i n d a n g e r o f i n s o l v e n c y , n o t h a v i n g r e a s o n to
b e l i e v e t h a t t h e r e were s u f f i c i e n t n e t p r o f i t s p r o p e r l y
a p p l i c a b l y t h e r e t o t o pay t h e same w i t h o u t i m p a i r i n g o r
d i m i n i s h i n g t h e c a p i t a l , t h e y s h a l l be j o i n t l y and s e v e r н
a l l y l i a b l e to the c r e d i t o r s o f the c o r p o r a t io n a t the
t im e o f d e c l a r i n g s u c h d i v i d e n d s to t h e amount o f t h e i r
c l a i m s . 51
M o d i f i e d t y p e s o f i n s o l v e n c y t e s t and t h e payment o f
d iv id en d s.
C a l i f o r n i a , 5 2 Ohio, and New Hampshire h ave p r o v i н
s io n s which, a lth o u g h n o t in s o lv e n c y t e s t s
i n th e s t r i c t
s e n s e o f t h e word, a r e , n e v e r t h e l e s s , d e s i g n e d t o a c c o m p l i s h
a b o u t t h e same p u r p o s e .
By c i t i n g an i l l u s t r a t i o n
t h i s type
o f p r o v i s i o n c a n be b e t t e r u n d e r s t o o d ; f o r e x a m p l e , the C a l i н
f o r n i a la w p r o v i d e s t h a t ;
No d i v i d e n d s h a l l be d e c l a r e d when t h e r e i s r e a s o n н
a b l e ground f o r b e l i e v i n g t h a t t h e r e u p o n t h e c o r p o r a t i o n ?s
d e b t s and l i a b i l i t i e s would e x c e e d i t s a s s e t s , o r t h a t
i t would be u n a b l e t o m e e t i t s d e b t s and l i a b i l i t i e s a s
th e y m a tu re.53
51 S t a t u t e s o f W i s c o n s i n R e l a t i n g t o P r i v a t e C orporat i o n s . 1 9 3 7 . S e c . 1 8 2 . 1 9 . See a l s o S e c . 1 8 2 . 1 4 .
1937. D iv.
1,
P t . I V , T i t . 1 , Ch. X I , S e c . 3 4 6 .
152
-Ohic^s s t a t u t e
is not q u ite
so l e n g t h y and p r o v i d e s m e r e l y
t h a t no c o r p o r a t i o n s h a l l d e c l a r e and pay d i v i d e n d s i n c a s h
o r o t h e r p r o p e r t y when t h e r e i s r e a s o n a b l e grounds f o r b e н
lie v in g that i t
i s u n a b l e or b y t h e payment o f t h e d i v i d e n d
may be r e n d e r e d u n a b l e t o s a t i s f y i t s o b l i g a t i o n s and l i a н
b ilitie s.^
In a l a t e r s e c t i o n the d i r e c t o r s in b o th C a l i н
f o r n i a and Ohio a r e made l i a b l e f o r t h e payment o f any d i v i н
dend m ad e?c o n t r a r y t o t h e p r o v i s i o n s o f t h e law.о^
T h e ' la w s
o f New Hampshire^о p r o v i d e e s s e n t i a l l y t h e same a s the
statu te;
i.e.,
Ohio
d i v i d e n d s a r e p r o h i b i t e d when the p r o p e r t y o f
t h e c o r p o r a t i o n i s I n s u f f i c i e n t o r w i l l be r e n d e r e d i n s u f f i н
c i e n t f o r t h e payment o f a l l i t s d e b t s .
S t a t e s h a v i n g c a p i t a l impa i r m e n t a n d / o r i n s o l v e n c y t e s t a s t h e o n l y l i m i t a t i o n on t h e payment o f d i v i d e n d s .
E i g h t s t a t e s , C o l o r a d o , I o w a , K e n t u c k y , M a s s a c h u s e t t s , M isн
s i s s i p p i , New H am pshire, New Y o rk , Wyoming, and t h e D i s t r i c t
o f Columbia h a v e some form o f i n s o l v e n c y a n d / o r c a p i t a l imн
p a i r m e n t t e s t a s t h e s o l e s t a t u t o r y l i m i t a t i o n on t h e payment
o f O hio.
G e n e r a l and F o r e i g n C o r p o r a t i o n A c t s o f the S t a t e
A nnotated 1939. S e c . 8 6 2 3 - 3 8 ( c ) .
55 P e e r i n g 1s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a ,
1 9 3 7 . D i v . 1 , P t . I V . T i t . 1 , Ch. X I I I , S e c . 363 and G e n e r a l
and F o r e i g n C o r p o r a t i o n A c t s o f t h e S t a t e o f O h io, A n n o t a t e d
1939. Sec. 8623-123b.
56 B u s i n e s s C o r p o r a t i o n Law and R e g u l a t i o n o f F o r e i g n
C o r p o r a t i o n s , 1 9 3 7 . S e c . 79 and 8 0 .
153
o f d ivid en d s;
fic
that i s ,
t h e s e s t a t e s do n o t m e n t i o n i n s p e c i н
term s t h e s o u r c e o f d i v i d e n d s ,
n et earnings, e t c .
su ch a s s u r p l u s ,
p ro fits,
T h is grou p o f s t a t e s r e l y on a n e g a t i v e
a p p r o a c h to t h e d i v i d e n d p r o b le m , f o r b y i m p l i c a t i o n ,
the
d i r e c t o r s may d e c l a r e d i v i d e n d s from s u r p l u s from w h a t e v e r
s o u r c e and w i t h o u t s t a t u t o r y i n t e r f e r e n c e so l o n g a s the
c a p i t a l i s n o t im paired or re n d er ed im p a ired , a n d /o r the
c o r p o r a tio n i s hot in s o lv e n t or rendered i n s o l v e n t .
S t a t e s h a v i n g no p r o v i s i o n r e g a r d i n g c a p i t a l i m p a i r н
ment a n d / o r i n s o l v e n c y l i m i t a t i o n on d i v i d e n d p a y m e n t s .
p rob lem o f d e t e r m i n i n g the s t a t e s
The
t h a t h ave no p r o v i s i o n con
c e r n i n g im p airm en t o f c a p i t a l and i n s o l v e n c y i s
indeed the
m ost d i f f i c u l t c l a s s i f i c a t i o n o f t h i s p h a s e o f t h e p r o b le m .
The f o l l o w i n g s t a t e s h ave no su ch p r o v i s i o n :
Alabama, D e l a н
w a r e , G e o r g i a , K a n s a s , L o u i s i a n a , M i c h i g a n , M i n n e s o t a , Pennн
s y l v a n i a , South C a r o l i n a ,
B u s i n e s s C o r p o r a t i o n A c t . 57
W a s h in g to n , and a l s o
This i s
the U niform
sig n ific a n t for i t w ill
b e n o t e d tha.t t h e s t a t e s n o t h a v i n g t h e s e p r o v i s i o n s a r e ,
e x c e p t f o r Alabama and S ou th C a r o l i n a , s t a t e s
c e n t ly r e v is e d t h e ir co rp o ra tio n law s.
t h a t h ave r e н
The i n c l u s i o n o f
57 Some o f t h e s t a t e s l i s t e d ; n a m e ly , C a l i f o r n i a , .
D elaw are, G eorgia, K a n sa s,.a n d M inn esota, have been c l a s s i н
f i e d a s p e r m i t t i n g the payment o f d i v i d e n d s e v e n t h o u g h n e t
a s s e t s amount t o l e s s t h a n t h e s t a t e d c a p i t a l - - ! . e . , d e s p i t e
th e im pairm en t o f c a p i t a l .
154
D e la w a r e i n t h i s grou p m i g h t h e q u e s t i o n e d on t h e b a s i s o f
t h e f o l l o w i n g s e c t i o n a p p e a r i n g i n the law:
.No c o r p o r a t i o n c r e a t e d u n d e r t h e p r o v i s i o n o f t h i s '
C h a p t e r , n o r the D i r e c t o r s t h e r e o f , s h a l l pay d i v i d e n d s
upon any s h a r e s -of the c o r p o r a t i o n e x c e p t i n a c c o r d a n c e
w ith the p r o v is i o n s o f t h i s Chapter. . . . .
In c a s e o f
an y w i l l f u l or n e g l i g e n t v i o l a t i o n o f the p r o v i s i o n s o f
t h i s - S e c t i o n , t h e D i r e c t o r s u n d e r whose a d m i n i s t r a t i o n
t h e same may h appen s h a l l b e j o i n t l y and s e v e r a l l y l i a н
b l e , a t any t im e w i t h i n s i x y e a r s a f t e r p a y i n g s u c h u n н
l a w f u l d i v i d e n d s , t o the c o r p o r a t i o n and to i t s c r e d i н
t o r s , i n t h e e v e n t o f i t s d i s s o l u t i o n o r i n s o l v e n c y , to,__
t h e f u l l amount o f the d i v i d e n d so u n l a w f u l l y p a i d . . . r
T h is does' n o t seem t o make t h e d i r e c t o r s l i a b l e f o r t h e p a yн
ment o f a d i v i d e n d when t h e c o r p o r a t i o n i s
its
ca p ita l is
i n s o l v e n t or when
im p aired , b u t r a t h e r I f the d iv id e n d s are
p a i d c o n t r a r y to l a w .
And t h e r e a r e many Item s t h a t m i g h t
make a d i v i d e n d i l l e g a l o t h e r t h a n c a p i t a l im p a irm en t or
in solven cy.
d irectors*
I t seems n e c e s s a r y t o d i s t i n g u i s h b e t w e e n
l i a b i l i t y f o r d i v i d e n d s p a i d when t h e c a p i t a l i s
i m p a i r e d or t h e c o r p o r a t i o n i s
i n s o l v e n t , and t h e p r o v i s i o n
making d i r e c t o r s l i a b l e when an i l l e g a l d i v i d e n d o f w h a t e v e r
c h a r a c t e r c a u s e s t h e c o r p o r a t i o n t o become i n s o l v e n t ,
c o n c e i v a b l e , t h a t two o t h e r s t a t e s ,
I t is
C a l i f o r n i a and Ohio,
m ig h t be i n c l u d e d a s n o t h a v i n g a p r o v i s i o n r e g a r d i n g c a p i н
t a l im p a irm en t or i n s o l v e n c y .
C O
However, t h e s e s t a t e s have
G e n e r a l P r o v i s i o n R e s p e c t i n g D o m e s t ic and F o r e i g n
C o r p o r a t i o n s C o n t a i n e d i n t h e G e n e r a l C o r p o r a t i o n Law o f
t h e S t a t e o f D e l a w a r e . as amended to 1 9 3 7 . Ch. 6 5 , A r t . 1 ,
S ec. 35.
155
b e e n e x c l u d e d from t h i s c l a s s s i n c e t h e y h ave b e e n c l a s s i н
f i e d as h a v in g a m o d if ie d type o f i n s o lv e n c y t e s t - - v i z . ,
d i v i d e n d s a r e n o t t o be p a i d when t h e r e i s r e a s o n a b l e g r o u n d s
f o r b e l i e v i n g t h a t the c o r p o r a t io n c o u ld n ot meet i t s d e b ts
as t h e y m a t u r e .
state
I t s h o u l d be n o t e d t h a t the f a i l u r e o f a
to i n c l u d e a p r o v i s i o n r e g a r d i n g c a p i t a l im pairm en t
a n d / o r i n s o l v e n c y d o e s n o t mean t h a t t h e s t a t e may n o t have
some o t h e r p r o v i s i o n r e g a r d i n g d i v i d e n d payment.
S ectio n B
General Statem ent
R e g a r d in g t h e S o u r c e s o f Gash D i v i d e n d s
Sources o f cash d iv id e n d s .
I t i s th e purpose o f t h i s
s e c t i o n to d eterm ine the a v a i l a b l e so u r c e s o f ca sh d iv id e n d s
as p r o v id e d by the s t a t u t e s .
The v a r i a t i o n i n s t a t u t o r y
t e r m i n o l o g y makes t h e o r g a n i z a t i o n o f t h e p r o v i s i o n s I n t o an
o rd erly c l a s s i f i c a t i o n d i f f i c u l t ;
therefore,
in the d i s c u s н
s i o n t h e d e t a i l s and d i f f e r e n c e s o f t h e v a r i o u s l a w s w i l l be
in d ica ted .
T h is d i s c u s s i o n w i l l e x c l u d e d i v i d e n d s r e s u l t i n g
from a r e d u c t i o n o f c a p i t a l , l i q u i d a t i n g d i v i d e n d s , o r s h a r e
d iv id en d s.
I t s h o u l d be n o t e d t h a t o n l y i n r e c e n t y e a r s h a s
any d i f f e r e n c e b e e n made i n r e g a r d to t h e s o u r c e o f d i v i d e n d s
f o r p r e f e r r e d s h a r e s a s compared t o d i v i d e n d s on common
shares.
The o l d e r s t a t u t e s h a v e p r o v i s i o n s d e a l i n g w i t h the
156
payment o f d i v i d e n d s w i t h o u t i n d i c a t i n g t h e c l a s s o f s t o c k
on w h ic h t h e y a r e t o be p a i d .
The newer s t a t u t e s , on the
o t h e r h a n d , u s u a l l y h ave c e r t a i n d e f i n i t e p r o v i s i o n s c o n c e r n - i n g t h e s o u r c e s a v a i l a b l e f o r d i v i d e n d s on p r e f e r r e d s h a r e s .
The a n a l y s i s i n t h i s s e c t i o n i s b a s e d on t h e s o u r c e s o f c a s h
d i v i d e n d s ; for. t h e o l d e r s t a t u t e s
t h e a n a l y s i s w i l l a p p l y to
d i v i d e n d s on b o t h p r e f e r r e d and common s h a r e s ; and f o r t h e
newer s t a t u t e s
t h e a n a l y s i s w i l l a l s o a p p l y t o d i v i d e n d s on
common and p r e f e r r e d s h a r e s , b u t a b r i e f s t a t e m e n t w i l l be
g i v e n o f t h e l i m i t a t i o n s o r r e s t r i c t i o n s p l a c e d on t h e p a y н
ment o f p r e f e r r e d d i v i d e n d s .
I t s h o u l d , o f c o u r s e , be u n d e r н
s t o o d t h a t t h e a p p l i c a t i o n o f g e n e r a l c o r p o r a t i o n la w i s
so m e t im e s s u b j e c t t o a d d i t i o n a l p r o v i s i o n s c o n t a i n e d i n t h e
c e r t i f i c a t e o f in corp oration .
The d i s c u s s i o n i n t h i s
secн
t i o n w i l l d e v e lo p the f o l l o w i n g o u t l i n e :
I.
II.
III.
IV.
D i v i d e n d s ^ b a s e d on n e t p r o f i t s or s u r p l u s .
D i v i d e n d s b a s e d on e x c e s s o f a s s e t s .
D i v i d e n d s b a s e d on n e t p r o f i t s or e x c e s s o f
D i v i d e n d s b a s e d on n e t p r o f i t s ,
assets.
p a id -in su rp lu s,
or a p p r e c ia tio n s u r p lu s .
V. No d i v i d e n d p r o v i s i o n , o r o n l y i n s o l v e n c y o r c a p i н
t a l im p a irm en t t e s t .
D i v i d e n d s b a s e d on n e t p r o f i t o r s u r p l u s .
S ix s t a t e s ,
157
A r i z o n a , 59 M o n ta n a ,60 N orth D a k o tо ,61 Oklahoma,62 S o u th Daн
k o t a , 6 ^ and U t a h , 6^ p r o v i d e t h a t d i v i d e n d s s h a l l he d e c l a r e d
and p a i d o u t of* '?s u r p l u s p r o f i t s a r i s i n g from t h e b u s i n e s s . ' 1
The term " s u r p l u s " when u s e d i n t h i s s e n s e u n d o u b t e d l y means
the n e t p r o f i t ;
that i s ,
the p r o f i t s a f t e r a l l e x p e n s e s have
been d e d u c te d --th e ex c ess p r o f i t s .
As an a d d i t i o n a l p r o v i н
s i o n t h e U ta h la w s a l l o w s d i r e c t o r s " t o d i s b u r s e o u t o f p r o н
fits
a c t u a l l y e a r n e d and on hand s u c h d i v i d e n d s from tim e to
tim e a s t h e d i r e c t o r s may deem p r u d e n t . " 65
T h is s t a t e m e n t
would, i t a p p e a r s, e x c lu d e u n r e a l i z e d a p p r e c i a t i o n of a s s e t s
and o t h e r u n e a r n e d income a s a s o u r c e o f d i v i d e n d p a y m e n t s.
O ther s t a t e s h ave d i v i d e n d p r o v i s i o n s t h a t d e n o t e e s s e n t i a l l y
t h e same; f o r e x a m p le ,
t h e C o n n e c t i c u t c o r p o r a t i o n law. h a s
59 R e v i s e d Code o f A r i z o n a , 1 9 2 8 . A n n o t a t e d . Ch. 1 0 8 ,
A rt. 9 , Sec. 4804.
60 The R e v i s e d Codes o f M ontana. 1 9 3 5 . Ch. 1 5 , S e c .
5939.
C o r p o r a t i o n Law o f t h e S t a t e o f N o r th D a k o t a :
G e n e r a l and C o o p e r a t i v e , R e v i s e d t o 1 9 2 5 w i t h s u p p l e m e n t a r y
amendments t o 1 9 3 7 . S e c . 4 5 4 3 .
Ill,
^ C om piled S t a t u t e s o f Oklahoma. 1 9 2 1 . Ch. 3 4 , A r t .
S ec. 5336.
63 C o r p o r a t i o n Laws o f S o u th D a k o t a , 1 9 3 8 . P t . 1 7 ,
Ch. 1 5 9 , A r t . 4 , S e c . 8 7 8 9 . '
64 R e v i s e d S t a t u t e s o f U t a h . 1 9 3 3 . T i t .
Sec. 1 8 -2 -1 7 .
1 8 , Ch. 2 ,
65 I b i d . . T i t . 1 8 , Ch. 2 , S e c . 1 8 - 2 - 1 6 ,
18-2-17.
( 4 ) and S e c .
, 158
as i t s
p r o v i s i o n s f o r d i v i d e n d s th e words " n e t p r o f i t s or ?
a c t u a l surplus'*
CL CL
( n o t e t h a t h e r e a g a i n r e a p p e a r s the s u g g e s н
t i o n t h a t t h e s u r p l u s must be a c t u a l l y e a r n e d ; t h i s c o u l d be
i n t e r p r e t e d t o mean r e a l i z e d s u r p l u s ) .
to be q u i t e d e f i n i t e
T his m eaning seems
i n the laws o f S o u th C a r o l i n a which
h a s t h e p h r a se " a d e q u a t e l y e a r n e d o r p a id o u t o f s u r p l u s
h e r e t o f o r e e a r n e d , and n o t s e t a s i d e f o r - a s p e c i f i c purн
p
o
s e ; " ^
M ich ig a n i n f e w e r w o r d s , -"earned s u r p l u s o r n e t
ea r n in g s ," о о i m p l i e s t h e same g e n e r a l i d e a .
In a f u l l e r
d e v e l o p m e n t o f t h e s o u r c e o f d i v i d e n d payment t h i s law menн
tion s
t h a t p r e f e r r e d d i v i d e n d s may be p a i d from any s u r p l u s ,
b u t i f su c h a d iv id e n d ' i s p a i d from o t h e r th an e a r n e d s u r н
p l u s , n o t i c e must be g i v e n t o the s t o c k h o l d e r s o f the
s o u r c e . " p r o f i t from t h e b u s i n e s s " 1^
i a t h e words u s e d i n
th e Texas s t a t u t e s and t h i s p h r a se i s a l s o u s e d i n th e
C o r p o r a t i o n Laws o f t h e S t a t e o f C o n n e c t i c u t . Reн
v is e d 1957.
Ch. 1 9 1 , P t . IB , S e c . 1 9 .
^
Codо o f Laws o f South C a r o l i n a , 1 9 3 2 . T i t . 2 1 ,
Ch. 7 0 , S e c . 1 3 5 3 .
оо S t a t e o f M ic h ig a n G e n e ra l C o r p o r a t i o n Laws, 1 9 3 8 .
Sec. 22.
Loc. c l t .
170 V er n o n 1s Texas S t a t u t e s , 1 9 3 6 , C e n t e n n i a l E d i t i o n .
T i t . 3 2 , Ch. 3 , S e c . 1 3 2 9 .
159
N ebraska s t a t u t e s 7 -^ when d i s c u s s i n g t h e s o u r c e o f d i v i d e n d s
f o r a m anufacturing b u s i n e s s .
M i s s o u r i u s e s t h e word
" p r o f i t s " 7^ j[n the g e n e r a l c o r p o r a t i o n l a w , and when d i s c u s н
s i n g d i v i d e n d s f o r o r g a n i z a t i o n s h a v i n g s t o c k w i t h o u t nominн
a l o r p ar v a l u e ,
t h e p h r a s e " n e t p r o f i t s or s u r p l u s earn--..,;
i n g s " 73 i s u s e d .
T h is d i f f e r e n c e
f o r i n many o f t h e o l d e r s t a t u t e s
i n w o r d in g i s n o t u n u s u a l ,
the s e c t i o n s a l l o w i n g the
c o r p o r a t i o n t o i s s u e s t o c k w i t h o u t par v a l u e h a s b e e n s u p e r н
im p osed on t h e g e n e r a l c o r p o r a t i o n l a w , and c o n s e q u e n t l y
t h e new s e c t i o n s f r e q u e n t l y d u p l i c a t e or i n some, i n s t a n c e s
r ew o rd c d r t a i n s e c t i o n s
t h a t h ave b e e n p r e v i o u s l y m e n t i o n e d
i n the g e n e r a l c o r p o r a t i o n law .
To c o n t i n u e , West V i r g i n i a
p e r m i t s d i v i d e n d s f fo m " n e t p r o f i t s . " 7^
The l e g i s l a t u r e s o f
7 -*- C ompiled S t a t u t e s o f N e b r a s k a . 1 9 2 9 . Ch. 2 4 , A r t .
I l l , S e c . 3 0 2 . T h is s t a t e d o e s n o t name any s p e c i f i c s o u r c e
f o r d i v i d e n d payments f o r o t h e r t y p e s o f c o r p o r a t e e n t e r p r is e s
7^ G e n e r a l C o r p o r a t i o n haws and M i s c e l l a n e o u s P r o v i н
s i o n s o f t h e S t a t e o f M i s s o u r i , R e v i s e d S t a t u t e s o f 1929
amendments t h r o u g h 1 9 3 3 .
Ch. 3 2 , A r t . 7 , S e c . 4 9 4 2 .
73 I b i d . ? Ch. 3 2 , A r t . 1 6 , S e c . 5 1 0 7 .
74
C o r p o r a t i o n Laws o f West V i r g i n i a . a d o p t e d by
L e g i s l a t i v e S p e c i a l S e s s i o n , March 1930 w i t h amendments t o
d a t e o f I s s u e , J u l y 1 , 1 9 5 5 . Ch. 3 1 , A r t . 1 , S e c . 7 0 .
160
New M e x i c o ,
*76
and North C a r o l i n a
76
have w r it t e n the s e c t i o n
u s i n g t h e w ords " s u r p l u s o r n e t p r o f i t s a r i s i n g from i t s
b u s i n e s s " ; and Oregon u s e s t h e words " n e t p r o f i t o r s u r - ?
p l u s ; " 77 Rhode I s l a n d 78 and Maryland79 r e v e r s e th e p h r a s e to
read " surplus or n e t p r o f i t s . "
New е o r k
RO
stip u la tes
that
a d i v i d e n d p a i d from o t h e r th a n s u r p l u s makes t h e d i r e c t o r
g u i l t y o f a m isd e m e a n o r .
To sum m arize, i t
can be s a i d t h a t n i n e t e e n s t a t e s i n
naming t h e s o u r c e o f d i v i d e n d s h a v e embodied t h e r e s t r i c н
t i o n s a s t o s o u r c e i n words s u c h a s " p r o f i t s , "
fits,"
"net p r o f i t s ,"
"surplus proн
" n e t e a r n i n g s o r s u r p l u s , " o r some
com b in ation o f t h e s e words.
In a t l e a s t th ree i n s t a n c e s the
7 ^ C o r p o r a t i o n Laws o f t h e S t a t e o f New M e x i c o . ' 1 9 2 8 .
Ch. I I , A r t . 1 , S e c . 6 0 . I f t h e c o r p o r a t i o n h a s s h a r e s w i t h н
o u t p ar v a l u e o u t s t a n d i n g , d i v i d e n d s may be p a i d o u t o f n e t
p r o f i t s o r s u r p l u s e a r n i n g s . Law o f 1 9 2 5 . C h . . 4 7 , S e c . 3 2 0 .
76 S t a t e o f N orth C a r o l i n a , C o r p o r a t i o n Laws, Ch. 22
o f t h e C o n s o l i d a t e d S t a t u t e s o f 1 9 5 5 . Ch. 22* A r t . 6 , S e c .
1179.
77 Oregon C o r p o r a t i o n Law, 1 9 3 6 .
Sec. 25-219.
T i t . XXV, Ch. I I ,
78 G e n e r a l C o r p o r a t i o n Law o f t h e S t a t e o f Rhode
I s l a n d . a s amended 1 9 3 6 .
Ch. 2 4 8 , A r t . I I , S e c . 4 1 .
79
Laws o f Maryland Rela t i n g to B u s i n e s s C o r p o r a t i o n s ,
A nnotated T w elfth E d i t i o n , 1937. A r t. 2 3 , S ec. 87.
80 E x t r a c t s from t h e S t a t e C o r p o r a t i o n Law. G e n e r a l
C o r p o r a t i o n Law, Tax Law, E x e c u t i v e Law and P e n a l , E d i t i o n
o f 1 9 3 8 . P e n a l Law, S e c . 664 ( 1 ) .
161
a d d i t i o n a l words a c t u a l o r e a r n e d have b e e n u s e d a p p a r e n t l y
to i n d i c a t e
su rp lu s i s
t h a t t h e l e g i s l a t u r e w i s h to e m p h a s i z e t h a t the
t o be r e a l i z e d .
This grou p m i g h t w e l l b e c l a s s i н
f i e d as t h e p r o f i t and l o s s s t a t e m e n t g r o u p .
The name seems
to d e s c r i b e q u i t e a c c u r a t e l y th e e s s e n t i a l id ea in v o lv e d
sin ce a l l o f these s ta tu te s
o f d iv id en d s i s
seem t o i n d i c a t e t h a t t h e s o u r c e
t o be p r o f i t s e a r n e d o r s u r p l u s , w hich i s ,
i f earned su rp lu s
i s c o n s i d e r e d , n o t h i n g more o r l e s s
than
the accum ulated u n d i s t r i b u t e d p r o f i t s o f p rev io u s a c c o u n tн
ing p e r io d s .
sid ered ,
Of c o u r s e ,
the a n a l y s i s
i f o th e r types o f su rplus are conн
is not q u ite accu rate.
The p ro b lem
o f the a v a i l a b i l i t y o f p a i d - i n su rp lu s or o th e r su rp lu s canн
n o t be d e t e r m i n e d p o s i t i v e l y from an e x a m i n a t i o n o f t h e s e
s e c t i o n s o f the s t a t u t e s ; however, in the ca se o f A rizona,
M i c h ig a n ( w i t h a q u a l i f i c a t i o n r e g a r d i n g p r e f e r r e d d i v i d e n d s ) ,
M i s s o u r i , Montana, N orth D a k o t a , N e b r a s k a , Oklahoma, South
C a r o lin a , South Dakota,
T e x a s , U t a h , and West V i r g i n i a the
q u a l i f y i n g words would seem t o r e q u i r e t h a t t h e s o u r c e
a v a i l a b l e f o r d i v i d e n d s be t h e r e s u l t o f b u s i n e s s o p e r a t i o n s .
M o r e o v e r , t h e q u e s t i o n a r i s e s a s t o w h e th er t h e l e g i s l a t o r s
meant t h e word s u r p l u s i n t h e p h r a s e " n e t p r o f i t o r s u r p l u s 11
to mean an a l t e r n a t i v e s o u r c e o f d i v i d e n d p a y n e n t , o r
w h e t h e r t h e word s u r p l u s , w h ich i s
so commonly u s e d on the
b a l a n c e s h e e t , was u n d e r s t o o d o r t h o u g h t t o mean the u n d i s н
t r i b u t e d p r o f i t s o f p r e v i o u s p e r i o d s w h ich s h o u l d o b v i o u s l y
162
be a v a i l a b l e f o r t h e payment o f d i v i d e n d s .
I t i s to be
d o u b t e d w h e t h e r t h e l e g i s l a t o r s o f many o f t h e s t a t e s were
c o n s i d e r i n g s u c h p ro b lem s a s d o n a t e d s u r p l u s , p a i d - i n o r
c o n t r i b u t e d s u r p l u s , o r s u r p l u s from u n r e a l i z e d a p p r e c i a t i o n .
The p rob lem o f s u b s t a n t i a t i n g t h i s
be d i f f i c u l t
statem ent, would, o f c o u r s e ,
i f not im p o ssib le, but i t i s
proposed h ere m ereн
l y a s an h y p o t h e s i s w h ich c o n c e i v a b l y m i g h t e x p l a i n much o f
the l e g i s l a t i o n .
D i v i d e n d s b a s e d on e x c e s s o f a s s e t s .
The n e x t major
grou p o f s t a t e s a r e t h o s e t h a t do n o t l i m i t d i v i d e n d d e c l a r a н
t i o n t o the p r o f i t s or e a r n i n g s a c c u m u l a t e d i n t h e s u r p l u s
a c c o u n t , b u t r a t h e r t h e s e s t a t e s a t t e m p t t o m e a su r e the
f e a s i b i l i t y and e q u i t a b i l i t y o f d i v i d e n d payment b y the e x н
c e s s o f a s s e t s over the l i a b i l i t i e s
and s t a t u t o r y c a p i t a l
(som etim es c a l l e d s t a t e d c a p i t a l , or c a p i t a l s t o c k ) ,
l a t t e r b ein g d eterm ined by c e r t a i n l e g a l r u le s
been d isc u sse d in a p revious ch a p ter.
the
t h a t have
I n fo r m u la form t h e
s t a t e m e n t m ig h t be shown a s f o l l o w s :
T otal aggregate a s s e t s
( T o t a l a g g r e g a t e l i a b i l i t i e s -*?
s t a t e d c a p i t a l ) = Surplus a v a i l a b l e f o r d iv id e n d s w ith
certa in lim ita tio n s.
.The same i d e a i s f r e q u e n t l y worded, a s f o l l o w s :
in e x c e s s o f the c a p i t a l . ?
ftn e t a s s e t s
T h is c o n c e p t c a n b e r e d u c e d t o
the f o l l o w i n g form u la:
T o ta l aggregate a s s e t s ? T otal aggregate l i a b i l i t i e s =
N et A s s e t s , .
163
and c o n t i n u i n g
N et A s s e t s ? S t a t e d C a p i t a l =? S u r p l u s a v a i l a b l e f o r
d ivid en d s w ith c e r t a in l im it a t i o n s
The U n ifo r m B u s i n e s s C o r p o r a t i o n A c t p r o v i d e s t h a t th e source ?
o f cash , d i v i d e n d s ' s h a l l
gregate o f i t s
a s s e t s over the a g g r e g a te o f i t s
i n c l u d i n g i n the l a t t e r
. . .
, r*81
be t h e n . . . . s u r p l u s o f t h e a g н
t h e amount o f i t s
c a p ita l stock
T h is s e c t i o n s e e m s - t o be t h e p r o t o t y p e f o r t h e
l e g i s l a t i o n o f t h e s t a t e s o f I d a h o , 82
W a s h in g to n ,
lia b ilitie s,
Q A
L o u i s i a n a ,
83 and
f o r th e la w s o f t h e s e s t a t e s so a p p e a r .
s t a t u t e o f Pennsylvania
Q R
is
The
t h e same a s t h a t o f t h e t h r e e
s t a t e s named w i t h t h e e x c e p t i o n o f t h e s u b s t i t u t i o n o f t h e
words " s t a t e d c a p i t a l ? f o r " c a p i t a l s t o c k " .
This s t a t e p r o н
v i d e s t h a t p a i d - i n s u r p l u s may be u s e d o n l y t o pay p r e f e r r e d
s t o c k and t h e n n o t i c e o f t h e s o u r c e m ust be g i v e n t o t h e
sh a reh o ld ers.
Ohio r e p h r a s e s t h e b a s i c i d e a i n t h e s e w o rd s:
"A c o r p o r a t i o n may d e c l a r e d i v i d e n d s p a y a b l e i n c a s h ,
8 -*- U niform B u s i n e s s C o r p o r a t i o n A c t .
82 Idaho C ode. 1 9 3 2 . T i t . 2 9 ,
shares,
S e c . 24 ( I V a ) .
Ch. 1 , S e c . 2 9 - 1 2 9 ( 4 a ) .
8о G e n e r a l C o r p o r a t i o n Laws o f t h e S t a t e o f L o u i s i н
ana . 1 9 3 8 .
Sec. 2 6 (1 ).
8 ^ Laws C o n c e r n in g P r i v a t e C o r p o r a t i o n s . S e c . 3 8 0 3 24 ( 4 a ) .
88 p a r d o n 1s P e n n s y l v a n i a S t a t u t e s . A n n o t a te d Permanн
ent E d itio n 1938.
T i t . 1 3 - 1 5 , T i t . 1 5 , Ch. 49B, A r t . V I I ,
Sec. 2852-701 ( A l ) .
or o t h e r p r o p e r t y o u t o f th e e x c e s s o f t h e a g g r e g a t e o f i t s
assets le ss
the d e d u c t i o n s h e r e i n a f t e r r e q u i r e d o v e r t h e
aggregate o f i t s
lia b ilitie s
p lu s s t a t e d cap ital."о о
a n o t h e r paragraphо7 t h e Ohio s t a t u t e s t a t e s
in
th a t d ivid en d s
from o t h e r than e a r n e d e x c e s s o f a s s e t s r e q u i r e n o t i c e t o be
g iv e n o f the so u rc e o f the d i v i d e n d s ; t h i s l a t t e r s e c t i o n
i n d i c a t e d q u i t e d e f i n i t e l y t h a t d i v i d e n d s may be p a i d from
o th e r th a n earned e x c e s s o f a s s e t s .
"The e x c e s s ,
C o lo r a d o p r o v i d e s t h a t ,
i f a n y , a t any g i v e n t im e o f t h e t h e n a c t u a l
v a l u e o f t h e t o t a l n e t a s s e t s o f th e c o r p o r a t i o n o v e r t h e
amount s o d e t e r m i n e d t o be c a p i t a l ,
s h a l l be s u r p lu s a v a i l н
a b l e f o r g e n e r a l c o r p o r a t e p r u p o s e s and d i s t r i b u t i o n as
e a r n e d s u r p lu s . " о о
be noted: f i r s t ,
C erta in phrases in t h i s q u o t a tio n should
the phrase "the then a c t u a l v a lu e o f a s s e t s
l/Vhether t h i s means t h e a p p r a i s e d v a l u e o f the a s s e t s or mere
l y book v a l u e c a n n o t be a s c e r t a i n e d .
S econ d ly,
in the l a s t
words m e n t i o n i s made o f " e a r n e d s u r p l u s " a l t h o u g h n o t a l l
s u r p l u s computed i n t h e manner s e t f o r t h would n e c e s s a r i l y
86 G e n e r a l and F o r e i g n C o r p o r a t i o n A pts o f t h e S t a t e
o f O h i o . A n n o t a t e d 1 9 S 9 . T i t . IX, D i v . I , Ch. I , S e c . 8 6 2 3 3 8 ( a ) . The d e d u c t i o n s r e q u i r e d i n c l u d e u n r e a l i z e d a p p r e c i a н
t i o n , d e p l e t i o n ( c e r t a i n e x c e p tio n s are a l l o w e d ) , d e p r e c ia н
tio n , lo s s , e t c .
87 I b i d .
1937.
OQ
T it.
IX, D i v . I , S e c . 8 6 2 3 - 3 8 ( d ) .
C o r p o r a t i o n Laws, a s r e v i s e d and amended t o O c t . 1
Ch. 4 1 , A r t . 1 , S u b d i v . 1 , S e c . 1 2 f .
165
be earned s u r p lu s .
Thus, t h e l e g i s l a t u r e s o f s i x s t a t e s have c h o s e n t o
s e t f o r t h t h e f u n d a m e n t a l d i v i d e n d p o l i c y i n term s o f a
b alan ce sh e e t m easure.
These s t a t e s a r e n o t p r i m a r i l y c o n н
c e r n e d w i t h t h e n e t p r o f i t s o r e a r n i n g s o r t h e i r a c c u m u la н
t i o n in the su rp lu s a cc o u n t, b u t r a th e r they se e k to break
away from, t h e p r o f i t and l o s s s t a t e m e n t a p p r o a c h i n the
m easu rem ent o f t h e s o u r c e o f d i v i d e n d s .
that u n less t h is
I t s h o u l d be n o t e d
type o f d iv id e n d c o n t r o l i s r e s t r i c t e d ,
it
has in h e r e n t in i t s p r o v is i o n s the p o s s i b i l i t y o f g r e a t i n н
e q u i t y b o t h t o t h e v a r i o u s c l a s s e s o f s t o c k h o l d e r s and t o
the c r e d i t o r s .
L e ss i t be t h o u g h t t h a t t h e s e s t a t e s have
n o t c u r t a i l e d t h e payment o f d i v i d e n d s from t h e s o u r c e menн
tion ed ,
i t may be s a i d t h a t t h e r e a r e i n some o f t h e s e
s t a t e s q u ite d e ta ile d lim it a t io n s .
At t h i s
p o in t , however,
the d i s c u s s i o n i s n o t concerned w ith the a d d i t i o n a l l i m i t a н
tio n s
th a t are added, b ut r a t h e r ,
t h e p rob lem i s
t h a t o f the
more g e n e r a l and f u n d a m e n t a l s t a t e m e n t o f the s o u r c e s o f
d iv id en d s.
D i v i d e n d s b a s e d on n e t p r o f i t s o r e x c e s s o f a s s e t s .
Some s t a t e s have s o u g h t t o com b ine the o l d e r p r o f i t o r e a r n н
in g t e s t as w e l l as
the newer e x c e s s o f a s s e t o r b a l a n c e ,
s h e e t t e s t i n an a l t e r n a t i v e
typ e o f d i v i d e n d t e s t .
T h is
t e n d e n c y i s shown i n t h e s t a t u t e s o f t h e s t a t e s o f Arkan-
166
s a s , 89 F l o r i d a , " Nevada,о-*- and V i r g i n i a . о ^
The f i r s t f o u r
s t a t e s p r o v i d e f o r d i v i d e n d s from n e t e a r n i n g s o r from s u r н
p lus o f a s s e t s over l i a b i l i t i e s ,
in clu d in g i t s
V i r g i n i a words t h e s e c t i o n t o r e a d '*. .
net a s s e ts
in excess of i t s
ca p ita l.
.
ca p ita l.
. .. n e t e a r n i n g s , or
.
and i n a d d i t i o n ,
t h i s s t a t e r e q u i r e s n o t i c e to b e g i v e n to the s h a r e h o ld e r s
i f d i v i d e n d s a r e p a i d from p a i d - i n s u r p l u s .
T h is d i v i d e n d
p r o v i s i o n b a s e d on n e t p r o f i t s o r an e x c e s s o f a s s e t s
s u b j e c t t o some r a t h e r u n u s u a l i n t e r p r e t a t i o n s .
o f the s t a t e s in q u estion p r o h ib its
d i v i d e n d s when t h e c a p i t a l i s
o f the s t a t e s ,
the
is
I f the la w
d ecla ra tio n of
im paired , as i t does in fo u r
t h e n , when t h e r e i s no e x c e s s o f a s s e t s , o r
when t h e a s s e t s e x a c t l y e q u a l t h e c a p i t a l s t o c k and l i a b i l i н
ties,
t o a p p l y t h e o t h e r a l t e r n a t i v e and pay d i v i d e n d s would
r e s u l t i n an i l l e g a l d i v i d e n d .
H e n c e, i t m i g h t be argu ed
t h a t t h e u s e o f t h e a l t e r n a t i v e p h r a s e o l o g y , !tn e t p r o f i t s o r
e x c e s s o f a s s e t s , ' * i s n o t o n l y u s e l e s s and c o n f u s i n g b u t
89 P o p e ' s D i g e s t o f t h e S t a t u t e s o f A r k a n s a s , 1 9 3 7 .
Ch. 3 1 , A r t . IV , S e c . 2 1 8 3 .
" C o r p o r a t i o n Law. S t a t e o f F l o r i d a . 1925 a s amendн
ed t o J u l y 1 , 1 9 3 4 . Ch. 1 0 0 9 6 , A r t . V I, S e c . 2 3 .
S t a t e o f Nevadз, D o m e s t ic and F o r e i g n C o r p o r a t i o n
Law, a s amended t o 1 9 3 7 , S e c . 2 6 .
^ D o m e s t ic and F o r e i g n C o r p o r a t i o n Laws o f T e n n e s s e e .
1 9 3 6 . Ch. 5 , A r t . I , S e c . 3 7 3 7 .
93 V i r g i n i a C o r p o r a t i o n Laws, w i t h a 11 amendments t o
June 2 1 , 1 9 3 8 . Ch. 1 4 7 , S e c . 3 8 4 0 .
167
a l s o d a n g e r o u s , f o r when a c o r p o r a t i o n s o u g h t t o u s e t h e
a lte r n a tiv e , net p r o f its ,
i n p a y i n g a d i v i d e n d , w h ic h i t
would n e e d to u s e o n l y when t h e r e was no e x c e s s o f a s s e t s ,
i t w ould a u t o m a t i c a l l y be d e c l a r i n g an i l l e g a l d i v i d e n d .
T h r e e ; s t a t e s , Delaware.,о4 G e o r g i a , a n d K a n s a s ,
i n an a t t e m p t t o s o l v e
t h i s dilemma h ave e n a c t e d l e g i s l a t i o n
c o n c e r n i n g t h e l e g a l i t y o f d e c l a r i n g and p a y i n g d i v i d e n d s
e v e n though t h e c a p i t a l i s
i m p a i r e d . The D ela w a r e s t a t u t e ,
w h i c h i s a p p a r e n t l y t h e m odel f o r t h e l e g i s l a t i o n o f t h e two
o th e r s t a t e s , read s as f o l l o w s :
The d i r e c t o r s o f e v e r y c o r p o r a t i o n c r e a t e d u n d e r t h i s
Chapter, s u b j e c t to any r e s t r i c t i o n s c o n ta in e d in i t s
C e r t i f i c a t e o f I n c o r p o r a t i o n , s h a l l h a v e power t o d e н
c l a r e and pay d i v i d e n d s upon t h e s h a r e s o f i t s c a p i t a l
s t o c k e i t h e r (a ) o u t o f i t s n e t a s s e t s i n e x c e s s o f i t s
c a p i t a l a s computed i n a c c o r d a n c e w i t h t h e p r o v i s i o n s o f
S e c t i o n s 1 4 , 2 6 , 2 7 , and 28 o f t h i s C h a p t e r , o r ( b ) , i n
c a s e t h e r e s h a l l b e no s u c h e x c e s s , o u t o f i t s n e t p r o н
f i t s f o r t h e f i s c a l y e a r t h e n c u r r e n t a n d / o r the p r e c e d н
in g f i s c a l year; p rovid ed , however, th a t i f the c a p i t a l
o f t h e c o r p o r a t i o n computed a s a f o r e s a i d s h a l l have b e e n
d im in is h e d by d e p r e c i a t i o n in the v a lu e o f i t s p r o p e r t y ,
o r b y l o s s e s , o r o t h e r w i s e , t o an amount l e s s t h a n t h e
a g g r e g a t e amount o f t h e c a p i t a l r e p r e s e n t e d b y t h e I s s u н
ed and o u t s t a n d i n g s t o c k o f a l l c l a s s e s h a v i n g a p r e f e r н
e n c e upon t h e d i s t r i b u t i o n o f a s s e t s , the d i r e c t o r s o f
s u c h c o r p o r a t i o n s h a l l n o t d e c l a r e and pay o u t o f s u c h
94 G e n e r a l P r o v i s i o n s R e s p e c t i n g D o m e s t ic and F o r e i g n
C o r p o r a t i o n C o n t a i n e d i n t h e G e n e r a l C o r p o r a t i o n Law o f t h e
S t a t e o f D elaw are a s amended t o 1 9 3 7 . Ch. 6 5 , A r t . l , S e c . 3 4 .
9 ^ A c t s and R e s o l u t i o n s o f t h e G e n e r a l A ssem b ly o f th e
S t a t e o f G e o r g i a . 1 9 3 4 - 1 9 3 8 . P t . 1 , T i t . 1 , S e c . 16 am ending
2 2 - 3 0 8 o f t h e Code o f G e o r g i a . 1 9 3 5 . See a l s o T i t . 2 2 , P t .
I l l , S e c . 2 2 - 7 1 3 w h ich i s i n c o n f l i c t .
96 S t a t e o f K a n sa s, S e s s i o n Laws, 1 9 3 9 . Ch. 1 5 2 , S e c .
80 and 8 1 .
168
n e t p r o f i t s a n y d i v i d e n d s upon any s h a r e s o f any c l a s s e s
o f i t s c a p i t a l s t o c k u n t i l the d e f i c i e n c y i n t h e amount
o f c a p i t a l r e p r e s e n t e d by th e i s s u e d and o u t s t a n d i n g
s t o c k o f a l l c l a s s e s h a v i n g a p r e f e r e n c e upon t h e d i s н
t r i b u t i o n o f a s s e t s s h a l l h ave b e e n r e p a i r e d . 9*7
The s t a t u t e s o f t h e s e t h r e e s t a t e s a r e n o t t h e same a s t h e
f a m i l i a r a l t e r n a t i v e t y p e o f s t a t u t e w h ic h p r o v i d e s f o r t h e
payment o f d i v i d e n d s o u t o f t h e e x c e s s o f a s s e t s o r n e t p r o н
fits.
The s t a t u t e s o f D e l a w a r e , G e o r g i a , and Kansas p r o v i d e
s p e c i f i c a l l y f o r t h e payment o f d i v i d e n d s o u t o f t h e e x c e s s
o f a s s e t s and i n c a s e t h e r e i s no s u c h e x c e s s - - i n o t h e r w o r d s ,
i f the c a p it a l i s
im p a ir e d --th e n e t p r o f i t s f o r the f i s c a l
y e a r o r t h e p r e c e d i n g y e a r may be u s e d f o r d i v i d e n d s .
T h is
t y p e o f p r o v i s i o n seems t o p r o v i d e f o r t h e c o n t i n g e n c y menн
t io n e d i n the p r e v io u s paragraph.
D i v i d e n d s b a s e d on n e t p r o f i t s , p a i d - i n s u r p l u s , o r
ap p reciation su rp lu s.
The s t a t u t e s o f s i x s t a t e s a r e r a t h e r
u n u s u a l and w a r r a n t comment.
These s t a t e s h a v e v a r i o u s comн
b i n a t i o n s o f d i v i d e n d s o u r c e s and a r e r a t h e r d i f f i c u l t t o
cla ssify .
They u s e t h e p r o f i t and l o s s a p p r o a c h r a t h e r t h a n
the e x c e s s a s s e t t e s t ;
in addition^
a l l o f them make a v a i l a н
b l e f o r d i v i d e n d p a y m e n t s , u n d er c e r t a i n c o n d i t i o n s , e i t h e r
p a i d - i n s u r p l u s or> s u r p l u s a r i s i n g from a p p r e c i a t i o n o f
^ G e n e r a l P r o v i s i o n R e s p e c t i n g D o m e s t i c and F o r e i g n
C o r p o r a t i o n C o n t a i n e d i n t h e G e n e r a l C o r p o r a t i o n Laws o f t h e
S t a t e o f D e l a w a r e . as amended to 1 9 3 7 . Ch. 6 5 , A r t . l , S e c . 3 4 .
169
assets.
For e x a m p l e , I n d i a n a p r o v i d e s f o r d i v i d e n d s "out o f
t h e s u r p l u s e a r n i n g s o r n e t p r o f i t s or s u r p l u s p a i d i n i n
cash o f the c o r p o r a t i o n . M a i n e ^ о
p rovid es that d iv id en d s
may he p a i d o u t o f " p r o f i t s " h u t when d i s c u s s i n g c a p i t a l and
t h e amount o f c o n s i d e r a t i o n r e c e i v e d from s h a r e s w i t h o u t par
v a l u e t h a t may he s e t a s i d e i n p a i d - i n s u r p l u s ,
t h e law
a l l o w s su ch amounts so a l l o c a t e d t o he a v a i l a b l e f o r d i v i н
dends an d o t h e r c o r p o r a t e p u r p o s e s .
T h is w ould seem t o
a l l o w any t y p e o f d i v i d e n d from p a i d - i n s u r p l u s .
o r s o f a New J e r s e y C o r p o r a t i o n s h a l l n o t pay ".
d en d s e x c e p t from i t s
su rp lu s,
.
. . d iv iн
i n c l u d i n g s u r p l u s as d e t e r н
m ined b y S e c t i o n 1 4 j 8 - 6 o f t h i s
fits
The d i r e c t н
title ,
or from t h e n e t p r o н
a r i s i n g from t h e b u s i n e s s o f the c o r p o r a t i o n ,
. . .
1*$оо
S e c t i o n 14: 8 - 6 p r o v i d e s t h a t a p o r t i o n o f t h e c o n s i d e r a t i o n
r e c e i v e d on t h e s a l e o f s t o c k may he a l l o c a t e d to s u r p l u s ,
that i s ,
p a id -in su rp lu s.
C a l i f o r n i a and M in n e so ta h a v e r a t h e r u n u s u a l f e a t u r e s ,
f o r b o t h o f t h e s e s t a t e s p r o v i d e t h a t d i v i d e n d s may b e p a i d
1937.
C e r t a i n Laws C o n c e r n in g C o r p o r a t i o n s f o r P r o f i t ,
Ch. 2 1 5 , P t . I , A r t . 1 , S e c . 1 2 .
S t a t e o f M aine, P r o v i s i o n s o f Law i n F o rc e R e l a t t o B u s i n e s s C o r p o r a t i o n s . .1930 a s amended.
Ch. 5 6 , S e c . 3 7
and S e c . 1 9 .
1 ░ ░ The G e n e r a l C o r p o r a t i o n Law o f New J e r s e y , i n c l u d н
i n g a l l s u p p l e m e n t s and amendments t o t h e end o f the L e g i s н
l a t i v e S e s s i o n , 1 9 3 8 . T i t . 1 4 , Ch. 8 , S e c . 14: 8 - 1 9 .
170
o u t of* e a r n e d s u r p l u s , o u t o f p a i d - i n s u r p l u s , and w i t h i n
c e r t a i n l i m i t a i o n s , d e s p i t e c a p i t a l im pairm ent, o u t o f n e t
p r o f i t s f o r the p r e c e d in g a c c o u n t in g p e r i o d .
are as f o l l o w s .
to l e s s
I n C a l i f o r n i a , 101 i f
The l i m i t a t i o n s
t h e n e t a s s e t s amount
than the l i q u i d a t i o n p r e fe r e n c e s o f the s t o c k en н
t i t l e d t h e r e t o , d i v i d e n d s s h a l l n o t be p a i d o u t o f n e t p r o н
fits
to sh a r e h o ld e r s o th e r than th o s e h aving l i q u i d a t i o n
p r e fe r e n c e ; fu r th e r , on ly p r e fe r r e d sh areh old ers s h a l l r e н
c e i v e d i v i d e n d s from p a i d - i n s u r p l u s .
M i n n e s o t a 10^ p r o v i d e s
in i t s
s t a t u t e s t h a t i f th e re are sh ares h aving p r e fe r r e d
righ ts
t o d i v i d e n d s , d i v i d e n d s s h a l l be p a i d o n l y on t h e p r e н
ferr ed stock out o f p a id -in su rp lu s.
T h is seems d i f f e r e n t
from t h e C a l i f o r n i a p r o v i s i o n w h ic h a l l o w s d i v i d e n d s o n l y to
preferred sto ck ,
and p r e s u m a b l y , I f t h e r e were no p r e f e r r e d
s t o c k no d i v i d e n d would be p a i d on common s t o c k .
however, p rovid es th a t i f
M innesota,
there i s a p referred c la s s o f sto c k ,
t h e n d i v i d e n d s c a n be p a i d o n l y t o p r e f e r r e d .
What w ould be
t h e s i t u a t i o n i f t h e r e were no p r e f e r r e d s t o c k o u t s t a n d i n g
i n a M in n e s o t a c o r p o r a t i o n ?
Could d i v i d e n d s be p a i d t o t h e
common s t o c k o u t o f p a i d - i n s u r p l u s ?
t h e la w a s I t s t a n d s .
That would seem t o b e
F u r th er , M innesota s t i p u l a t e s
that
P e e r i n g * s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a ,
1 9 3 7 . D i v . 1 , P t . IV , T i t . 1 , Ch. X I , S e c . 3 4 6 .
1935.
1 0^ M i n n e s o t a B u s i n e s s C o r p o r a t i o n A c t , a s amended t o
Ch. 3 0 0 , S e c . 21 ( I I ) .
171
d i v i d e n d s s h a l l b e p a i d o u t o f n e t p r o f i t s o f the c u r r e n t
or p r e c e d i n g p e r i o d d e s p i t e c a p i t a l im p a i r m e n t .
i m p o r t a n t w i t h the p r e c e e d i n g ,
E qually
i f th ere are shares e n t i t l e d
t o p r e f e r e n c e s upon l i q u i d a t i o n , d i v i d e n d s s h a l l n o t be p a i d
upon any o t h e r s h a r e s e x c e p t t o t h e e x t e n t t h a t the f a i r
valu e o f the a s s e t s exceeds the aggregate o f i t s
and i t s
lia b ilitie s
s t a t e d c a p i t a l r e p r e s e n t e d by a l l sh a re s e n t i t l e d to
l i q u i d a t i o n p r e f e r e n c e , and p r o v i d e d no d i v i d e n d s h a l l be
paid i f
the f a i r v a l u e o f t h e a s s e t s
gate o f i t s l i a b i l i t i e s
is less
t h a n the a g g r e н
in c l u d i n g the proposed d iv id e n d as
a lia b ility .
F in a lly ,
t h e r e r e m a i n s to be c o n s i d e r e d the W i s c o n s i n
s t a t u t o r y p r o v i s i o n s w h ic h a r e as f o l l o w s :
( 1 ) No d i v i d e n d s h a l l be p a i d b y any c o r p o r a t i o n u n t i l
a t l e a s t f i f t y per c e n t o f the a u t h o r iz e d c a p i t a l s t o c k
h a s b e e n f u l l y p a i d i n , and t h e n o n l y o u t o f n e t p r o f i t s
p rop erly a p p lica b le th e r e to , . . . .
( 2 ) But any c o r p o r a t i o n w h ich h a s i n v e s t e d n e t e a r n н
i n g s or income i n perm anent a d d i t i o n s t o i t s p r o p e r t y ,
o r whose p r o p e r t y s h a l l h a v e i n c r e a s e d i n v a l u e , may d e н
c l a r e a d i v i d e n d e i t h e r i n money o r i n s t o c k t o t h e e x н
t e n t o f t h e n e t e a r n i n g or income t o i n v e s t e d o r o f the
s a i d in c r e a s e in th e v a lu e o f i t s p r o p e r ty ; b u t the t o н
t a l amount o f s u c h d i v i d e n d s h a l l n o t e x c e e d t h e a c t u a l
c a s h v a l u e o f t h e a s s e t s owned b y t h e c o r p o r a t i o n i n e x н
c e ss of th e t o t a l l i a b i l i t i e s , in clu d in g i t s c a p it a l
s to c k . 103
The p r o v i s i o n o f t h e f i r s t p a ra g ra p h o f t h i s q u o t a t i o n m i g h t
1
S t a t u t e s o f W i s c o n s i n R e la t i n g t o P r i v a t e C orp oraн
tio n s , 1937. S ec. 18 2 .1 9 .
172
con ceivab ly j u s t i f y c l a s s if y in g
t h i s s t a t e a s one g o v e r n i n g
d iv id e n d s by the n e t p r o f i t t e s t .
However, t h e s e c o n d p a r a н
g ra p h i s so i m p o r t a n t and so s p e c i f i c a s to w a r r a n t i n c l u d н
ing t h i s s t a t e w ith th ose s t a t e s h a v in g -r a th e r unusual proн
v isio n s.
Under t h e la w s o f W i s c o n s i n d i v i d e n d s i n c a s h a r e
a l l o w e d from p a i d - i n surplus-*-^4 and from u n r e a l i z e d a p p r e c i н
a t i o n , and w h i l e t h i s l a t t e r s o u r c e o f d i v i d e n d s w i l l be
d isc u sse d at len g th l a t e r ,
present p oin t.
s o m e t h i n g s h o u l d be s a i d a t t h e
I f a c o r p o r a tio n has e a r n i n g s ,
in a s s e t s w i l l appear f i r s t
the i n c r e a s e
i n t h e form o f c u r r e n t a s s e t s ,
n o t n e c e s s a r i l y i n t h e form o f c a s h , b u t f o r the p u r p o s e a t
hand i t may b e assumed to be c a s h .
i n perm anent a d d i t i o n s ,
creased.
I f such cash i s in v e s t e d
the f i x e d a s s e t s g r o u p w i l l be i n н
The a c q u i s i t i o n o f f i x e d a s s e t s w i l l t e n d t o d e н
crease the cash a v a ila b le f o r d iv id en d s; y e t ,
t h e la w a l l o w s
t h e c o r p o r a t i o n t o pay d i v i d e n d s b e c a u s e o f t h e i n v e s t m e n t
in f ix e d a s s e t s .
A lso ,
t h i s law a l l o w s t h e d i r e c t o r s
to pay
a c a s h d i v i d e n d a s a r e s u l t o f an i n c r e a s e i n t h e v a l u e o f
the f i x e d a s s e t s ; p r o v id e d , however,
the d iv id en d i s not
g r e a t e r than the a c t u a l c a s h v a lu e o f the a s s e t s o v er the
lia b ilitie s
and c a p i t a l s t o c k .
The d e t e r m i n a t i o n o f t h e
a c tu a l valu e o f th e f ix e d a s s e t s o f a corp oration i s d i f f i н
c u l t t o d e t e r m i n e ' a c c u r a t e l y , and t h i s v a l u e w i l l f l u c t u a t e
on t h e b a s i s o f t h e p r i c e l e v e l .
104 I b id . Sec.
182;?14.
If,
f o r exam ple,
the cash
173
v alu e o f the f i x e d a s s e t s
r i s in g p rice l e v e l ,
in cr ea se s s t e a d i l y because o f a
the c o r p o r a t i o n can pay d i v i d e n d s and b y
so d o i n g d e p l e t e t h e c u r r e n t a s s e t group u n d e r the a s s u m p t i o n
t h a t w h i l e the c u r r e n t a s s e t s a r e d e c l i n i n g t h e f i x e d a s s e t s
a r e i n c r e a s i n g , and t h a t i f n e c e s s a r y ,
ca n b e r e p l e n i s h e d b y s e l l i n g
the c u r r e n t a s s e t s
the f i x e d a s s e t s .
When t h e
o p e r a t in g a s s e t s o f th e fir m are s o l d to s e c u r e c u r r e n t
assets,
or when t h e peak o f t h e p r i c e l e v e l i s r e a c h e d and
the p r ic e l e v e l b eg in s
to f a l l ,
the c o r p o r a t i o n i s l i k e l y to
encounter c o n sid er a b le f in a n c i a l d i f f i c u l t y
i f d ivid en ds
have b e e n p a i d f r o m . u n r e a l i z e d a p p r e c i a t i o n o f a s s e t s .
No d i v i d e n d p r o v i s i o n , o r o n l y i n s o l v e n c y o r c a p i t a l
im pairm en t t e s t .
There a r e e i g h t s t a t e s 105 and t h e D i s t r i c t
o f Columbia t h a t h a v e e i t h e r no named p r o v i s i o n r e g a r d i n g the
s o u r c e o f d i v i d e n d s , o r t h a t depend on t h e c a p i t a l i m p a i r н
ment a n d / o r i n s o l v e n c y t e s t a s t h e s o l e r e s t r i c t i o n on t h e
d e c l a r a t i o n ?o f d i v i d e n d s .
In a d d i t i o n ,
two o t h e r s t a t e s ,
I l l i n o i s and N ebraska m i g h t p o s s i b l y be i n c l u d e d i n t h i s
105 Alabama, Io w a, K e n t u c k y , M a s s a c h u s e t t s , M i s s i s s i p н
p i , New H am pshire, Vermont, and Wyoming. While Alabama h a s
no s p e c i f i c p r o v i s i o n r e g a r d i n g t h e s o u r c e o f c a s h d i v i d e n d s ,
t h e la w o f t h i s s t a t e i n d i s c u s s i n g s t o c k d i v i d e n d s c o n t a i n s
t h e f o l l o w i n g : uWhenever any c o r p o r a t i o n s h a l l h a v e a s u r н
p l u s o f money, w h ic h i s p r o p e r l y s u b j e c t t o d i s t r i b u t i o n as
d i v i d e n d s , o r w h en ever t h e n e t a s s e t s o f a c o r p o r a t i o n , a f t e r
d ed uctin g therefrom i t s l i a b i l i t i e s e x c e p t f o r c a p i t a l sto c k ,
e x c e e d i n v a l u e t h e par v a l u e o f i t s o u t s t a n d i n g s t o c k ,
. . . . ft Whether t h i s s t a t e m e n t i s m eant t o a p p l y t o c a s h
d ivid en d s is su b je c t to c o n je c tu r e .
174
category.
I llin o is ^ о о governs the d e c l a r a t i o n o f d iv id e n d s
in g e n e r a l through th e in s o lv e n c y t e s t , but p r e fe r r e d d i v i н
dends may b e p a i d o u t o f p a i d - i n s u r p l u s or r e d u c t i o n s u r н
p lu s.
Nebraska-*-0 ^ h a s no p r o v i s i o n o t h e r t h a n c a p i t a l imн
pairm ent f o r c o r p o r a tio n s o t h e r th a n m anu factu ring c o n c e r n s ,
w h ic h h a v e " p r o f i t s ?* a s t h e i r s o u r c e o f d i v i d e n d s .
S ection 0
Summary
Summary o f c a p i t a l im pairm en t a n d / o r i n s o l v e n c y t e s t .
The d i s c u s s i o n o f t h e v a r i o u s c l a s s i f i c a t i o n s h a s become
r a t h e r i n v o l v e d , and a summary o r b r o a d o u t l i n e m i g h t do
much t o c l a r i f y t h e f i n d i n g s .
I t s h o u l d be u n d e r s t o o d t h a t
s u c h a summary c a n n o t b e a t a l l c o m p l e t e , f o r i t
b le
t o i n d i c a t e a l l t h e m in u t e s u b d i v i s i o n s .
is
im p ossiн
N in eteen
s t a t e s ^ о e i t h e r p r o h i b i t d i v i d e n d s o r make t h e d i r e c t o r s
lia b le
i f d i v i d e n d s a r e p a i d when t h e c a p i t a l i s i m p a i r e d or
t h e payment w ould r e n d e r t h e c a p i t a l o f t h e c o r p o r a t i o n im-
The B u s i n e s s C o r p o r a t i o n A c t , 1 9 3 7 .
S e c . 4 1 , and
s e e a l s o S e c . 59 and 60 f o r a d d i t i o n a l l i m i t a t i o n s .
Compiled S t a t u t e s o f N e b r a s k a , 1 9 2 9 . Ch. 2 4 , A r t .
2 4 - 2 1 8 and Ch. 24? A r t . I l l , S e c . 3 0 2 .
108 A r i z o n a , A r k a n s a s , I d a h o , M aine, Montana, N e b r a s н
k a , N evada, New J e r s e y , New M e x i c o , New York:, N o rth C a r o l i n a ,
N o r th D a k o t a , Oklahoma, Rhode I s l a n d , S o u t h Dakota', T e n n e sн
s e e , U t a h , Vermont, and V i r g i n i a .
175
p aired .
The r e t e n t i o n o f t h e c a p i t a l i s n o t c o n s i d e r e d o f
f u n d a m e n t a l i m p o r ta n c e by f i v e
states,
C a l i f o r n i a , D e la w a r e ,
K a n s a s , G e o r g i a , and M i n n e s o t a , f o r u n d e r c e r t a i n c o n d i t i o n s ,
d i v i d e n d s may be p a i d o u t o f n e t p r o f i t s d e s p i t e c a p i t a l imн
pairm ent.
I n C a l i f o r n i a and M in n e s o t a i f
t h e c a p i t a l h as
b e e n i m p a i r e d to t h e d e g r e e t h a t t h e a g g r e g a t e n e t a s s e t s
are l e s s th an the l i q u i d a t i o n p r e f e r e n c e o f sh ares having
such a p r e fe r e n c e ,
t h e n d i v i d e n d s c a n b e p a i d o n l y on su c h
sh a r e s as lo n g as the c a p i t a l i s so im p a ired .
j o in s such d iv id e n d s i f
M innesota enн
the f a i r v a lu e o f th e a s s e t s are l e s s
than th e e x i s t i n g l i a b i l i t i e s
and the p r o p o s e d d i v i d e n d s .
D e l a w a r e , G e o r g i a , and Kansas p r o h i b i t d i v i d e n d s on any
s h a r e s when t h e c a p i t a l h as b e e n d e p l e t e d to an amount l e s s
t h a n the a g g r e g a t e p r e f e r e n c e o f s h a r e s h a v i n g a l i q u i d a t i o n
p reference.
In s i x s t a t e s , C o n n e c ticu t, I l l i n o i s , M a ssa c h u s e tts,
Oregon,
T e x a s , and Wyoming, d i v i d e n d s a r e p r o h i b i t e d or t h e
d i r e c t o r s a r e made l i a b l e
I f t h e y v o t e f o r a d i v i d e n d when
t h e c o r p o r a t i o n I s I n s o l v e n t or t h e d i v i d e n d w o u ld r e n d e r
the c o r p o r a t i o n i n s o l v e n t .
C a l i f o r n i a , O h io , and New Hampн
s h i r e h a v e what h a s b e e n term ed a m o d i f i e d t y p e o f i n s o l н
vency ' t e s t .
T h is t e s t makes i t u n l a w f u l f o r a c o r p o r a t i o n
t o pay a d i v i d e n d when t h e d e b t s and l i a b i l i t i e s
would e x н
c e e d i t s a s s e t s o r when t h e payment o f t h e d i v i d e n d would
make i t
i m p o s s i b l e f o r t h e c o r p o r a t i o n t o m e e t i t s d e b t s as
176
they f a l l due.
B oth t h e c a p i t a l im p airm en t a n d / o r i n s o l v e n c y t e s t i s
u s e d t o l i m i t t h e d i v i d e n d payments o f c o r p o r a t i o n s o r g a n i z н
ed i n C o l o r a d o , F l o r i d a , I n d i a n a , Iow a, K e n tu c k y , M arylan d,
M i s s i s s i p p i , M i s s o u r i , West V i r g i n i a , W i s c o n s i n , and t h e
D i s t r i c t o f C olu m b ia.
The im p o r t a n c e o f t h e c a p i t a l i m p a i r н
ment and? i n s o l v e n c y t e s t i n c e r t a i n j u r i s d i c t i o n s
is
in d ica tн
ed b y t h e f a c t t h a t e i g h t s t a t e s , C o l o r a d o , I o w a , K e n t u c k y ,
M assachusetts, M i s s is s ip p i,
New H am p sh ir e, New Y o rk , and
Wyoming, h ave e i t h e r one o r t h e o t h e r o r b o t h o f t h e s e t e s t s
as t h e s o l e l i m i t a t i o n on d i v i d e n d p a y m e n t s .
C onversely,
t h e r e a r e t e n s t a t e s , Alabama,. D e l a w a r e , G e o r g i a , K a n s a s ,
L o u is ia n a , M ichigan, M innesota, P en n s y lv a n ia , South C a r o lin a ,
and W a s h in g to n ,
t h a t do n o t u s e e i t h e r t h e c a p i t a l i m p a i r н
ment o r i n s o l v e n c y t e s t .
Summary o f s o u r c e o f c a s h d i v i d e n d s .
The s t a t u t o r y
p r o v i s i o n s r e g a r d i n g t h e s o u r c e o f c a s h d i v i d e n d s may a l s o
be sum m arized .
Ten s t a t e s ,
in c lu d in g A rizona, M isso u r i,
Montana, Nebraska ( m a n u f a c t u r i n g c o n c e r n s o n l y ) , N orth
D a k o t a , Oklahoma, S o u t h D a k o t a ,
T e x a s , U t a h , and West V i r н
g i n i a , name " p r o f i t s , ? " n e t p r o f i t , ? o r as i t
ca lled ,
is freq u en tly
" su rp lu s p r o f i t s " as t h e so u rc e o f c a sh d i v i d e n d s .
M isso u r i u s e s th e term " p r o f i t s ? in the g e n e r a l c o r p o r a tio n
la w and t h e p h r a s e " n e t p r o f i t s o r s u r p l u s e a r n i n g s " when
d i s c u s s i n g s h a r e s w i t h o u t p ar v a l u e .
Another group o f s t a t e s
composed o f C o n n e c t i c u t , M aryland, M i c h i g a n , New M e x ic o ,
N orth C a r o l i n a , Oregon, Rhode I s l a n d ,
and S ou th C a r o l i n a
name t h e s o u r c e o f c a s h d i v i d e n d s a s th e " n e t p r o f i t s or
su rp lu s."
S outh C a r o l i n a s p e c i f i c a l l y r e q u i r e s t h a t d i v i н
d ends be p a i d from s u r p l u s " a d e q u a t e l y e a r n e d o r p a i d o u t o f
s u r p l u s h e r e t o f o r e e a r n e d , and n o t s e t a s i d e f o r a s p e c i f i c
p u r p o s e , " and C o n n e c t i c u t names th e s o u r c e as " a c t u a l s u r p l u s
M i c h ig a n m o d i f i e s t h e g e n e r a l i t y o f t h e s t a t e m e n t b y a l l o w н
i n g p r e f e r r e d d i v i d e n d s from "any s u r p l u s . "
tio n s on ly " su rp lu s."
New York menн
The p ro b lem o f p a i d - i n s u r p l u s i s d e н
f i n i t e l y met i n t h e s t a t u t e s o f I n d i a n a , M a in e , and New
J e r s e y w hich a l l o w c a s h d i v i d e n d s from n e t p r o f i t o r s u r p l u s
in clu d in g p a id -in su rp lu s.
A grou p o f s t a t e s composed o f C o l o r a d o , I d a h o , L o u i s i н
a n a , O h io , P e n n s y l v a n i a , and W ash in gton a l l o w t h e . s u r p l u s ,
d e t e r m i n e d b y t a k i n g t h e d i f f e r e n c e b e t w e e n the a g g r e g a t e o f
the a s s e t s over th e a g g r e g a te l i a b i l i t i e s
t o be t h e s o u r c e o f c a s h d i v i d e n d s .
and c a p i t a l s t o c k ,
T h is t y p e o f s t a t u t e
would a l l o w any s u r p l u s to be u s e d f o r d i v i d e n d s ;
however, 'certain l i m i t a t i o n s
there a re,
to t h i s g e n e r a l s t a t e m e n t . For
e x a m p l e , P e n n s y l v a n i a a l l o w s o n l y d i v i d e n d s on p r e f e r r e d
sto ck out o f p a id -in su rp lu s.
sas,
I n t h e j u r i s d i c t i o n o f Arkanн
F l o r i d a , Nevada, T e n n e s s e e , and V i r g i n i a c a s h d i v i d e n d s
may be p a i d from e i t h e r t h e ?h e t e a r n i n g s o r t h e s u r p l u s o f
178
a s s e t s over the l i a b i l i t i e s
s i m i l a r t o the
and s t a t e d c a p i t a l . ?
Somewhat
l a s t grou p b u t a d d in g an i m p o r t a n t f e a t u r e
a r e t h e s t a t e s o f D e l a w a r e , G e o r g i a , and Kansas w h ic h a l l o w
c a s h d i v i d e n d s o u t o f ?n e t a s s e t s i n e x c e s s o f c a p i t a l , ? o r
o u t o f t h e ?n e t p r o f i t f o r t h e y e a r ; ? t h a t i s ,
c a n be p a i d d e s p i t e a c a p i t a l i m p a i r m e n t .
a divid en d
C a l i f o r n i a and
M i n n e s o t a l i k e w i s e s a n c t i o n t h e payment o f a c a s h d i v i d e n d ,
w i t h c e r t a i n r e s t r i c t i o n s , o u t o f n e t p r o f i t s e v e n though
t h e c a p i t a l i s i m p a i r e d , and i n a d d i t i o n ,
t h e s e two s t a t e s
make e i t h e r e a r n e d s u r p l u s or p a i d - i n s u r p l u s a v a i l a b l e f o r
such d iv id e n d s , w ith c e r t a i n l i m i t a t i o n s .
W isconsin a llo w s
d i v i d e n d s from e i t h e r n e t p r o f i t s , p a i d - i n s u r p l u s , o r s u r н
p lu s a r i s i n g ffom u n r e a l i z e d a p p r e c i a t i o n o f a s s e t s .
There a r e e l e v e n s t a t e s , A r i z o n a , Montana, N orth Daн
k o t a , Oklahoma, S o u th D a k o t a , U t a h , N e b r a s k a , T e x a s , New
J e r s e y , New M e x i c o , and N orth C a r o l i n a ,
that,
in a d d it io n to
some o t h e r p h r a s e c o n c e r n i n g th e s o u r c e o f d i v i d e n d s , u s e
th e m o d i f y i n g p h r a s e ??from t h e b u s i n e s s . ?
These s t a t e s h a v e
b e e n c l a s s i f i e d ab ove a c c o r d i n g t o t h e m ajor p r o v i s i o n , b u t
are in c lu d e d here in order to i n d i c a t e
tio n that a p p lie s .
th e im portant l i m i t a н
Three o f t h e s e s t a t e s ,
New J e r s e y , New
M e x ic o , and N orth C a r o l i n a , u s e t h e words !ln e t p r o f i t from
the b u s i n e s s ? and t h e n c o n t i n u e t h e s t a t e m e n t b y u s i n g t h e words "or s u r p l u s . ?
On t h e i n t e r p r e t a t i o n o f t h e word s u r н
p l u s d e p e n d s t h e im p o r t a n c e o f t h e p h r a s e ? from t h e b u s i n e s s . ?
There a r e e i g h t s t a t e s , Alabama, Iowa, K e n t u c k y ,
M a s s a c h u s e t t s , M i s s i s s i p p i , New H am p sh ir e, Vermont, Wyoming,,
and th e D i s t r i c t o f C olu m b ia, t h a t h a v e e i t h e r no p r o v i s i o n
r e g a r d i n g t h e s o u r c e o f d i v i d e n d s o r depend s o l e l y on a
c a p i t a l im pairm en t o r i n s o l v e n c y t e s t t o r e s t r i c t d i v i d e n d s .
Two o t h e r s t a t e s ,
in t h is group.
I l l i n o i s and N ebraska m i g h t be i n c l u d e d
I l l i n o i s governs a l l , d iv id e n d s, e x c e p t p reн
f e r r e d d i v i d e n d s fro m p a i d - i n s u r p l u s , by an i n s o l v e n c y t e s t
and Nebraska h a s no p r o v i s i o n g o v e r n i n g d i v i d e n d s o f t h e
g e n e r a l c o r p o r a t i o n ( s e e above f o r t h e m a n u f a c t u r i n g concern)
CHAPTER V
CORPORATE LAW
AND THE PAYMENT OF SHARE DIVIDENDS
P u r p ose o f t h e c h a p t e r .
The r i g h t o f a c o r p o r a t i o n
t o pay d i v i d e n d s i n t h e form o f s h a r e s o f t h e i r own s t o c k i s
d e f i n i t e l y ' l i m i t e d in.som e s t a t e s .
f o r w hile i t
T h is i s
as i t
should b e ,
i s t r u e t h a t a s h a r e d i v i d e n d d o e s n o t h i n g more
t h a n g i v e t h e s h a r e h o l d e r more c e r t i f i c a t e s a s e v i d e n c e o f
o w n e r s h i p o f t h e same amount o f b ook v a l u e , n e v e r t h e l e s s ,
if
t h e s e d iv id e n d s are i s s u e d t o c e r t a i n c l a s s e s o f sto ck h o ld ers,
i t may work t o t h e d e t r i m e n t o f o t h e r c l a s s e s o f s h a r e h o l d н
ers.
The a t t e m p t t o l i m i t s h a r e d i v i d e n d s h a s o n l y b e e n a t н
t e m p t e d i n t h e newer s t a t u t e s *
In the d i s c u s s i o n t h a t f o l н
lo w s I t m ust be remember t h a t g e n e r a l l i m i t a t i o n s r e g a r d i n g
d ep recia tio n ,
i n s o l v e n c y , c a p i t a l i m p a i r m e n t , and a b i l i t y t o
m e e t o b l i g a t i o n s would a p p l y i n j u d g i n g t h e l e g a l i t y o f th e
share d iv id e n d .
These f e a t u r e s , h o w e v e r , w i l l n o t be s p e c i f н
i c a l l y con sid ered here because o f t h e ir in c lu s io n in a p reн
ceding d is c u s s io n .
With t h e s e r e s t r i c t i o n s
i n mind the d i s н
cu ssio n w i l l develop the fo llo w in g o u tlin e :
I.
S t a t e s t h a t p r o v i d e f o r d i v i d e n d s w i t h o u t naming
the t y p e ,
and s u p p le m e n t t h i s g e n e r a l s t a t u t e
w i t h a p r o v i s i o n t h a t s h a r e d i v i d e n d s may be i s н
s u e d , p r e s u m a b l y , u n d er t h e same c o n d i t i o n s .
(.a) S o u r ce o f d i v i d e n d s
(b) Amount t h a t m ust be c a p i t a l i z e d a t t h e tim e
o f t h e payment o f t h e s h a r e d i v i d e n d s .
II.
S t a t e s t h a t p rovide f o r share d iv id en d s by h aving
s e p a r a t e p r o v i s i o n s and c o n d i t i o n s f o r s h a r e
d ivid en d s.
(a) S o u r ce o f s h a r e d i v i d e n d s
(b) Amount t h a t must be c a p i t a l i z e d a t t h e t im e
o f t h e payment o f t h e s h a r e d i v i d e n d s .
( c ) L i m i t a t i o n o n ^ s h a r e - d i v i d e n d s on t h e b a s i s
o f the c l a s s o f s t o c k to be is s u e d
(d) N o t i f i c a t i o n r e q u i r e d ,
III.
i f any
S t a t e s a llo w in g sh a re d iv id e n d s under m i s c e l l a n н
eous types o f s t a t u t o r y p r o v is io n .
IV. S t a t e s h a v i n g no p r o v i s i o n c o n c e r n i n g s h a r e d i v i н
d ends .
V. Summary o f p r i n c i p a l s t a t u t o r y p r o v i s i o n s d e a l i n g
w ith share d iv id e n d s .
S t a t e s t h a t p r o v i d e f o r d i v i d e n d s w i t h o u t naming t h e
t y p e and s u p p le m e n t t h i s g e n e r a l s t a t u t e w i t h a_ p r o v i s i o n
s t a t i n g t h a t s h a r e d i v i d e n d s may a I s o be i s s u e d , p r e s u m a b l y .
u n d e r t h e same c o n d i t i o n s .
A t o t a l o f twenty-one s t a t e s
s p e c i f i c a l l y p r o v i d e f o r s h a r e d i v i d e n d s , and o f t h i s number
n i n e s t a t e s may be i n c l u d e d i n t h e f i r s t g ro u p ;
i.e.
states
182
t h a t p r o v i d e f o r d i v i d e n d s and s u p p le m e n t t h i s g e n e r a l s t a t н
u t e w i t h a p r o v i s i o n a l l o w i n g s h a r e d i v i d e n d s t o be i s s u e d ,
p r e s u m a b l y , u n d e r t h e same c o n d i t i o n s .
F lorid a,
G eorgia, In d ia n a ,
T e n n e s s e e a r e the s t a t e s
A rkansas, D elaw are,
I l l i n o i s , M i c h i g a n , Nevada, and
t h a t m ay.be i n c l u d e d i n t h i s g r o u p .
Even among t h e s e s t a t e s t h e r e a r e some d i f f e r e n c e s
in p r o v iн
s i o n s ; f o r e x a m p l e , t h e s t a t u t e s o f A r k a n s a s , 1 F l o r i d a , 2 and
Nevada,о h a v e p r a c t i c a l l y t h e same p r o v i s i o n w h ic h i s worded
as f o l l o w s :
D i v i d e n d s may b e p a i d to s t o c k h o l d e r s from a c o r p o r a н
t i o n ? s n e t e a r n i n g s o r from t h e s u r p l u s o f i t s a s s e t s
over i t s l i a b i l i t i e s , in clu d in g c a p i t a l , . . . . , but
not oth erw ise.
When t h e d i r e c t o r s s h a l l so d e t e r m i n e ,
d i v i d e n d s may b e p a i d i n s t o c k . ^
From t h i s s t a t e m e n t i t
i s e v i d e n t tha t s h a r e d i v i d e n d s may
have as t h e i r sou rce e i t h e r n e t e a r n in g s or su r p lu s o f
a s s e t s - - t h e same s o u r c e a s c a s h d i v i d e n d s .
M o r eo v e r, on the
b a s i s o f t h i s p r o v i s i o n t h e d i r e c t o r s m i g h t pay s h a r e d i v i н
dends from p a i d - i n s u r p l u s s i n c e s u c h a s u r p l u s o f a s s e t s
would b e i n c l u d e d i n d e t e r m i n i n g t h e n e t a s s e t s ,
and a l s o
u n r e a l i z e d a p p r e c i a t i o n m i g h t b e u s e d f o r su ch d i v i d e n d s .
Pop о1a D i g e s t o f t h e S t a t u t e s o f A r k a n s a s , 1 9 3 7 .
Ch. 3 1 , A r t . IV , S e e . 2 1 8 3 .
2 C o r p o r a t i o n Law. S t a t e o f F l o r i d a . 1925 a s amended
to J u l y 1 , 1 9 3 4 . Ch. 1 0 0 9 6 , A r t . V I, S e c . 2 3 .
о S t a t e o f N evada, D o m e st ic and F o r e i g n C o r p o r a t i o n
Laws, a s amended t o 1 9 3 7 . S e c . 2 6 .
^ Loc. c i t .
183
N o t h i n g i s s a i d i n t h e s e a c t s c o n c e r n i n g t h e amount o f s u r н
p l u s t h a t m ust be t r a n s f e r r e d t o t h e s t a t u t o r y c a p i t a l o f
t h e c o r p o r a t i o n a t t h e time o f t h e i s s u a n c e o f s h a r e d i v i н
dends.
T h is d e f i c i e n c y i s c o r r e c t e d i n t h e T e n n e s s e e l a w ,
w h i c h i s i d e n t i c a l t o t h e f i r s t s e n t e n c e o f t h e above q u o t a н
tio n ,
and i n a d d i t i o n a d d s :
. . . . I t s h a l l be l a w f u l f o r a c o r p o r a t i o n , when t h e
d i r e c t o r s so d e t e r m i n e , t o i s s u e e i t h e r common or p r e f e r н
r e d s t o c k a s a d i v i d e n d to i t s s t o c k h o l d e r s , p r o v i d e d ,
i t h a s a s u r p l u s e q u a l in' v a l u e , a t a f a i r v a l u a t i o n , to
s u c h s t o c k i s s u e d a s a d i v i d e n d , and p r o v i d e d , f u r t h e r ,
t h a t t h e s u r p l u s o f s u c h c o r p o r a t i o n i s r e d u c e d i n an
amount e q u a l to t h e v a l u e o f t h e s t o c k i s s u e d a s a s t o c k
d iv id en d .5
T h is s t a t u t e s p e c i f i c a l l y a l l o w s f o r t h e i s s u a n c e o f b o t h
common and p r e f e r r e d s t o c k , b u t r e q u i r e s t h a t t h e s u r p l u s be
e q u a l a t a f a i r v a l u a t i o n t o th e s t o c k i s s u e d ,
and t h a t t h e
s u r p l u s m ust be c a p i t a l i z e d t o the amount o f su c h v a l u e .
The
u s e o f t h e term f a i r v a l u a t i o n r a t h e r t h a n par v a l u e seems
t o p r o v i d e f o r t h e p roblem o f i s s u a n c e o f s h a r e s w i t h o u t par
v a l u e , and a l s o c o n c e i v a b l y a l l o w s f o r the
i s s u a n c e o f par
v a l u e s t o c k a s a d i v i d e n d a t a d i s c o u n t or premium..
v i s i o n s e t f o r t h i n t h e D ela w a r e s t a t u t e s
The p r o н
t e n d s to a c c o m p l i s h
t h e same a s t h e T e n n e s s e e l a w , b u t t h r o u g h d i f f e r e n t w o r d in g :
The d i r e c t o r s o f e v e r y c o r p o r a t i o n c r e a t e d u n d e r t h i s
C h a p t e r , s u b j e c t t o any r e s t r i c t i o n s c o n t a i n e d i n i t s
C e r t i f i c a t e o f I n c o r p o r a t i o n , s h a l l h ave power t o d e c l a r e
C
1936.
D o m e s t i c and F o r e i g n C o r p o r a t i o n Laws o f T e n n e s s e e .
Ch. 5 , A r t . I , S e c . 3 7 3 7 .
184
and pay d i v i d e n d s upon t h e s h a r e s o f I t s c a p i t a l s t o c k
e i t h e r (a) ou t o f i t s n e t a s s e t s in e x c e s s o f i t s c a p i н
t a l as computed i n a c c o r d a n c e w i t h t h e p r o v i s i o n s o f
S e c t i o n s 1 4 , 2 6 , 27 a n d 28 o f t h i s C h a p t e r , o r ( b ) , i n
c a s e t h e r e s h a l l b e no su ch e x c e s s , o u t o f i t s n e t p r o н
f i t s f o r t h e f i s c a l y e a r t h e n c u r r e n t a n d / o r the p r e c e d н
in g f i s c a l y e a r ; . . . . 6
. . . .
D i v i d e n d s may be p a i d i n c a s h , i n p r o p e r t y , or
i n s h a r e s o f t h e c a p i t a l s t o c k , i n the c a s e o f s h a r e s
w i t h p ar v a l u e a t p a r , and i n the c a s e o f s h a r e s w i t h o u t
p a r v a l u e at s u c h p r i c e a s may be f i x e d by t h e Board o f
D irecto rs.'
T h is s e c t i o n , b y an i n t e r p r e t a t i o n s i m i l a r to t h a t g i v e n f o r
Arkansas, F lo r id a ,
and N evada, m i g h t be c o n s i d e r e d a s a l l o w н
i n g s h a r e d i v i d e n d s from p a i d - i n s u r p l u s and u n r e a l i z e d a p н
p recia tio n .
T h is s t a t u t e w ould seem t o s a n c t i o n the payment
o f s h a r e d i v i d e n d s d e s p i t e c a p i t a l im pairm en t.о
The s t a t e o f G e o r g ia h a s th e same g e n e r a l s t a t e m e n t
o f so u rce o f d iv id e n d s as D elaw are.
I n t h i s s t a t e the
d i r e c t o r s may pay d i v i d e n d s i n c a s h o r p r o p e r t y o u t o f t h e
net a s s e ts in ex cess o f l i a b i l i t i e s
and c a p i t a l , o r ,
in case
t h e r e i s no s u c h e x c e s s , o u t o f the n e t p r o f i t f o r th e c u r н
r e n t or preceding f i s c a l y e a r .
I t s h o u l d be n o t e d t h a t the
s t a t e m e n t i s made " d i v i d e n d s i n c a s h or p r o p e r t y " ,
no
о G e n e r a l P r o v i s i o n s R e s p e c t i n g D o m e s t ic and F o r e i g n
C o r p o r a t i o n s C o n t a i n e d i n t h e G e n e r a l C o r p o r a t i o n Daw o f t h e
S t a t e o f D e l a w a r e . a s amended to 1 9 3 7 . Ch. 6 5 , A r t . l , S e c . 3 4 .
^ I b i d . л Sec. 35.
о г? C a l i f o r n i a b elow .
9 A c t s and R e s o l u t i o n s o f t h e G e n e r a l A s s e m b ly o f
t h e S t a t e o f G e o r g i a . 1 9 3 7 - 1 9 3 8 . P t . I , T i t . I , S e c . 17
am ending S e c . 2 2 - 3 0 8 o f t h e Code o f G e o r g i a . 1 9 3 5 .
185
m e n t i o n b e i n g made o f s h a r e d i v i d e n d s .
low ing s e c t i o n the m atter i s
However, i n t h e f o l н
t a k e n up a l t h o u g h t h e s o u r c e i s
n o t named:
S u b j e c t t o any r e s t r i c t i o n i n t h e c h a r t e r , a c o r p o r a н
t i o n may d e c l a r e and pay d i v i d e n d s on CinJ i t s own
s h a r e s o f any c l a s s a u t h o r i z e d by t h e c h a r t e r upon r e н
s o l u t i o n o f i t s board o f d i r e c t o r s .
Any d i v i d e n d p a i d :
i n s t o c k o f a s p e c i a l c l a s s s h a l l be approved by the
v o t e or w r i t t e n c o n s e n t o f t w o - t h i r d s o f t h e s h a r e h o l d e r s
o f t h e c l a s s o f s h a r e s t o be i s s u e d a s a d i v i d e n d , i f
s u c h a c l a s s e x i s t s p r i o r to su ch i s s u e .
I f a stock
d i v i d e n d s h a l l a f f e c t a d v e r s e l y any r i g h t or p r e f e r e n c e
o f t h e h o l d e r s o f any o t h e r c l a s s o f s t o c k i n th e c o r н
p o r a t i o n , the c o n se n t o f t w o - t h ir d s o f su c h a d v e r s e l y
a f f e c t e d s t o c k h o ld e r s s h a l l be o b t a in e d , e i t h e r by v o te
a t a s to c k h o ld e r s ' m eetin g or in w r it in g .
T h is s e c t i o n
s h a l l be deemed t o a u t h o r i z e a d i v i s i o n or s u b d i v i s i o n
o f s h a r e s o f any c l a s s o f s t o c k i n l i k e manner a s a
s t o c k d iv id e n d ; n e i t h e r a s t o c k d iv id e n d nor a s u b d i v i н
s i o n o f s h a r e s n e e d be made o u t o f t h e s u r p l u s o r e a r n н
i n g s o f the c o r p o r a t i o n b u t a d e f i c i t may n o t be c r e a t н
ed o r i n c r e a s e d t h e r e b y .
A s t o c k d i v i d e n d may be d e н
c l a r e d i n t r e a s u r y s h a r e s , a u t h o r i z e d and u n i s s u e d
s h a r e s , or by t h e c r e a t i o n o f a d d i t i o n a l s h a r e s t h r o u g h
c h a r te r am en dm ent.^
The requirem e n t r e g a r d i n g t h e payment o f d i v i d e n d s w hich
w i l l a d v e r s e l y a f f e c t an y group o f s h a r e h o l d e r s w o u l d , o f
c o u r s e , c u r t a i l the payment o f d i v i d e n d s i n one c l a s s o f
sh a re s to s h a r e h o ld er s o f a n o th er c l a s s .
But i n t h i s i n s t н
ance,
t h e la w seems t o p u t t h e b u r d e n o f p r o o f on a g i v e n
cla ss
t o p r o v e t h a t t h e y would be a f f e c t e d .
The amount t o
be c h a r g e d to s u r p l u s a t the t im e o f payment o f t h e s h a r e
d i v i d e n d seem s to be somewhat i n d e f i n i t e i n t h e la w , f o r t h e
s h a r e d i v i d e n d q u i t e p o s i t i v e l y n e e d n o t be o u t o f s u r p l u s
o r e a r n i n g s o f the
company.
10 I b i d . . S e c .
17.
Does t h i s mean t h a t s h a r e d i v i -
186
d ends a s w e l l a s s t o c k s p l i t - u p s may b e made w i t h o u t making
any e n t r y t r a n s f e r r i n g a p o r t i o n o f t h e s u r p l u s t o t h e s t a t н
u tory c a p ita l?
is
s o , why i s
Such would seem to be i n c a s e , b u t ,
i f th is
i t n e c e s s a r y to p r o v i d e t h a t a d e f i c i t may n o t
be c r e a t e d or I n c r e a s e d thereby?
in the su r p lu s a c c o u n t,
and i f
I f no e n t r y n e e d be made
the b o a r d o f d i r e c t o r s c h o o s e
t o make no change i n the a c c o u n t a t .th e t im e o f t h e d e c l a r a н
t i o n o f share d iv id e n d s ,
the b a la n c e o f the su r p lu s a cc o u n t
w ou ld n o t be ch a n g ed t o a d e b i t b a l a n c e o r i t s d e b i t b a l a n c e
in creased .
Other p o s s i b l e i n t e r p r e t a t i o n s m ig h t be t h a t no
e x c e s s o f a s s e t s n e e d be a v a i l a b l e when a s h a r e d i v i d e n d i s
p a i d , or t h a t the s t a t u t e
i s a t t e m p t i n g to i n d i c a t e t h a t
e a r n e d s u r p l u s , a s d i s t i n g u i s h e d from o t h e r t y p e s o f s u r p l u s ,
n e e d n o t be a v a i l a b l e f o r s u c h a c t i o n .
In t h is s t a t e
share
d i v i d e n d s may be p a id i n t r e a s u r y s t o c k o r u n i s s u e d s t o c k .
M i c h i g a n a l s o ca n be p l a c e d i n t h i s g e n e r a l g r o u p ,
f o r a lth o u g h i t d oes n o t e x a c t l y c o i n c i d e in wording,
m eaning i s a p p r o x i m a t e l y the same.
the
The la w i s a s f o l l o w s :
The d i r e c t o r s o f e v e r y c o r p o r a t i o n form ed o r e x i s t i n g
u nd er t h i s a c t , s u b j e c t to any r e s t r i c t i o n s c o n t a i n e d i n
i t s - a r t i c l e s , s h a l l h ave power to d e c a l r e and pay d i v i -* dends upon the s h a r e s o f i t s c a p i t a l s t o c k e i t h e r from
e a r n e d s u r p l u s o r from n e t e a r n i n g s .
In d eterm ining
e a r n e d s u r p l u s a p p r e c i a t i o n o f v a l u e o f a s s e t s o f the
- c o r p o r a t i o n s h a l l n o t be I n c l u d e d u n t i l r e a l i z e d :
11
Sec.
22.
S t a t e o f M i c h i g a n , G e n e r a l C o r p o r a t i o n Law, 1 9 3 8 .
187
W hile t h i s s e c t i o n seem s t o e s t a b l i s h t h e s o u r c e o f d i v i d e n d s ,
t h e l i m i t a t i o n on u n r e a l i z e d a p p r e c i a t i o n i s l a r g e l y n u l l i f i н
ed b y t h e f o l l o w i n g :
N o t h in g c o n t a i n e d i n t h i s a c t s h a l l p r e v e n t a c o r p o r н
a t i o n , whose c a p i t a l i s n o t i m p a i r e d , from d e c l a r i n g
s t o c k d i v i d e n d s from a p p r e c i a t i o n o f t h e v a l u e o f t h e
a s s e t s o f such c o r p o r a t i o n .- ^
A c c o r d i n g to t h i s s e c t i o n ,
a s l o n g a s the c a p i t a l i s n o t imн
p a i r e d r e v a l u a t i o n o f a s s e t s m ay.be u s e d f o r s h a r e d i v i d e n d s .
A l s o a c o r p o r a t i o n may pay s h a r e d i v i d e n d s from p a i d - i n s u r н
plus.-*-о
As f o r t h e c a p i t a l i z a t i o n o f s u r p l u s , the f o l l o w i n g
q uotation is p ertin en t;
D i v i d e n d s may be d e c l a r e d i n c a s h , i n p r o p e r t y , i n
o b l i g a t i o n s o f the c o r p o r a t i o n , o r i n s h a r e s o f t h e c a p i н
t a l s t o c k , in the c a s e o f sh a re s w ith par v a lu e a t par,
and i n t h e c a s e o f s h a r e s w i t h o u t par v a l u e a t s u c h
p r i c e a s may be f i x e d a s i n s e c t i o n n i n e t e e n o f t h i s a c t
p r o v i d e d . -*-4
T u rn in g t o s e c t i o n 22 t h e r e q u i r e m e n t s a r e more p o s i t i v e l y
d e t e r m i n e d i n t h e s e w ords;
No s t o c k d i v i d e n d from s h a r e s w i t h o u t p ar v a l u e s h a l l
be d e c l a r e d u n l e s s t h e r e s h a l l be t r a n s f e r r e d t o c a p i t a l
a t l e a s t the e q u i v a l e n t i n v a lu e per share o f such d i v i н
dend a s e q u a l s t h e a v e r a g e o r i g i n a l c o n s i d e r a t i o n p e r
s h a r e o f t h e s h a r e s w i t h o u t par v a l u e o u t s t a n d i n g a t t h e
t im e o f su ch d e c l a r a t i o n w h ich i s c a r r i e d a s capital.^*-о
hoc. c i t .
13 I b i d . , S ec. 20.
^
I b id . , Sec. 23.
15 I b i d . . S e c . 2 2 .
188
T h is s e c t i o n i s q u i t e u n u s u a l i n the r e q u i r e m e n t c o n c e r n i n g
t h e amount t h a t must be c a p i t a l i z e d when s h a r e s w i t h o u t par
v a lu e are is s u e d .
The la w r e q u i r e s t h a t t h e r e be computed ?
an a v e r a g e o f t h e amount o f o r i g i n a l c o n s i d e r a t i o n w h i c h h a s
been- r e c o r d e d a s s t a t u t o r y c a p i t a l f o r e a c h o u t s t a n d i n g
s h a r e , and t h i s a v e r a g e i s t o be u s e d to d e t e r m i n e t h e
amount to be c a p i t a l i z e d when s h a r e s w i t h o u t par v a l u e a r e
is s u e d as share d iv id e n d s .
T h is a v e r a g e would u n d o u b t e d l y
be m e a s u r e d s t a t i s t i c a l l y by the mean and t o be a c c u r a t e i t
w ould n e c e s s a r i l y be a w e i g h t e d mean.
T h is p r o v i s i o n i s
c o n t r a d i s t i n c t i o n t o t h e la w s o f many s t a t e s
ered in the f o llo w in g pages)
in
( t o be c o n s i d н
w h ic h r e q u i r e no named amount
t o be c a p i t a l i z e d , o r o n l y t h e f a i r v a l u e , or t h e v a l u e as
d eterm in ed by the board o f d i r e c t o r s .
However, t h i s p r o v i н
s i o n would n o t take i n t o a c c o u n t t h e ch an ge i n b ook v a l u e o f
the ou tstan d in g sh a res.
The s t a t u t e o f I n d i a n a p r o v i d e s t h a t t h e d i r e c t o r s
may pay d i v i d e n d s !to u t o f s u r p l u s e a r n i n g s o r n e t p r o f i t s o r
su rp lu s p aid in in cash o f the c o r p o r a t i o n .
dends may b e p a i d i n c a s h ,
Such d i v i н
i n p r o p e r t y , o r i n s h a r e s , b u t no
d i v i d e n d i n c a s h o r p r o p e r t y may be p a i d o u t o f t h e s u r p l u s
due t o o r a r i s i n g from u n r e a l i z e d a p p r e c i a t i o n i n v a l u e , or
from r e v a l u a t i o n o f a s s e t s .
Share d i v i d e n d s may b e i s s u e d
16 C e r t a i n Laws C o n c e r n in g C o r p o r a t i o n s f o r P r o f i t .
1 9 3 7 . Ch. 2 1 5 , P t . I I , A r t . 1 , S e c . 1 2 .
189
and c h a r g e d a g a i n s t an u n e a r n e d i n c r e m e n t In a s s e t v a l u e .
When s h a r e d i v i d e n d s a r e p a i d , par s h a r e s s h a l l he p a i d a t
par and s h a r e s w i t h o u t par v a l u e
s h a l l he p a i d a t the v a l u e
d eterm ined by the board o f d i r e c t o r s .
T h is s t a t e ,
in ad diн
t i o n , w i l l n o t s a n c t i o n t h e payment o f d i v i d e n d s i n one
c l a s s o f s h a r e s t o s h a r e h o l d e r s o f a n o t h e r c l a s s u n l e s s su ch
a c t i o n i s p e r m i t t e d b y the a r t i c l e s
i t y o f the
or approved by a m ajorн
s h a r e s o f t h e c l a s s i n w h ich payment i s
to be made.
The c o r p o r a t i o n law o f I l l i n o i s 1 ^ p r o v i d e s t h a t d i v i н
dends may be p a i d i n c a s h , p r o p e r t y , o r i t s own s h a r e s s u b н
j e c t t o t h e l i m i t a t i o n t h a t no d i v i d e n d , e x c e p t d i v i d e n d s
payable in i t s
own s h a r e s ,
s h a l l be d e c la r e d or paid out o f
s u r p l u s a r i s i n g from u n r e a l i z e d a p p r e c i a t i o n i n v a l u e or
rev a lu a tio n o f a s s e t s .
I n a d d i t i o n , no s h a r e d i v i d e n d may
be p a i d i n s h a r e s h a v i n g a p r e f e r e n c e a s t o d i v i d e n d s o v e r
t h e s h a r e s upon w h ich su ch d i v i d e n d s a r e p a i d u n l e s s t h e p a y н
ment t h e r e o f i s a u t h o r i z e d b y the a r t i c l e s o f i n c o r p o r a t i o n . ^ о
T h is means t h a t i f a c o r p o r a t i o n had two c l a s s e s o f s t o c k ,
common and p r e f e r r e d , a s h a r e d i v i d e n d c o u l d not- be p a i d on
t h e common s h a r e s w i t h p r e f e r r e d s t o c k u n l e s s a u t h o r i z e d b y
th e a r t i c l e s .
R e g a r d i n g t h e amount o f s u r p l u s to be c a p i t a l -
The B u s i n e s s C o r p o r a t i o n A c t . .1937. S e c . 4 1 . T his
s t a t e r e l i e s p r i m a r i l y on t h e i n s o l v e n c y and c a p i t a l i m p a i r н
ment t e s t .
18 h o c , c i t .
190
izred, t h e la w o f I l l i n o i s r e q u i r e s t h a t par s h a r e s s h a l l he
i s s u e d a t par and t h e a g g r e g a t e
statu tory c a p ita l,
t h e r e o f t r a n s f e r r e d to- t h e
and s h a r e s w i t h o u t par v a l u e s h a l l be i s н
s u e d a t t h e v a l u e d e t e r m i n e d b y t h e b o a rd o f d i r e c t o r s ,
the
a g g r e g a t e amount b e i n g c r e d i t e d to t h e s t a t u t o r y c a p i t a l .
N o t i f i c a t i o n o f th e amount o f s u r p l u s t r a n s f e r r e d t o c a p i t a l
must be g i v e n t o t h e s h a r e h o l d e r s . ^ ^
The s t a t e m e n t o f t h e
a v a i l a b i l i t y o f p a i d - i n su r p lu s fo r share d iv id e n d s i s not
too d e f i n i t e as i s
shown b y t h i s q u o t a t i o n :
(b) D i v i d e n d s may be p a i d o u t o f p a i d - i n s u r p l u s o r
s u r p l u s a r i s i n g from the s u r r e n d e r t o t h e c o r p o r a t i o n o f
any o f i t s s h a r e s o n l y upon s h a r e s h a v i n g a p r e f e r e n t i a l
r i g h t t o r e c e i v e d i v i d e n d s , p ro v id ed t h a t the sou rce
o f su ch d i v i d e n d s s h a l l b e d i s c l o s e d t o t h e s h a r e h o l d e r s
r e c e i v i n g su c h d i v i d e n d s , c o n c u r r e n t l y w i t h the payment
th e r e o f.^
S i n c e t h e r e i s no r e s t r i c t i o n i n t h i s s t a t e m e n t ,
I t ca n p r o н
b a b l y b e assu m ed t o a p p l y to s h a r e d i v i d e n d s and would t h e n
be. i n t e r p r e t e d a s a l l o w i n g s h a r e d i v i d e n d s o u t o f p a i d - i n
s u r p l u s o n l y on the p r e f e r r e d s h a r e s .
S t a t e s tha t p r o v i d e f o r s h a r e d i v i d e n d s b y h a v i n g
s e p a r a t e p r o v i s i o n s and c o n d i t i o n s f o r s h a r e d i v i d e n d s .
C a l i f o r n i a , -Idah o, L o u i s i a n a , M i n n e s o t a , O h io, P e n n s y l v a n i a ,
and W a sh in g to n a r e i n c l u d e d among the s t a t e s
th a t provide for
19
I b i d . , S e c . 1 7 : 11That p a r t o f t h e s u r p l u s o f a
c o r p o r a t i o n which' 1i s t r a n s f e r r e d t o s t a t e d c a p i t a l upon t h e
i s s u a n c e o f s h a r e s as a s h a r e d i v i d e n d s h a l l be deemed to be
t h e c o n s i d e r a t i o n f o r t h e i s s u a n c e o f s u c h s h a r e s . 1'
20 I b i d . ,
S e c . 41 and Cf. S e c . 6 0 .
191
s h a r e d i v i d e n d s by a s e p a r a t e s e c t i o n r a t h e r th an b y r e l y i n g
on a mere m o d i f i c a t i o n o f a g e n e r a l d i v i d e n d s e c t i o n . E x c e p t
f o r one s m a l l grou p o f s t a t e s w h ich f o l l o w s i n m ajor o u t l i n e
t h e U niform B u s i n e s s C o r p o r a t i o n A c t , a l l o f t h e s e s t a t e s
have s u c h v a r i e d p r o v i s i o n s
that i t
a m u tu ally e x c lu s iv e c l a s s i f i c a t i o n ;
is
im p o ssib le to secu re
therefore,
t h e y w i l l be
d iscu ssed in d iv id u a lly .
The U niform B u s i n e s s C o r p o r a t i o n A ct p r o v i d e s f o r
share d iv id e n d s a s f o l l o w s :
IV. No c o r p o r a t i o n s h a l l pay d i v i d e n d s
(b) i n s h a r e s o f t h e c o r p o r a t i o n , e x c e p t from the s u r p l u s
o f the a g g r e g a te o f i t s a s s e t s over the aggregate o f i t s
l i a b i l i t i e s , i n c l u d i n g i n t h e l a t t e r the amount o f i t s
ca p ita l stock.
VI.
S u b je c t to any l i m i t a t i o n c o n ta in e d i n t h i s s e c н
t i o n , a d i v i d e n d may be d e c l a r e d In s h a r e s o f t h e c o r н
p o r a t i o n w henever t h e b o a r d o f d i r e c t o r s so d e t e r m i n e ,
provided th a t
(a) i f t h e d i v i d e n d i s to be p a i d i n s h a r e s h a v i n g a
p a r v a l u e , the a g g r e g a t e par v a l u e o f s u c h s h a r e s s h a l l
n o t e x c e e d t h e amount o f t h a t p o r t i o n o f the c o r p o r a н
t i o n ? s s u r p l u s which i s t r a n s f e r r e d to c a p i t a l as p a y н
ment f o r s u c h s h a r e s ;
(b) i f t h e d i v i d e n d i s p a i d i n s h a r e s h a v i n g no p ar
v a l u e , t h e number o f s u c h s h a r e s may b e f i x e d b y the
board o f d i r e c t o r s ;
( c ) No d i v i d e n d p a y a b l e i n s h a r e s o f any c l a s s s h a l l
be p a i d t o s h a r e h o l d e r s o f any o t h e r c l a s s u n l e s s t h e
a r t i c l e s so p r o v i d e o r s u c h payment i s a u t h o r i z e d b y the
v o t e o f the h o l d e r s o f a m a j o r i t y o f t h e s h a r e s o f t h e
c l a s s i n w h i c h t h e payment I s t o be m a d e .21
The p r o v i s i o n a s s t a t e d a b o v e i s f o l l o w e d c l o s e l y b y the
UnjLforra B u s in e ss Corporation A c t. S e c . 2 4 .
192
s t a t e s o f I d a h o , 22 L o u i s i a n a , ^
P e n n s y l v a n i a , * ^ and Washingн
t o n . 25
From t h e manner i n w h ic h t h i s la w i s w ord ed , i t would
a l l o w a c o r p o r a t i o n t o pay s h a r e d i v i d e n d s from u n r e a l i z e d
a p p r e c i a t i o n , f o r I t a l l o w s s h a r e d i v i d e n d s from t h e s u r p l u s
of it s
a s s e t s over i t s
lia b ilitie s
and c a p i t a l s t o c k , w h ic h
would a l l o w f o r a w r i t e up o f a s s e t s .
T h is judgment i s r e н
i n f o r c e d by the f a c t t h a t when t h e s t a t u t e i s d e t e r m i n i n g
t h e l e g a l i t y o f c a s h d i v i d e n d s , u n r e a l i z e d a p p r e c i a t i o n and
v a r i o u s t y p e s o f u n r e a l i z e d income a r e d e f i n i t e l y e x c l u d e d ,
b u t t h e s e r e s t r i c t i o n s a r e s i g n i f i c a n t l y a b s e n t when the d i s н
c u s s i o n turns to the is s u a n c e o f share d i v id e n d s .
L ouisiana
makes i t v e r y p o s i t i v e b y s t a t i n g t h a t l i m i t a t i o n s ,
u n r e a liz e d a p p r e c ia tio n in valu e o f f ix e d a s s e t s ,
ies,
s u c h as
in ven torн
o r u n r e a l i z e d p r o f i t s o f any k i n d w h a t e v e r a r i s i n g from
n o t e s , bonds,
in sta llm en t c r e d its ,
do n o t a p p l y when d e t e r н
m i n i n g t h e l e g a l i t y o f s h a r e d i v i d e n d s . 26 Not d i r e c t l y , b u t
22 Idaho Code, 1 9 3 2 . T i t . 2 9 ,
Sec. 29-122.
1938.
Ch. 1 , S e c . 2 9 - 1 2 9 and
G e n e r a l C o r p o r a t i o n Laws o f t h e S t a t e o f L o u i s i a n a .
Sec. 26.
^
Purdon* s P e n n s y l v a n i a S t a t u t e s . A n n o t a te d Permanн
e n t E d i t i o n , 1 9 3 8 . T i t . 1 3 - 1 5 . T i t . 1 5 , Ch. 49B , A r t . V I I ,
S e c . 2 8 5 2 - 7 0 1 and S e c . 2 8 5 2 - 7 0 3 .
^
Laws C o n c e r n in g P r i v a t e C o r p o r a t i o n s . S e c . 3 8 0 3 - 2 4 .
26 G e n e r a l C o r p o r a t i o n Laws o f t h e S t a t e o f L o u i s i a n a ,
1938.
Sec.
26
(III)
193
by I m p l ic a t io n ,
t h e U niform B u s i n e s s C o r p o r a t i o n A ct a l l o w s
s h a r e d i v i d e n d s from p a i d - i n s u r p l u s .
S hare d i v i d e n d s may,
i t a p p e a r s , be p a i d i n e i t h e r common o r p r e f e r r e d s t o c k w i t h
the l i m i t a t i o n t h a t s h a r e s o f one c l a s s may n o t be p a i d to
sh a r e h o ld e r s o f an oth er c l a s s w ith o u t a p r o v is io n in the
a r t i c l e s or a p p r o v a l b y a m a j o r i t y o f t h e s h a r e s o f t h e
cla ss
i n w h i c h t h e payment i s
t o be made.
Under any c i r c u m н
s t a n c e s t h e par v a l u e o f s h a r e s h a v i n g a p ar v a l u e i s s u e d as
a s h a r e d i v i d e n d m ust be c a p i t a l i z e d .
I f s h a r e s w i t h o u t par
v a l u e a r e i s s u e d a s a s h a r e d i v i d e n d . n e i t h e r the U niform
B u s i n e s s C o r p o r a t i o n A c t n o r t h e laws o f I d a h o , L o u i s i a n a ,
o r W a sh in g to n make any m e n t i o n o f the. amount t h a t m u s t b e
c a p i t a l i z e d , b u t m e r e l y r e q u i r e t h a t t h e number o f s h a r e s
i s s u e d be d e t e r m i n e d .
P e n n s y l v a n i a demands t h a t t h e d i r e c t н
o r s d e t e r m i n e the v a l u e o f su ch s h a r e s and t h a t t h e y o r d e r
t r a n s f e r r e d t o s t a t e d c a p i t a l t h e a g g r e g a t e v a l u e so f i x e d . ^
C a l i f o r n i a a l l o w s a c o r p o r a t i o n t o pay d i v i d e n d s i n
sh ares o n ly as f o l l o w s :
( 1 ) Out o f e a r n e d s u r p l u s ; o r
( 2 ) Out o f p a i d - i n s u r p l u s a n d / o r s u r p l u s a r i s i n g
from r e d u c t i o n o f s t a t e d c a p i t a l ; p r o v i d e d t h a t n o t i c e
s h a l l be g i v e n t o s h a r e h o l d e r s r e c e i v i n g s u c h d i v i d e n d s
o f t h e source' t h e r e o f p r i o r t o o r c o n c u r r e n t l y w i t h p a y н
ment t h e r e o f .
U n realized a p p r e c ia tio n o f a s s e t s ,
i f any,
s h a ll not
2 7 Purdon* s P e n n s y l v a n i a S t a t u t e s . A n n o t a t e d Permanн
e n t E d i t i o n , 1 9 3 8 . T i t . 1 3 - 1 5 . T i t . 1 5 , Ch. 4 9 B , A r t . V I I ,
Sec. 2852-703.
194
be I n c l u d e d In t h e c o m p u t a t i o n o f s u r p l u s a v a i l a b l e f o r
a d iv id e n d payable in s h a r e s .
Upon t h e d e c l a r a t i o n o f a d i v i d e n d p a y a b l e i n s h a r e s
t h e amount o f s u r p l u s from w h ich s u c h d i v i d e n d i s d e - ?
c l a r e d s h a l l be t r a n s f e r r e d . t o s t a t e d c a p i t a l .
If a
?d ivid en d i s d e c la r e d in sh ares h a v in g a par v a lu e , the
a g g r e g a t e par v a l u e o f s u c h d i v i d e n d s s h a l l be d e d u c t e d
from s u r p l u s and a d d e d t o s t a t e d c a p i t a l .
I f t h e d i v i d e n d i s d e c l a r e d i n s h a r e s w i t h o u t par
v a l u e , t h e n , i f su ch s h a r e s a r e p r e f e r r e d s h a r e s t h e y
s h a l l be v a l u e d a t t h e amount to w h ich such s h a r e s a r e
e n t i t l e d i n p r e f e r e n c e to s h a r e s o f a n o t h e r c l a s s upon
in vo lu n ta ry liq u id a t io n .
I f s u c h s h a r e s a r e common
s h a r e s o r h ave no l i q u i d a t i o n p r e f e r e n c e t h e y s h a l l be
v a l u e d upon t h e b a s i s o f t h e e s t i m a t e d f a i r v a l u e o f
s u c h s h a r e s upon i s s u e , a s d e t e r m i n e d and s t a t e d b y r e н
s o l u t i o n o f t h e board o f d i r e c t o r s .
Upon t h e d e c l a r a н
t i o n o f a d i v i d e n d p a y a b l e i n s h a r e s n o t i c e s h a l l be
g i v e n to t h e s h a r e h o l d e r s o f the amount p e r s h a r e t r a n s н
f e r r e d from s u r p l u s and o f t h e p a r t i c u l a r s u r p l u s from
w h i c h su ch amount was t r a n s f e r r e d . 28
The s o u r c e o f s h a r e d i v i d e n d s i s d e f i n i t e l y s e t f o r t h i n this
sectio n ;
it
is
s i g n i f i c a n t th a t in t h i s s t a t e cash d ivid en ds
may be p a i d from t h e n e t p r o f i t s f o r
the p reced in g a cco u n tн
i n g p e r i o d d e s p i t e c a p i t a l im p a i r m e n t, b u t s h a r e d i v i d e n d s
c a n n o t be p a i d from t h e same s o u r c e .
O ther l i m i t a t i o n s i n н
clu d e the p r o v i s i o n r e q u i r i n g n o t i c e o f the so u r c e o f share
d i v i d e n d s a t t h e t i m e o f payment o f t h e d i v i d e n d i f from
p a id - in surplus or r e d u c tio n su rp lu s,
amount to be c a p i t a l i z e d .
and a l s o n o t i c e o f th e
The amount t o be c a p i t a l i z e d i s
a s f o l l o w s : p a r v a l u e f o r s h a r e s h a v i n g p ar v a l u e , l i q u i d a -
1937.
^ P e e r i n g 1s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a ╗
D i v . 1 , P t . IV, T i t . 1 , Ch. X I , S e c . 3 4 6 a .
195
t l o n p r e f e r e n c e f o r s h a r e s w i t h o u t p ar v a l u e h a v i n g l i q u i d н
a t i o n p r e f e r e n c e ; and the f a i r v a l u e o f t h e s h a r e s a t the
tim e o f i s s u e f o r s h a r e s w i t h o u t par v a l u e h a v i n g no l i q u i d н
a tio n preference.
I n o r d e r t h a t t h e s h a r e h o l d e r s s t e 11 he
f u l l y aware o f t h e a c t i o n s o f t h e b o a r d o f d i r e c t o r s ,
it
is
r e q u i r e d t h a t t h e d i r e c t o r s g i v e n o t i c e t o th e s h a r e h o l d e r s
o f t h e amount c a p i t a l i z e d and o f the s o u r c e o f the d i v i d e n d s .
The law o f M in n e s o t a i s v e r y s i m i l a r to the C a l i f o r н
n i a p r o v i s i o n s w i t h some f e w e x c e p t i o n s and a d d i t i o n s .
M in n eso ta ^ о
The
la w makes no m e n t i o n o f a s h a r e d i v i d e n d from
s u r p l u s a r i s i n g from r e d u c t i o n o f s t a t e d c a p i t a l ,
w h i l e t h e amount to b e c a p i t a l i z e d i s
and a l s o
t h e same a s i n the
C a l i f o r n i a Law, no s t i p u l a t i o n e x i s t s r e q u i r i n g t h a t n o t i c e
be g i v e n t o the s h a r e h o l d e r s o f t h e amount t r a n s f e r r e d t o
s u r p l u s , b u t n o t i c e must be g i v e n i f
from p a i d - i n s u r p l u s .
a p p reciation ,
th e 'd iv id e n d i s paid
C o n c e r n in g th e p rob lem o f u n r e a l i z e d
th e re i s a s l i g h t d i f f e r e n c e i n the s t a t u t o r y
r e q u ir e m e n t, f o r M innesota a llo w s the f o l l o w i n g :
In d eterm in in g th e f a i r v a lu e o f the a s s e t s o f a c o r н
p o r a t i o n t o a s c e r t a i n w h e th e r i t may pay a d i v i d e n d o r
may p u r c h a s e i t s own s h a r e s , u n r e a l i z e d a p p r e c i a t i o n o f
a s s e t s s h a l l n o t be I n c l u d e d ; p r o v i d e d , t h a t s e c u r i t i e s
h a v i n g a r e a d i l y a s c e r t a i n a b l e m a rk et v a l u e , o t h e r t h a n
s e c u r i t i e s i s s u e d b y the c o r p o r a t i o n , may b e v a l u e d a t
n o t more t h a n m a r k e t v a l u e . 3 ^
29 M i n n e s o t a B u s i n e s s C o r p o r a t i o n A c t , a s amended t o
1 9 3 5 . Ch. 3 0 0 , S e c . 21 ( I I I ) .
50 I b i d . ,
S e c . 21
(I).
196
The r i g h t to u s e t h e m arket v a l u e o f s e c u r i t i e s a s a b a s i s
f o r v a l u i n g m a r k e t a b l e s e c u r i t i e s and t h e s u b s e q u e n t u s e o f
t h e s u r p l u s d e t e r m i n e d by s u c h c a l c u l a t i o n f o r d i v i d e n d s i s
a rather s ig n if ic a n t excep tion.
An a d d i t i o n a l p r o v i s i o n ,
n o t c o n ta in e d in th e C a lif o r n ia law , s t i p u l a t e s
th a t share
d i v i d e n d s In one c l a s s o f : s t o c k may n o t be p a i d t o s h a r e н
h o ld e r s o f another c l a s s u n le s s a u th o r iz e d by the a r t i c l e s
o r by t w o - t h i r d s v o t e o f t h e s h a r e s o f t h e c l a s s
t h e payment i s
i n which
t o b e made.
The s t a t u t e o f the s t a t e o f Ohio h a s some r a t h e r i n н
t e r e s t i n g p r o v i s i o n s w h i c h w a r r a n t a r a t h e r d e t a i l e d e x a m in н
a tio n .
The i n t r o d u c t o r y s t a t e m e n t p r o v i d e s t h a t a c o r p o r a н
t i o n may d e c l a r e d i v i d e n d s p a y a b le In c a s h , s h a r e s , o r o t h e r
p r o p e r ty ou t o f the a g g r e g a te o f i t s
d e d u c tio n s , over the a g g r e g a te o f i t s
assets,
le s s certa in
l i a b i l i t i e s p lus s t a t н
ed c a p i t a l . 31 I n e n u m e r a t i n g t h e d e d u c t i o n s
the f o l l o w i n g
s t a t e m e n t i s made:
( b ) . . . . In c o m p u tin g t h e e x c e s s o f a s s e t s f o r t h e
p u r p o s e o f d e t e r m i n i n g t h e fu n d a v a i l a b l e f o r a d i v i d e n d
payab le o th e r w is e than in sh a res o f a c o r p o r a t i o n , d e н
d u c t i o n s s h a l l a l s o be made f o r t h e u n r e a l i z e d a p p r e c i a н
t i o n , i f a n y , a p p e a r i n g on I t s b o o k s , u n l e s s the amount
t h e r e o f . s h a l l h a v e b e e n t r a n s f e r r e d t o and i n c l u d e d In
stated c a p ita l.
(d) Whenever a d i v i d e n d i s p a i d ,
i n w h o le o r i n p a r t ,
3 1 G e n e r a l and F o r e i g n C o r p o r a t i o n A c t s o f t h e S t a t e
o f O h i o , A n n o t a t e d 1 9 3 9 . T i t . IX, D i v . I , Ch. I , S e c . 8 6 2 3 - 3 8 .
197
o u t o f o t h e r t h a n e a r n e d e x c e s s o f a s s e t s a p p e a r i n g on
t h e b o o k s o f t h e c o r p o r a t i o n a t t h e tim e o f t h e d e c l a r a н
t i o n o f s u c h d i v i d e n d , t h e s h a r e h o l d e r s r e c e i v i n g su ch
? d i v i d e n d s h a l l be n o t i f i e d as t o i t s s o u r c e . S 2
C lea rly ,
t h i s s t a t u t e a llo w s a su rp lu s b a la n c e c r e a t e d as a
r e s u l t o f an i n c r e a s e i n t h e v a l u e o f t h e a s s e t s
to be u sed
a s t h e b a s i s f o r a d e c l a r a t i o n o f d i v i d e n d s i n s h a r e s , and
t o make i t v e r y d e f i n i t e a s t o j u s t what i s m e a n t ,
the s t a t н
u t e i n a su b s e q u e n t - p a ra g ra p h p r o v i d e s t h a t :
Whenever the b o a r d o f d i r e c t o r s o f a c o r p o r a t i o n s h a l l
be o f t h e o p i n i o n t h a t i t s a s s e t s , i n c l u d i n g p a t e n t s o r
g o o d w i l l , h ave a f a i r v a l u e t o the c o r p o r a t i o n i n e x c e s s
o f t h e amount a t w h i c h t h e y a r e c a r r i e d on t h e b o o k s ,
and s h a l l d e t e r m i n e t h e amount o f s u c h f a i r v a l u e , i t
may o r d e r a l l o r a p a r t o f t h e f a i r v a l u e so d e t e r m i n e d
t o be e n t e r e d on i t s b o o k s and t h e r e b y c r e a t e an e x c e s s
o f a s s e t s , w h ich t h e b oard o f d i r e c t o r s may a p p l y to a
d i v i d e n d i n s h a r e s o f t h e c o r p o r a t i o n and t r a n s f e r t o
s t a t e d c a p i t a l o r a p p l y to an i n c r e a s e o f s t a t e d c a p i t a l
r e p r e s e n t e d b y s h a r e s w i t h o u t par v a l u e .
Any t r a n s f e r o f e x c e s s o f a s s e t s t o s t a t e d c a p i t a l
s h a l l be deemed t o h av e b e e n made from t h a t p a r t o f t h e
e x c e s s , i f a n y , w h ic h r e s u l t e d from u n r e a l i z e d a p p r e c i a н
tio n .
A d iv id e n d p ayable in sh a r e s w ith o u t par valu e
may b e d e c l a r e d and p a i d upon the t r a n s f e r to s t a t e d
c a p i t a l o f any amount t h a t maybe o r d e r e d b y t h e b o a r d o f
d i r e c t o r s , o r , w i t h o u t any change i n s t a t e d c a p i t a l , as
th e b o a r d o f d i r e c t o r s may d e t e r m i n e .
No d i v i d e n d s h a l l be p a i d to the s t o c k h o l d e r s o f any
c l a s s o f s h a r e s i n v i o l a t i o n o f t h e r i g h t s o f th e holders
o f any o t h e r c l a s s o f s h a r e s . S3
Not o n l y r e v a l u a t i o n o f t h e f i x e d a s s e t s , b u t a l s o the f l u c t н
u a t i o n s i n th e v a l u e o f su c h i n t a n g i b l e s a s , g o o d w i l l and
52 L o c . c i t .
55 I b i d . . Sec'. 8 6 2 3 - 3 8 ( f ) .
198
p a t e n t s may be made t h e b a s i s o f s h a r e d i v i d e n d s .
ute
i s t h e o n l y one t h a t i s
may be r e v a l u e d ; o f c o u r s e ,
This s t a t н
so p r e c i s e a s t o t h e i t e m s t h a t
t h e o t h e r s t a t u t e s by t h e i r g e n н
e r a l i t y do n o t by t h a t f a c t n e c e s s a r i l y n u l l i f y the p o s s i н
b i l i t y o f u s in g such a sou rce f o r share d i v i d e n d s .
As f o r
t h e amount t o be c a p i t a l i z e d a t t h e tim e o f t h e d e c l a r a t i o n
o f the share d iv id e n d s ,
t h e Ohio law p r o v i d e s t h a t when
? s h a r e s w i t h o u t par v a l u e ' a r e I s s u e d th e a g g r e g a t e t r a n s f e r н
r e d t o s t a t e d c a p i t a l s h a l l be t h e amount d e t e r m i n e d b y t h e
b o a r d o f d i r e c t o r s , w h ich maybe z e r o i f
No c o g n i z a n c e i s
th ey so d ete r m in e .
t a k e n o f t h e p roblem o f t h e i s s u a n c e o f
s h a r e s w i t h o u t par v a l u e h a v i n g c e r t a i n p r e f e r e n t i a l r i g h t s
in liq u id a tio n .
The a g g r e g a t e par v a l u e o f s h a r e s h a v i n g a
par v a l u e must be c a p i t a l i z e d when s u c h s h a r e s a r e i s s u e d as
d ivid en d s . ^
S t a t e s a l l o w i n g s h a r e d i v i d e n d s u n d er m i s c e l l a n e o u s
types o f s t a t u t o r y p r o v i s i o n s .
The f i v e r e m a i n i n g s t a t e s
h a v e b e e n c l a s s i f i e d s e p a r a t e l y b e c a u s e t h e y c o u l d n o t be
i n c l u d e d i n the
two form er g r o u p s w i t h o u t many r e s e r v a t i o n s .
The f i r s t f o u r , M aryland, New H am p sh ir e, West V i r g i n i a , and
W i s c o n s i n b a s e t h e i r p r o v i s i o n on t h e c a p i t a l i z a t i o n o f s u r н
p l u s a t t h e t im e o f t h e payment o f s h a r e d iv id e n d s ^ and t h e
-* 4
I b id . . Sec.
8623-37
(5).
199
l a s t s t a t e , Alabama, d i f f e r s from the o t h e r s i n tba t i t h a s
no p o s i t i v e p r o v i s i o n f o r c a s h d i v i d e n d s b u t d o e s h ave a
. p r o v is io n con cern in g share d iv id e n d s .
The la w s o f M a r y l a n d ,33 New H a m p s h i r e , 36 and West
V i r g i n i a , a r e uncommon b e c a u s e o f t h e p h r a s e o l o g y em p lo y e d .
The West V i r g i n i a law p r o v i d e s t h a t :
Any c o r p o r a t i o n t h r o u g h i t s b o a f d o f d i r e c t o r s may
i s s u e and d i s t r i b u t e i t s s h a r e s o f s t o c k as a d i v i d e n d
a g a i n s t i t s accum ulated e a r n in g s or su r p lu s a n d .th e c o n н
s i d e r a t i o n f o r i t s ' s h a r e s o f s t o c k so i s s u e d s h a l l be
t a k e n to be t h e c a p i t a l i z a t i o n t h e r e b y o f the s u r p l u s or
n e t p r o f i t s o f the c o r p o r a t i o n , and the a c t u a l v a l u e o f
s u c h c o n s i d e r a t i o n s h a l l b e an amount e q u a l to t h e s u r н
p l u s o r n e t p r o f i t s t h e r e b y c a p i t a l i z e d . 3 *7
The s e c t i o n e m b o d ie s the m o st c i r c u i t o u s
t h a t c o u l d be i m a g i n e d .
amount o f s u r p l u s t h a t
the
type o f sta te m e n t
I n a t t e m p t i n g t o e s t a b l i s h th e
s h o u l d be c a p i t a l i z e d a s
payment o f a s h a r e d i v i d e n d t h e l e g i s l a t o r s
made a d e f i n i t e
a r e su ltof
have n ot
s t a t e m e n t , but r a t h e r th ey have s a i d t h a t
t h e c o n s i d e r a t i o n r e c e i v e d s h a l l be. t h e c a p i t a l i z a t i o n o f the
s u r p l u s o r n e t p r o f i t s o f t h e c o r p o r a t i o n , and t h e n , a p p a r н
e n t l y t o add t o t h e c o n f u s i o n t h e y p r o v i d e t h a t t h e a c t u a l
c:
Haws o f Maryland Rela t i n g t o B u s i n e s s C o r p o r a t i o n s .
A nnotated T w elfth E d it io n 1937. A rt. 2 3 , S e c . 4 6 .
36 B u s i n e s s C o r p o r a t i o n Law and R e g u l a t i o n o f F o r e i g n
C o r p o r a t i o n s , 1 9 3 7 . Ch. 2 2 7 , S e c . 15 and 1 6 .
C o r p o r a t i o n Laws o f West V i r g i n i a , a d o p t e d b y
L e g i s l a t u r e , S p e c i a l S e s s i o n March 1 9 3 0 , w i t h amendments t o
d a t e o f I s s u e , J u l y 1 , 1 9 3 5 . Ch. 3 1 , A r t . 1 , S e c . 3 0 .
200
v a l u e o f s u c h c o n s i d e r a t i o n s h a l l h e an amount e q u a l t o the
s u r p l u s or n e t p r o f i t c a p i t a l i z e d .
The f i r s t p a r t seems to
im p ly tha t a t t h e tim e o f the d e c l a r a t i o n o f a s h a r e d i v i н
dend t h e e n t i r e s u r p l u s o r n e t p r o f i t i s
t h e r e b y t o be c a p i н
t a l i z e d , but the second s e c t i o n appears to e s t a b l i s h the
" a c t u a l v a l u e " o f t h e c o n s i d e r a t i o n a s t h e amount to be
ca p ita lized .
The e s s e n c e o f t h e w h o l e s e c t i o n t h e n i s
that
t h e b o a r d o f d i r e c t o r s may d e t e r m i n e t h e amount o f n e t p r o н
f i t or s u r p l u s t h a t ' s h o u l d b e c a p i t a l i z e d a t t h e t i m e o f the
d e c la r a t io n o f a share d iv id e n d .
The la w o f Maryland i s
s i m ila r reg a rd in g sh ares is s u e d as share d iv id e n d s .
New Hampshire a l l o w s s h a r e d i v i d e n d s i n t h e f o l l o w i n g
sectio n :
Any c o r p o r a t i o n now e x i s t i n g , o r w hich may h e r e a f t e r
b e e s t a b l i s h e d u n d e r the la w s o f t h i s s t a t e , w h i c h h a s a
c a p i t a l s t o c k and h a s among i t s o b j e c t i v e s a d i v i s i o n o f
p r o f i t s among i t s s t o c k h o l d e r s , may c a p i t a l i z e i t s u n н
d i v i d e d s u r p l u s p r o f i t s b y i s s u i n g to i t s s t o c k h o l d e r s
c e r t i f i c a t e s o f stock rep resen tin g th e ir r e sp e c tiv e
sh a r e s o f the w h o le , or such p a r t t h e r e o f a s the co rp o rн
a t i o n may d e t e r m i n e , o f a n y s u r p l u s p r o f i t s b e l o n g i n g t o
t h e c o r p o r a t i o n and r e p r e s e n t e d b y c a s h or p r o p e r t y .
For t h i s p u r p o se t h e c o r p o r a t i o n may i n c r e a s e i t s
c a p i t a l s t o c k w i t h i n the l i m i t s p r o v i d e d b y la w , b u t no
s t o c k r e p r e s e n t i n g u n d i v i d e d s u r p l u s p r o f i t s s h a l l be
a u th o r iz e d t o be i s s u e d a t l e s s th an p ar, nor u n t i l a
c e r t i f i e d c o p y o f t h e v o t e a u t h o r i z i n g t h e same, and a
c e r t i f i c a t e as h e r e i n a f t e r p r o v id e d , s h a l l have been r e н
c o r d e d i n the o f f i c e o f t h e c l e r k o f t h e town i n w h ic h
i t s p r i n c i p a l p l a c e o f b u s i n e s s i s l o c a t e d and the o f f i c e
o f the s e c r e t a r y o f s t a t e . 38
3 8 The p u b l i c haws o f t h e S t a t e o f New H a m p s h ir e , 1 9 2 6 .
T i t . XXIV, Ch. 2 2 7 , S e c . 15 and 1 6 .
201
I n New Hampshire a c o r p o r a t i o n may i s s u e s h a r e d i v i d e n d s ,
b u t p a r v a l u e - s h a r e s m ust be i s s u e d a t par and a c o p y o f t h e
a c t a u t h o r i z i n g s u c h p r o c e d u r e m ust be r e c o r d e d .
No s t a t e н
ment i s made c o n c e r n i n g t h e c a p i t a l i z a t i o n o f s h a r e s w i t h o u t
par v a lu e .
W isconsin,
i n t h e e v e n t o f t h e payment o f s h a r e d i v i н
d en d s. p r o v id e s t h a t the board o f d i r e c t o r s
t h e amount to be c a p i t a l i z e d .
s h a l l determ ine
D i v i d e n d s i n s h a r e s may be
p aid o u t o f n e t p r o f i t s , p a i d - i n s u r p lu s , or u n r e a liz e d apн
p reciation .^ о
Alabama b y s t a t u t e a l l o w s s h a r e d i v i d e n d s
i n the
f o l l o w i n g w ords:
The d i r e c t o r s o f any c o r p o r a t i o n , when a u t h o r i z e d to
. do so a t any r e g u l a r o r c a l l e d m e e t i n g o f t h e s t o c k h o l d н
e r s , may i s s u e a d d i t i o n a l s t o c k o r i n c r e a s e i t s c a p i t a l
s t o c k , p u r s u a n t t o la w , i n t h e n a t u r e o f s t o c k d i v i d e n d s
and pay f o r s u c h s t o c k i n w hole or i n p a r t o u t o f i t s
s u r p lu s or accum ulated p r o f i t s .
It is
s i g n i f i c a n t t h a t th e s e c t i o n r e q u i r e s t h a t a u t h o r i z a н
t i o n m ust b e g i v e n t h e d i r e c t o r s a t a s t o c k h o l d e r s m e e t i n g
b e f o r e the board can i s s u e the d i v i d e n d s .
The n e x t s e c t i o n
i s e v e n more d e f i n i t e r e g a r d i n g s u c h d i v i d e n d s ;
i t p rovid es
that:
^ S t a t u t e s o f W i s c o n s i n R e l a t i n g to P r i v a t e C orp oraн
t i o n s . 1 9 3 7 . S e c . 1 8 2 . 1 4 and S e c . 1 8 2 . 1 9 .
D o m e s t ic C o r p o r a t i o n Laws o f Alabama. 1 9 2 4 . Ch.
274, A rt. 4 , Sec. 6990.
202
Whenever any c o r p o r a t i o n s h a l l h ave a s u r p l u s of*
m oney, w hich i s p r o p e r l y s u b j e c t t o d i s t r i b u t i o n a s d i v i н
d e n d s , o r w henever t h e n e t a s s e t s o f a c o r p o r a t i o n ,
a f t e r d ed u ctin g therefrom i t s l i a b i l i t i e s , e x c e p t f o r
c a p i t a l s t o c k , e x c e e d In v a l u e th e p a r v a l u e o f I t s o u t н
s t a n d i n g c a p i t a l s t o c k , the b o a r d o f d i r e c t o r s o f s a i d
c o r p o r a t i o n -may d e c l a r e a s t o c k d i v i d e n d , and i s s u e s u c h
s t o c k so d e c l a r e d to i t s s t o c k h o l d e r s t o t h e e x t e n t o f
s u c h e x c e s s i n v a l u e o f i t s n e t a s s e t s o v e r t h e par
valu e o f i t s ou tstan d in g sto c k .
No s t o c k d i v i d e n d s h a l l
be b a s e d , i n w hole o r i n p a r t , upon t h e v a l u a t i o n o f
o t h e r th a n t a n g i b l e a s s e t s .
B efore the board o f d i r e c t н
o r s o f a n y c o r p o r a t i o n s h a l l be a u t h o r i z e d to d e c l a r e
an y s u c h s t o c k d i v i d e n d , o t h e r t h a n on a s u r p l u s o f money,
I t s h a l l ord er the a p p r a i s a l o f a l l t a n g i b l e .as s e t s o f
the c o r p o r a tio n by a com petent a p p r a is e r or a p p r a i s e r s ,
who s h a l l n o t be a s t o c k h o l d e r o r o t h e r w i s e c o n n e c t e d
w i t h t h e c o r p o r a t i o n , and t h e r e p o r t o f su ch a p p r a i s e r
o r a p p r a i s e r s u nd er o a t h s h a l l be f i l e d and e n t e r e d on
t h e m i n u t e s o f the b oard o f d i r e c t o r s .
Whenever any
s t o c k d i v i d e n d n e c e s s i t a t e s an i n c r e a s e In t h e c a p i t a l
s t o c k , s a i d i n c r e a s e s h a l l be made a s a u t h o r i z e d b y s e c н
t i o n 7 0 0 3 . 41
? '
The s o u r c e o f s h a r e d i v i d e n d s i n S e c t i o n 6 9 9 0 i s t h e s u r p l u s
o r a c c u m u l a t e d e a r n i n g s and i n the n e x t s e c t i o n t h e s o u r c e
is
t h e s u r p l u s o f money o r n e t a s s e t s o f t h e c o r p o r a t i o n ,
a f t e r d ed uctin g l i a b i l i t i e s ,
excep t c a p i t a l sto c k , exceedin g
the par v a lu e o f th e o u t s t a n d in g c a p i t a l s t o c k .
What i s
meant b y the term " s u r p l u s o f money" i s r a t h e r d o u b t f u l .
Does t h i s mean an e x c e s s i v e l y l a r g e amount o f c a s h In t h e
cash account?
I f th is is
t h e c a s e , what i s
its
sig n ifica n ce
s i n c e c a s h i s n o t n e e d e d to pay a s h a r e d i v i d e n d ?
May. I t
4 *^ I b i d . , S e c . 6 9 9 1 . The v a l u a t i o n o f s h a r e s w i t h o u t
par v a l u e i n d e t e r m i n i n g t h e c a p i t a l would p r o b a b l y be a s
r e q u i r e d i n Ch. 2 7 4 , A c t . 5 , S e c . 7012 a l t h o u g h n o t h i n g d e - f in it e is stated.
203
mean t h a t i f c a s h i s a v a i l a b l e
t h e r e ca n be no. d o u b t o f i t s
v a l u e , and t h a t an a t t e m p t i s b e i n g made t o u s e the n e x t
s e n te n c e in the a c t co n cern in g the v a l u a t i o n o f a s s e t s ?
On
t h e o t h e r h a n d , may i t m e r e l y be t a k e n a s a means o f g i v i n g
assurance th a t there i s a c r e d it b alance in the su rp lu s a c н
count?
I f such i s m eant,
th e a l t e r n a t i v e d e f i n i t i o n w ould
p rovid e f o r such a circu m sta n ce .
The i m p l i c a t i o n o f t h e
phrase, i s . s u b j e c t t o two i n t e r p r e t a t i o n s and c a n n o t b e c a t e н
g o r i c a l l y determ in ed .
T h is s t a t u t e ,
i t would se e m , p e r m i t s
s h a r e d i v i d e n d s from s u r p l u s c r e a t e d a s a r e s u l t o f a r e v a l u н
atio n o f a s s e t s ,
t a n g i b l e a s s e t s o n l y , when s u c h a s s e t
v a lu e s have b een d eterm in ed by in depend en t a p p r a i s a l .
The
amount t o be c a p i t a l i z e d a t t h e t i m e o f the s h a r e d i v i d e n d
d e c l a r a t i o n i s n o t m entioned.
S t a t e s h a v i n g no p r o v i s i o n c o n c e r n i n g s h a r e d i v i d e n d s .
There a r e t w e n t y - s e v e n 4 ^ s t a t e s and t h e D i s t r i c t o f Columbia
t h a t h a v e no s p e c i f i c p r o v i s i o n a l l o w i n g s h a r e d i v i d e n d s .
T h is f a c t , h o w e v e r , s h o u l d n o t be i n t e r p r e t e d as m ea n in g
t h a t i n t h e s e s t a t e s t h e b o a r d o f d i r e c t o r s may n o t d e c l a r e
s h a r e d i v i d e n d s ; on t h e c o n t r a r y ,
i t s h o u l d be i n t e r p r e t e d ,
A r i z o n a , C o l o r a d o , C o n n e c t i c u t , Iow a, K a n s a s , Kenн
t u c k y , M aine, M a s s a c h u s e t t s , M i s s i s s i p p i , M i s s o u r i , Montana,
N e b r a s k a , New J e r s e y , New M e x i c o , New Y ork , N o rth C a r o l i n a ,
N orth D a k o t a , Oklahoma, Oregon, Rhode I s l a n d , S o u t h C a r o l i n a ,
South D a k o t a , T e x a s , U t a h , Vermont, V i r g i n i a , and Wyoming.
204
i n a l l p r o b a b i l i t y , a s m eaning t h a t t h e l e g i s l a t o r s h ave
t a k e n a r a t h e r b r o a d v i e w o f t h e s i t u a t i o n and assumed t h a t
the p r o v is io n s governing cash d iv id e n d s are a p p lic a b le to
share d iv id e n d s ;
i.e .,
t h e same s o u r c e may be u s e d f o r c a s h ,
p r o p e r t y , and s h a r e d i v i d e n d s . ^
Summary o f p r i n c i p a l s t a t u t o r y p r o v i s i o n s d e a l i n g
w ith share d iv id e n d s .
The p e r t i n e n t f a c t s r e g a r d i n g s h a r e
d i v i d e n d s may now be summarized.
(1)
Tw enty-one s t a t e s ,
Alabama, A r k a n s a s ,
C a lif o r n ia , D elaн
ware, F lo r id a , G eorgia, Idaho, I l l i n o i s ,
Indiana,
L o u i s i a n a , M aryland, M i c h i g a n , M i n n e s o t a , Nevada,
New H am pshire, O h io, P e n n s y l v a n i a , T e n n e s s e e , Washн
i n g t o n , West V i r g i n i a ,
and W i s c o n s i n h a v e some p r o v i н
s io n re g a rd in g sh are d iv id e n d s ; the o th e r s t a t e s ,
w h i l e t h e y have no s p e c i f i c p r o v i s i o n , u n d o u b t e d l y
a l l o w s h a r e d i v i d e n d s on t h e same b a s i s and from t h e
same s o u r c e a s t h e y a l l o w . c a s h d i v i d e n d s .
( 2 ) Nin e s t a t e s ,
Illin o is,
Arkansas, D elaw are, F l o r i d a ,
G eorgia,
I n d i a n a , M i c h i g a n , Nevada and T e n n e s s e e , have
43 Rhode I s l a n d , when d i s c u s s i n g t h e p rob lem o f t h e
d e te r m in a tio n o f c a p i t a l , m entions th a t c a p i t a l s h a l l i n н
c l u d e t h e amount t r a n s f e r r e d t o c a p i t a l upon t h e i s s u a n c e
o f s h a r e s w i t h o u t par v a l u e .
G e n e r a l C o r p o r a t i o n Law o f
th e S t a t e o f Rhode I s l a n d , a s amended t o 1 9 3 2 .
Ch. 2 4 8 ,
A rt. I l l , Sec. 53.
205
g e n e r a l p r o v i s i o n s c o n c e r n i n g d i v i d e n d s and s u p p l e н
ment t h i s t r e a t m e n t w i t h a s h o r t s t a t e m e n t g o v e r n i n g
share d iv id e n d s .
The r e m a i n i n g s t a t e s p r o v i d e a
s p e c i a l s e c t i o n t o g o v e r n t h e s o u r c e and l i m i t a t i o n
o f su c h d i v i d e n d s .
( 3) I n o r d e r t o r e d u c e t o some r e a s o n a b l y l o g i c a l b a s i s
v a rio u s so u rces o f share d iv id e n d s, i t
is necessary
t o c o n s i d e r t h e s o u r c e s o f d i v i d e n d s i n g e n e r a l as
w e l l a s tbe named s p e c i f i c s o u r c e s , f o r f r e q u e n t l y ,
t h e r e i s an o v e r l a p p i n g and c e r t a i n a s s u m p t i o n s may
be drawn w hich v i t a l l y a f f e c t t h e f i n a l c o n c l u s i o n .
( a ) The s t a t e s o f C a l i f o r n i a , I n d i a n a , M aryland,
M i c h i g a n , M i n n e s o t a , New H am p sh ir e, West
V irg in ia,
and W i s c o n s i n a l l o w s h a r e d i v i d e n d s
out o f the n e t p r o f i t s or earned su rp lu s w ith н
o u t the a l t e r n a t i v e e x c e s s a s s e t t e s t .
(b) Pour s t a t e s : n a m e ly , A r k a n s a s , F l o r i d a , N evada,
and T e n n e s s e e , make a s t h e i r s o u r c e o f d i v i н
dends t h e a l t e r n a t i v e
type o f s t a t e m e n t - -
n e t e a r n i n g , or su r p lu s o f a s s e t s o v e r the
lia b ilitie s
in clu d in g c a p it a l sto ck .
( c ) Alabama, i n one s e c t i o n , h a s a s i t s
source o f
share d iv id e n d s the su r p lu s or accum ulated
e a r n i n g s and i n a n o t h e r s e c t i o n ,
surplus o f
money o r n e t a s s e t s , a f t e r d e d u c t i n g l i a b i l н
206
itie s
e x c e p t c a p i t a l s t o c k , e x c e e d i n g t h e par
v a l u e o f the s t o c k o u t s t a n d i n g .
(d) D e la w a r e a l l o w s s h a r e d i v i d e n d s o u t o f t h e n e t
a s s e t s in e x c e ss o f c a p i t a l , or i f
excess,
t h e r e h e no
o u t o f th e n e t p r o f i t s f o r the c u r r e n t
or preced in g p erio d .
(e) Surplus o f the a g g re g a te o f th e a s s e t s over the
a g g r e g a t e o f the l i a b i l i t i e s ,
ta l,
is
in clu d in g c a p iн
t h e l i m i t a t i o n p l a c e d on t h e d e c l a r a н
t io n o f share d iv id e n d s by the s t a t e s o f Idaho,
L o u i s i a n a , O h io , P e n n s y l v a n i a , and W a s h in g to n .
( f ) By s p e c i f i c p r o v i s i o n s h a r e d i v i d e n d s may be
p a i d from p a i d - i n s u r p l u s b y c o r p o r a t i o n s
o r g a n iz e d i n the s t a t e s o f
ana, I l l i n o i s
and M i n n e s o t a .
the s t a t u t e s ,
C a l i f o r n i a , ^
In d i-'
( p r e f e r r e d s t o c k o n l y ) , M ichigan,
A l t h o u g h n o t a named s o u r c e i n
i t m i g h t be a r g u e d and up h e l d
th a t p a id - in surplus i s a ls o a v a ila b le f o r a
share d iv id en d in a l l th o se s t a t e s th a t use
e i t h e r the n e t p r o f i t or su r p lu s o f a s s e t s
over l i a b i l i t i e s ,
in clu d in g c a p it a l,
or the
s u r p l u s o f t h e a g g r e g a t e o f a s s e t o v e r th e
aggregate l i a b i l i t i e s
in clu d in g the c a p i t a l
^ C a l i f o r n i a a l l o w s s h a r e d i v i d e n d s from s u r p l u s
a r i s i n g from a r e d u c t i o n o f c a p i t a l .
207
t y p e o f s t a t e m e n t of* s o u r c e o f d i v i d e n d s .
C l e a r l y , by s u c h a t e s t ,
i s s u c h an e x c e s s .
the p a i d - i n s u r p l u s
T h is c o n c l u s i o n ,
then,
would add t h e f o l l o w i n g s t a t e s t o t h e group
a l l o w i n g s h a r e d i v i d e n d s from c o n t r i b u t e d s u r н
p lu s:
Alabama, A r k a n s a s , D e l a w a r e , F l o r i d a ,
I d a h o , L o u i s i a n a , N evada, O h io ,
T e n n e s s e e , and W a s h in g to n .
P ennsylvania,
G e o r g ia m i g h t be
in c lu d e d alth ou gh I t has t h i s l i m i t i n g s t a t e н
m ent,
t h e s i g n i f i c a n c e o f w h ich I s r a t h e r
d ou b tfu l: n.
. . ? n e it h e r a sto c k d ivid en d
n o r s u b d i v i s i o n o f s h a r e s n e e d b e made o u t o f
the su r p lu s or e a r n in g s o f the c o r p o r a t io n
. . . . f|45 H ence, a t o t a l o f s e v e n t e e n s t a t e s ,
by e i t h e r s p e c i f i c p r o v i s i o n or i n t e r p r e t a t i o n ,
a l l o w s h a r e d i v i d e n d s from p a i d - i n s u r p l u s .
( g ) The a v a i l a b i l i t y o f s u r p l u s a r i s i n g from unreal-^
i z e d a p p r e c i a t i o n o r r e v a l u a t i o n o f a s s e t s h as
a l w a y s b e e n a p r o b le m , and t h e r e i s no unanimн
i t y i n t h e law s o f t h e s t a t e s .
C aliforn ia
s p e c i f i c a l l y p r o h ib its the use o f su ch su rp lu s
f o r s h a r e d i v i d e n d s a s d o e s M i n n e s o t a ,, p r o v id - '
^ A c t s and R e s o l u t i o n o f the G e n e r a l A ssem b ly o f t h e
S t a t e o f G e o r g i a , 1 9 3 7 - 1 9 3 8 . P t . I , T i t . 1 , S e c . 1 7 , amendн
i n g S e c . 2 2 - 3 0 8 o f t h e Code o f G e o r g i a .
208
e d , how ever, t h a t in the l a t t e r s t a t e s e c u r i н
t i e s h a v i n g a r e a d i l y a s c e r t a i n a b l e m arket
v a l u e , o t h e r t h a n t h e c o m p a n ie s own s e c u r i t i e s ,
may be v a l u e d a t m ark et v a l u e .
t h e s e two s t a t e s
I n c o n t r a s t to
i s the la w o f Alabama ( t a n g i н
b le a s s e t s o n ly ) , Idaho, I l l i n o i s , L o u isia n a ,
M i c h i g a n , O h io , P e n n s y l v a n i a , W a s h in g to n , and
W i s c o n s i n w h ic h a l l o w u n r e a l i z e d a p p r e c i a t i o n
to b e u s e d a s a s o u r c e o f s h a r e d i v i d e n d s . In
fact,
some o f t h e s e s t a t e s , n o t a b l y L o u i s i a n a
and O h io ,
Ohio)
( t a n g i b l e and i n t a n g i b l e a s s e t s i n
t a k e c o n s i d e r a b l e s p a c e t o s e t f o r t h the
i t e m s t h a t may be i n c l u d e d . ^ о
p reta tio n ,
A g a in b y i n t e r н
i t m i g h t be a r g u e d t h a t A r k a n s a s ,
Delaw are, G e o r g ia , ^
F l o r i d a , N evada, and Tenн
n e s s e e m ig h t be i n c l u d e d , f o r i n t h e s e s t a t e s
the e x c e s s o f the a g g r e g a te a s s e t s over the
aggregate l i a b i l i t i e s ,
in clu d in g c a p it a l,
a v a ila b le fo r d ivid en d s.
ment i s
However, the a g r u -
n o t as s t r o n g a s i t was f o r p a i d - i n
s u r p l u s and m i g h t b e q u e s t i o n e d ;
ed h e r e o n l y a s a p o s s i b i l i t y . ?
46 Cf* s u p r a . ,
4^
is
192, 197. '
d i s c u s s i o n o f G eo rgia s t a t u t e .
it
i s m entionн
209
(4) C o n c e r n in g t h e amount o f s u r p l u s t h a t m ust he t r a n s н
f e r r e d t o s t a t e d c a p i t a l a t t h e tim e o f t h e d e c l a r a н
t i o n o f a share d iv id e n d , o r , as i t
i s som etim es
worded, t h e v a l u a t i o n o f s h a r e s i s s u e d as s h a r e d i v i н
d e n d s , t h e f o l l o w i n g g e n e r a l i z a t i o n s ca n be made:
( a ) Alabama, A r k a n s a s , F l o r i d a , and Nevada make no
m e n t i o n o f t h e amount t o be c a p i t a l i z e d ,
e i t h e r f o r s h a r e s w i t h or w i t h o u t par v a l u e .
W i s c o n s i n makes no' m e n t i o n o f t h e v a l u a t i o n
o f par s h a r e s and New Hampshire makes no
m en tio n o f the v a l u a t i o n o f sh a re s w ith o u t
p ar v a l u e .
(b) Twelve s t a t e s ; n a m e ly , C a l i f o r n i a , D e l a w a r e ,
Idaho, I l l i n o i s ,
In d ia n a , L o u isia n a , M ichiн
g a n , M i n n e s o t a , New H am pshire, O h io, P e n n s y l н
v a n i a , and W a s h in g to n , p r o v i d e t h a t par v a l u e
s h a r e s s h a l l be v a l u e d a t p a r .
Tennessee by
s t a t u t e r e q u i r e s the par v a lu e s t o c k to be
issu ed at i t s f a ir va lu e.
( c ) When d e a l i n g w i t h s h a r e s w i t h o u t par v a l u e ,
C a l i f o r n i a and M in n e s o t a d i f f e r e n t i a t e b e н
tw e e n s h a r e s h a v i n g l i q u i d a t i o n p r e f e r e n c e
and s h a r e s h a v i n g no l i q u i d a t i o n p r e f e r e n c e .
I f t h e s h a r e s h ave a l i q u i d a t i o n p r e f e r e n c e ,
an amount e q u a l to t h e l i q u i d a t i o n p r e f e r e n c e
210
m u st be c a p i t a l i z e d ;
if
the sh a r e s are w i t h н
out liq u id a t io n p re fe r e n c e ,
cap ita lized is
the amount t o be
to be d e t e r m i n e d by t h e b o a rd
o f d i r e c t o r s as the e s t im a t e d f a i r v a l u e .
The
o t h e r s t a t e s do n o t make t h i s d i f f e r e n t i a t i o n ,
b u t t h e y do v a r y a s b e t w e e n t h e m s e l v e s on t h e
v a l u e t o be t r a n s f e r r e d t o s u r p l u s .
The p r i c e
o f s h a r e s w i t h o u t par v a l u e i s to be d e t e r m i n н
ed b y tbe b o a r d o f d i r e c t o r s b y r e q u i r e m e n t o f
th e la w s o f D e l a w a r e , I l l i n o i s ,
O h io .
I n d i a n a , and
M i c h i g a n , b e i n g more d e f i n i t e ,
provides
t h a t t h e s t o c k w i t h o u t p ar . v a l u e s h a l l be v a l u н
ed a t t h e a v e r a g e o f t h a t amount o f o r i g i n a l
c o n s id e r a tio n t r e a te d as s t a te d c a p i t a l .
(d) Three s t a t e s r e q u i r e no v a l u e t o be p l a c e d on
s h a r e s w i t h o u t par v a l u e I s s u e d a s s h a r e d i v i н
dends, but in s t e a d ,
the board o f d i r e c t o r s
m ust d e t e r m i n e t h e number o f s h a r e s to be I s н
sued.
The s t a t e s a r e I d a h o , L o u i s i a n a , and
W a s h in g to n .
( e ) T e n n e s s e e makes no m e n t i o n o f d i v i d e n d s i n s h a r e s
w i t h o r w i t h o u t par v a l u e , b u t p r o v i d e s t h a t
t h e common and p r e f e r r e d s t o c k i s s u e d a s s h a r e
d i v i d e n d s s h a l l be v a l u e d a t a f a i r v a l u a t i o n .
(f)
The t h r e e r e m a i n i n g s t a t e s a r e so i n d e f i n i t e as
211
to d e f y c l a s s i f i c a t i o n .
Maryland and West
V irg in ia p rovid e, in e s s e n c e ,
t h a t t h e amount
c a p i t a l i z e d s h a l l be t h e v a l u e o f t h e s h a r e s
so i s s u e d ; and G eo rg ia s t i p u l a t e s
th a t share
d i v i d e n d s n e e d n o t be made from s u r p l u s or
e a r n i n g s , b u t a d e f i c i t may n o t be c r e a t e d or
i n c r e a s e d by such a d i v id e n d .
(5)
To p r o t e c t t h e s h a r e h o l d e r s o f t h e v a r i o u s c l a s s e s o f
s t o c k t h e la w s o f G e o r g i a , I d a h o , I n d i a n a , L o u i s i a n a ,
M i n n e s o t a , P e n n s y l v a n i a , and W ash in gton p r o v i d e t h a t ,
u n l e s s t h e c h a r t e r so s t i p u l a t e s , no d i v i d e n d s p a y н
a b l e i n s h a r e s o f any c l a s s may be p a i d t o s h a r e н
h o l d e r s o f any o t h e r c l a s s u n l e s s a u t h o r i z e d b y v o t e
o f the h o ld e r s o f the sh a r e s o f the c l a s s
t h e payment i s t o be made.
i n w h ich
.I n the c a se o f a l l
s t a t e s , e x c e p t G e o r g ia and M i n n e s o t a ,
the
the v o t e m ust
be b y a m a j o r i t y , and i n G e o r g ia and M i n n e s o t a b y a
tw o-th ird s v o t e .
Ohio p r o v i d e s a l e s s e x a c t r e q u i r e н
ment: su ch a d i v i d e n d s h a l l n o t be p a i d to s h a r e н
h o l d e r s o f any c l a s s
in v i o l a t i o n o f the r i g h t s o f
t h e h o l d e r s o f any o t h e r c l a s s o f s h a r e s .
Illin o is
p e r m i t s no d i v i d e n d s i n s h a r e s h a v i n g a p r e f e r e n c e , as
t o d i v i d e n d s o v e r t h e s h a r e s upon w h ic h c a s h d i v i . dends a r e p a i d u n l e s s a u t h o r i z e d b y t h e c e r t i f i c a t e
o f in co rp o ra tio n .
212
(6) As f o r n o t i f i c a t i o n o f t h e s o u r c e o f s h a r e d i v i d e n d s ,
the f o l l o w i n g i s p ro v id ed :
C a l i f o r n i a r e q u i r e s that
n o t i c e be g i v e n a t t h e tim e o f d e c l a r i n g a s h a r e
d i v i d e n d o f t h e amount p e r s h a r e t r a n s f e r r e d t o
s u r p l u s , and o f t h e s o u r c e o f t h e d i v i d e n d s ;
Minneн
s o t a and, I l l i n o i s r e q u i r e n o t i c e o f s o u r c e o f d i v i н
dend i f p a i d - i n s u r p l u s i s u s e d a s t h e s o u r c e o f
the - d i v i d e n d s ;
Ohio p r o v i d e s t h a t n o t i c e b e g i v e n
w h en ever t h e s h a r e d i v i d e n d s a r e p a i d i n o t h e r
than e a r n e d e x c e s s o f a s s e t s ; and I l l i n o i s r e q u i r e s
t h a t when s h a r e s w i t h o u t par v a l u e a r e i s s u e d ,
n o t i c e o f the amount t r a n s f e r r e d t o c a p i t a l s h a l l
be g i v e n .
CHAPTER' VI
STATUTORY PROVISIONS
AND DIVIDEND PAYMENTS: SPECIAL PROVISIONS
Purpose o f t h e c h a p t e r .
T h is c h a p t e r . w i l l c o n s i d e r
c e r t a i n s p e c i a l f e a t u r e s w hich e i t h e r fu r th e r r e s t r i c t o r ,
through e x c e p t i o n s , ten d t o broaden th e g e n e r a l p r o v i s i o n s
r e g a r d i n g t h e payment o f d i v i d e n d s a s t h e y a r e s e t f o r t h i n
t h e two p r e v i o u s c h a p t e r s .
The d i s c u s s i o n w i l l d e v e l o p ,
four p r in c ip a l id eas:
S e c t i o n A. U n r e a l i z e d A p p r e c i a t i o n o f A s s e t s and
D i v i d e n d Payments.
S e c t i o n B. P a i d - i n S u r p l u s and D i v i d e n d Payments.
S e c t i o n C. D e p l e t i o n and D i v i d e n d Paym ents.
S e c t i o n D. M i s c e l l a n e o u s A d d i t i o n a l P r o v i s i o n s
and D i v i d e n d P aym ents.
S e c t i o n E. Summary.
S ection A
U n realized A pp reciation o f
A s s e t s an d D i v i d e n d Payments
U n r e a l i z e d a p p r e c i a t i o n o f a s s e t s and d i v i d e n d payн
m en ts .
An i n c r e a s e i n t h e v a l u e o f a s s e t s r e s u l t i n g from a
r i s e o f t h e p r i c e l e v e l f r e q u e n t l y c r e a t e s a p r o b le m i n v o l v
214
i n g t h e payment o f d i v i d e n d s .
Many c o r p o r a t i o n s w i s h to
show t h e i n c r e a s e i n v a l u e o f t h e a s s e t s , e i t h e r f i x e d or
c u r r e n t , on t h e i r f i n a n c i a l s t a t e m e n t s , and a s a r e s u l t i n н
c r e a s e t h e b a l a n c e o f some s u r p l u s a c c o u n t . .
I f su c h an e n н
t r y i s made t h e c r e d i t s h o u l d n o t , u n d e r any c i r c u m s t a n c e s ,
be c a r r i e d t o the r e g u l a r su r p lu s a c c o u n t s , such as earned
s u r p l u s , p a i d - i n s u r p l u s , o r d o n a t e d s u r p l u s , ' b u t s h o u l d b e.
c a r r i e d t o a s e p a r a t e and c l e a r l y named s u r p l u s a c c o u n t ;
e .g .,
U n r e a l i z e d A p p r e c i a t i o n o f A s s e t s , o r Unearned I n c r e н
ment on Land V alue o r some s u c h s i m i l a r t i t l e .
a t i s s u e now i s
The problem
the s t a t u t o r y p r o v is i o n s r e g a rd in g the payн
ment o f d i v i d e n d s , e i t h e r c a s h , p r o p e r t y , o r s h a r e s , from a
s u r p l u s a c c o u n t so c r e a t e d .
There i s a l s o t h e s u p p l e m e n t a r y
p ro b lem o f t h e payment o f d i v i d e n d s from any u n e a r n e d in c o m e .
S t a t e s w i t h no p r o v i s i o n r e g a r d i n g u n r e a l i z e d a p p r e cia tio n .
The laws o f t h i r t y - s e v e n s t a t e s 3- and t h e D i s t r i c t
o f Columbia do n o t c o n t a i n any s p e c i f i c p r o v i s i o n r e f e r r i n g
t o t h e payment o f d i v i d e n d s from a s u r p l u s c r e a t e d a s a r e н
s u l t o f w r i t i n g up t h e v a l u e o f t h e a s s e t s .
While t h e s e
_
Alabama, A r i z o n a , A r k a n s a s , C o l o r a d o , C o n n e c t i c u t ,
D e l a w a r e , F l o r i d a , G e o r g i a , I o w a , K a n s a s , K e n t u c k y , M aine,
M aryland, M a s s a c h u s e t t s , M i s s i s s i p p i , M i s s o u r i , Montana,
N e b r a s k a , Nevada, New H a m p sh ir e, New J e r s e y , New M e x i c o ,
New Y ork , N orth C a r o l i n a , N orth D a k o t a , Oklahoma, O regon ,
Rhode I s l a n d , S o u th C a r o l i n a , S o u t h D a k o t a , T e n n e s s e e , T e x a s ,
U t a h , Vermont, V i r g i n i a , West V i r g i n i a , and Wyoming.
215
s t a t e s do n o t have an y s p e c i f i c p r o v i s i o n s c o n c e r n i n g th e
u s e o f s u r p l u s from u n r e a l i z e d a p p r e c i a t i o n a s a so t ir c e o f
d i v i d e n d s , t h i s d o e s n o t n e c e s s a r i l y mean t h a t t h e s t a t u t e s
o f some o f t h e named s t a t e s m ig h t n o t be i n t e r p r e t e d a s p r o н
v i d i n g some r e s t r i c t i o n s a g a i n s t t h e payment o f d i v i d e n d s
from s u c h a s o u r c e , and i n o t h e r s t a t e s
the s t a t u t e s m ight
b e ' i n t e r p r e t e d a s a l l o w i n g the payment o f d i v i d e n d s from
such a s o u r c e .
For i n s t a n c e , i f t h e s t a t u t e s p e r m i t s d i v i н
dends o n l y o u t o f " s u r p lu s p r o f i t s o r n e t p r o f i t s , ?* s u c h a
p r o v i s i o n would seem t o p r e c l u d e t h e u s e o f u n r e a l i z e d a p н
p r e c ia t io n fo r d ivid en d purposes.
Montana, N e b r a s k a ,
A r i z o n a , Madne, M i s s o u r i ,
( m a n u f a c t u r i n g c o n c e r n s ) , N o r th D a k o ta ,
Oklahoma, S o u t h D a k o t a ,
T e x a s , U t a h , and West V i r g i n i a would
come u n d e r t h i s c l a s s i f i c a t i o n .
A lso C o n n ec ticu t w ith i t s
s t a t u t e p e r m i t t i n g d i v i d e n d s from " n e t p r o f i t o r a c t u a l s u r н
plus'" and S o u t h C a r o l i n a w i t h i t s
statu te
s t ip u la t in g that
d i v i d e n d s may be p a i d o u t o f " s u r p l u s ear n e d " m i g h t be i n н
cluded in t h i s group.
In o t h e r w o r d s ,
there are t h i r t e e n
s t a t e s ^ whose s t a t u t e s do n o t m e n t i o n d i v i d e n d s fro m u n r e a l н
i z e d a p p r e c i a t i o n , b u t whose p r o v i s i o n s r e g a r d i n g t h e s o u r c e
o f d i v i d e n d s a r e s u c h as' t o w a r r a n t t h e s u p p o s i t i o n t h a t
d i v i d e n d s , e i t h e r c a s h o r s h a r e , from s u c h a s o u r c e m i g h t be
con sid ered i l l e g a l .
On t h e o t h e r h a n d , t h e r e a r e some s t a t -
^ D o c u m e n t a t io n f o r t h i s s t a t e m e n t w i l l be f o u n d i n
C h ap ter IV.
216
u t e s t h a t t h r o u g h t h e i r l a c k o f e x p l i c i t p r o v i s i o n s m ig h t
p e r m i t d i v i d e n d s from u n r e a l i z e d a p p r e c i a t i o n u n d er a l i b e r a l
i n t e r p r e t a t i o n o f the s t a t u t e s .
The s t a t e s
t h a t c o u l d be
i n c l u d e d u n e r t h i s grou p a r e : A r k a n s a s , C o l o r a d o , D e l a w a r e ,
F lo rid a ,
G e o r g i a , K a n s a s , Nevada, T e n n e s s e e , and V i r g i n i a .
These s t a t e s u s e t h e f a m i l i a r s u r p l u s o f a s s e t s o v e r t h e
lia b ilitie s
and c a p i t a l t e s t t o e s t a b l i s h t h e s o u r c e o f d i v i н
dends and do n o t q u a l i f y t h e p r o v i s i o n i n any manner.
The
r e m a i n i n g s t a t e s h ave a s o u r c e o f d i v i d e n d s t a t e m e n t , s u c h
a s ??n e t a s s e t s o r s u r p l u s , ? w h ich make a judgment u n c e r t a i n
b e c a u s e o f t h e v a r i o u s p o s s i b l e i n t e r p r e t a t i o n s t h a t may be
p l a c e d on t h e term s u r p l u s .
C l a s s i f i c a t i o n o f s t a t e s having; a_ p r o v i s i o n c o n c e r n н
ing; u n r e a l i z e d a p p r e c i a t i o n .
The s t a t e s t h a t h ave a p r o v i н
s i o n g o v e r n i n g th e u s e o f u n r e a l i z e d a p p r e c i a t i o n o f a s s e t s
a s a s o u r c e o f d i v i d e n d s may be d i v i d e d i n t o f o u r c l a s s e s :
I . S t a t e s t h a t make u n r e a l i z e d a p p r e c i a t i o n u n a v a i l н
a b le f o r e i t h e r ca sh or share d i v i d e n d s , w ith
certa in excep tion s.
II.
S t a t e s t h a t make u n r e a l i z e d a p p r e c i a t i o n u n a v a i l н
able f o r cash d iv id e n d s, but a v a ila b le f o r share
d iv id en d s.
III.
' -
S t a t e s t h a t make u n r e a l i z e d a p p r e c i a t i o n u n a v a i l н
a b l e f o r c a s h d i v i d e n d s , b u t b y i m p l i c a t i o n make
217
such a sou rce a v a i l a b l e f o r share d iv id e n d s .
IV. S t a t e s t h a t make u n r e a l i z e d a p p r e c i a t i o n o f a s s e t s
a v a i l a b l e f o r both cash and/or share d iv id e n d s .
Gash and s h a r e d i v i d e n d s p r o h i b i t e d from u n r e a l i z e d
a p p r e c i a t i o n , w ith c e r t a i n e x c e p t i o n s .
In the f i r s t c l a s s
a r e C a l i f o r n i a and .M i n n e s o t a ; the C a l i f o r n i a s t a t u t e r e a d s
as f o l l o w s :
No d i v i d e n d s h a l l b e d e c l a r e d o u t o f mere a p p r e c i a н
t i o n i n t h e v a l u e o f i t s a s s e t s n o t y e t r e a l i s e d , nor
s h a l l any d i v i d e n d s be d e c l a r e d from e a r n e d s u r p l u s r e н
p r e s e n t i n g p r o f i t s d e r i v e d from an e x c h a n g e o f a s s e t s
u n l e s s and u n t i l su c h p r o f i t s have b e e n r e a l i z e d or u n н
l e s s the a s s e t s a r e c u r r e n t l y r e a l i z a b l e . i n ; c a s h . 3
U n rea lized a p p r e c ia tio n o f a s s e t s , i f any, s h a l l not
be i n c l u d e d In the c o m p u t a t i o n o f s u r p l u s a v a i l a b l e f o r
a d iv id en d in s h a r e s .4
T h is p r o v i s i o n c l e a r l y e x c l u d e s u n r e a l i z e d a p p r e c i a t i o n as
a sou rce o f d iv id e n d s a lth o u g h the phrase a llo w in g d iv id e n d s
from e a r n e d s u r p l u s on th e e x c h a n g e o f a s s e t s ,
if
the a s s e t s
may be c u r r e n t l y r e a l i z e d i n c a s h , seems to- a l l o w d i v i d e n d s
out o f a su rp lu s not a c t u a l l y earned or r e a l i z e d ,
f o r even
thou gh t h e a s s e t s m ig h t be s o l d f o r c a s h , u n t i l t h e y a r e
sold ,
the p r o f i t has n o t been earned.
The M in n e so ta s t a t u t e
P e e r i n g 1s C i v i l c ode o f t h e S t a t e o f C a l i f o r n i a ,
1 9 3 7 . D i v . 1 , P t . ~IV, T i t . 1 , Ch. X I , S e c . 3 4 6 .
^ Ib id .,
Sec.
346a.
218
p rovid es th a t:
I . In d e t e r m i n i n g t h e f a i r v a l u e o f t h e a s s e t s o f a
c o r p o r a t i o n t o a s c e r t a i n w h e t h e r i t .may pay a d i v i d e n d
o r may p u r c h a s e i t s own s h a r e s , u n r e a l i z e d a p p r e c i a t i o n '
o f a s s e t s s h a l l n o t be i n c l u d e d ; p r o v i d e d , , t h a t s e c u r i н
t i e s h avin g a r e a d i l y a s c e r t a i n a b l e market v a l u e , o t h e r '
th a n s e c u r i t i e s i s s u e d by t h e c o r p o r a t i o n , may be v a l u н
ed a t n o t more t h a n m ark et v a l u e . 5
T h is s t a t u t e l i k e w i s e h a s an e x c e p t i o n to t h e g e n e r a l r u l e
l a i d down i n t h e f i r s t p a r t o f the s t a t e m e n t .
t i o n would a l l o w m a r k e t a b l e s e c u r i t i e s
v a lu e r a th e r than c o s t .
This e x c e p н
t o be v a l u e d a t market
This m i g h t be s a t i s f a c t o r y i f
m a r k e t was t e n d i n g s t e a d i l y upward, b u t I t s t i l l
the
introduces
i n t o the a c c o u n t s an u n e a r n e d s u r p l u s t o b e u s e d a s d i v i н
dends.
P r o f i t s a r e made o n l y when the g o o d s , commodity,
s e c u r i t y , or s e r v i c e s a r e s o l d and n o t b e f o r e .
Cash d i v i d e n d s p r o h i b i t e d , b u t s h a r e d i v i d e n d s a l l o w н
ed from u n r e a l i z e d a p p r e c i a t i o n .
of I llin o is ,
second c l a s s ;
The s t a t u t e s o f t h e s t a t e s
L o u i s i a n a , M i c h i g a n , and Ohio f a l l
i.e .,
i n t o the
s t a t e s t h a t make u n r e a l i z e d a p p r e c i a t i o n
u n a v a ila b le f o r cash d iv id e n d s , b u t a v a ila b le f o r share d i v i f
- dends.
The s t a t u t e s v a r y w i d e l y i n t h e i r w ord in g and i n the
s p e c ific excep tion,
and t h e r e f o r e , a r a t h e r d e t a i l e d e x a m in н
a tio n of c e r ta in passages
is
ju stified .
The I l l i n o i s
corporaн
t i o n law words t h e p r o v i s i o n m o st t e r s e l y a s f o l l o w s :
( c ) No d i v i d e n d , e x c e p t a d i v i d e n d p a y a b l e In i t s
1935.
own
M i n n e s o t a B u s i n e s s C o r p o r a t i o n A c t , as amended to
Sec. 21.
s h a r e s , s h a l l be d e c l a r e d or p a i d o u t o f s u r p l u s a r i s i n g
from u n r e a l i z e d a p p r e c i a t i o n i n v a l u e , or r e v a l u a t i o n ,
o f a ssets.о
There c a n be no d o u b t o f t h e m eaning o f t h i s p a s s a g e , and as
It is
r u le.
l a i d down,
t h e r e a r e no p o s s i b l e e x c e p t i o n s to t h e
The. B u s i n e s s C o r p o r a t i o n Act- o f L o u i s i a n a p h r a s e s i t s
p r o h i b i t i o n i n t h e s e w ord s:
I.
No c o r p o r a t i o n s h a l l pay d i v i d e n d s In c a s h o r p r o p e r t y ,
( a ) e x c e p t from the s u r p l u s o f t h e a g g r e g a t e o f i t s
a s s e t s o v e r the a g g r e g a t e o f i t s l i a b i l i t i e s ,
p l u s the amount o f i t s c a p i t a l s t o c k ; o r
(b) o u t o f any s u r p l u s due or a r i s i n g from
( 1 ) -any p r o f i t on t r e a s u r y s h a r e s b e f o r e r e s a l e ;
or
( 2 ) a n y 'u n r e a l i z e d a p p r e c i a t i o n i n v a l u e o r r e н
v a l u a t i o n o f f i x e d a s s e t s ; or
(3) any u n r e a l i z e d p r o f i t s due to I n c r e a s e i n
v a l u a t i o n o f i n v e n t o r i e s b e f o r e s a l e ; or
(4) t h e u n a c c r u e d p o r t i o n o f u n r e a l i z e d p r o f i t s
on n o t e s , bonds o r o b l i g a t i o n s f o r t h e
payment o f money, p u r c h a s e d or o t h e r w i s e
a c q u i r e d , u n l e s s s u c h n o t e s , bonds or
o b l i g a t i o n s are r e a d i l y m a r k e ta b le , i n
w h ich c a s e t h e y may be t a k e n a t t h e i r
a c t u a l m a rk et v a l u e ; o r
(5 ) t h e u n a c c r u e d or u n e a r n e d p o r t i o n o f any u n н
r e a l i z e d p r o f i t In any form w h a t e v e r , wheth
e r i n t h e form o f n o t e s , b o n d s , o b l i g a t i o n s
? f o r t h e payment o f money, i n s t a l l m e n t s a l e s
c r e d i t s , or o t h e r w i s e , e x c e p t as p rovid ed
i n the p r e c e d i n g s u b - p a r a g r a p h ( 4 ) .
III.
No c o r p o r a t i o n s h a l l pay d i v i d e n d s i n s h a r e s o f th e
c o r p o r a t i o n , e x c e p t from t h e s u r p l u s o f t h e a g g r e g a t e
o f i t s a s s e t s , w h i c h , f o r t h i s p u r p o se o n l y , may I n н
c lu d e item s m en tion ed i n S u b d i v i s i o n I ( b ) , over the
a g g r e g a t e o f i t s l i a b i l i t i e s , p l u s t h e amount o f i t s
0
The B u s i n e s s
C orp oration A c t , 19 3 7 .
Sec.
41
(c).
220
c a p i t a l s t o c k . 1?
T his s e c t i o n i n c l u d e s i t e m s t h a t t e c h n i c a l l y s h o u l d be c o n н
s i d e r e d u n d e r th e t erm u n e a r n e d income r a t h e r t h a n u n r e a l i z н
ed a p p r e c i a t i o n .
N everth eless,
t h e e n t i r e s e c t i o n was p r e н
s e n t e d i n o r d e r t o i n d i c a t e i n d e t a i l t h e c a r e g i v e n to t h e
d r a f t i n g o f some s t a t u t e s .
The M ic h ig a n s t a t u t e p r o v i d e s a s f o l l o w s :
In d eterm in in g earned su r p lu s a p p r e c i a t i o n o f v a lu e
o f t h e a s s e t s o f t h e c o r p o r a t i o n s h a l l n o t be i n c l u d e d
u n t i l r e a l i z e d : P rovided, t h a t a p p r e c ia t io n o f valu e
s h a l l n o t b e c o n s t r u e d t o i n c l u d e any i n c r e a s e s w h ic h
r e s u l t from r e a d j u s t m e n t o f p r e v i o u s r e d u c t i o n s o f v a l u e
to c o r r e c t l y r e f l e c t the a cco u n ts o f the c o r p o r a tio n a t
t h e t im e o f s u c h d e t e r m i n a t i o n o f e a r n e d s u r p l u s .
In
d e t e r m i n i n g what i s e a r n e d s u r p l u s t h e judgment o f t h e
b o a r d o f d i r e c t o r s s h a l l be c o n c l u s i v e u n l e s s i t s h a l l
be shown t h a t t h e d i r e c t o r s a c t e d i n bad f a i t h o r were
g ro ssly n eg lig en t.
N o t h in g i n t h i s s e c t i o n c o n t a i n e d s h a l l p r e v e n t a
c o r p o r a t i o n from d e c l a r i n g and p a y i n g d i v i d e n d s upon
i t s p r e f e r r e d s t o c k from any s u r p l u s : P r o v i d e d , t h a t
i f s u c h d i v i d e n d s h a l l be d e c l a r e d and p a i d from any
s u r p lu s o t h e r than earn ed s u r p lu s the s h a r e h o ld e r s r e н
c e i v i n g t h e same s h a l l b e a d v i s e d o f t h a t f a c t a t t h e
tim e o f payment t o them and the n e x t a n n u a l s t a t e m e n t
o f a c c o u n t s t o be g i v e n t o the s h a r e h o l d e r s s h a l l i n н
d i c a t e t h e s u r p l u s from w h ich s u c h d i v i d e n d was p a i d .
N o t h in g c o n t a i n e d i n t h i s a c t s h a l l p r e v e n t a c o r н
p o r a t i o n , whose c a p i t a l I s n o t i m p a i r e d , from d e c l a r н
i n g s t o c k d i v i d e n d s from a p p r e c i a t i o n o f t h e v a l u e o f
such c o r p o r a tio n . 8
7 G e n e r a l C o r p o r a t i o n Laws o f
the S t a t e o f L o u is l a n d ,
1938. Sec. 26.
8
Sec. 22.
S t a t e o f M i c h i g a n , G e n e r a l C o r p o r a t i o n Laws, 1 9 3 8 .
221
S in c e t h i s s t a t e p r o v id e s as a sou rce o f d iv id e n d s the
"'earned s u r p l u s o r n e t e a r n i n g s / * and s i n c e a p p r e c i a t i o n o f
assets
it
i s t o be e x c l u d e d when d e t e r m i n i n g e a r n e d s u r p l u s ,
i s not p o s s ib le f o r a corp oration incorporated in t h is
s t a t e t o u s e such s u r p l u s a s a s o u r c e o f c a s h d i v i d e n d s ,
a l t h o u g h s h a r e d i v i d e n d s a r e p r e m i t t e d from s u c h s u r p l u s .
There i s , h o w e v e r , an i m p o r t a n t e x c e p t i o n to t h i s g e n e r a l
r u l e : an i n c r e a s e i n v a l u e o f a s s e t s up to t h e amount o f
p r e v i o u s r e d u c t i o n s i n a s s e t v a l u e i s n o t t o be c o n s i d e r e d
a p p recia tio n su rp lu s.
T h is p a r t i c u l a r s e c t i o n i s r a t h e r
u n i q u e , and t h e j u s t i f i c a t i o n f o r su c h a p r o v i s i o n m i g h t b e
s t a t e d as f o l l o w s .
I t i s n o t n e c e s s a r y u n d e r sou nd and
commonly a c c e p t e d a c c o u n t i n g p r i n c i p l e s f o r a c o r p o r a t i o n
t o w r i t e down i t s f i x e d a s s e t s b e l o w t h e c o s t l e s s r e a s o n н
a b l e d e p r e c i a t i o n , d e p l e t i o n , and o b s o l e n c e a s l o n g a s t h e
a s s e t s are b e in g u s e d i n the b u s i n e s s .
flu ctu a tio n s
In o th e r words,
i n the m a r k e t v a l u e o f f i x e d a s s e t s n e e d n o t
be c o n s i d e r e d .
But, i f the d ir e c t o r s ,
i n o r d e r t o be c o n н
s e r v a t i v e , w r i t e down the f i x e d a s s e t s d u r i n g a p e r i o d o f
f a l l i n g p r i c e s , t h e y s h o u l d h a v e t h e power a t a t im e o f r i s н
i n g p r i c e s t o w r i t e up t h e c a r r y i n g v a l u e o f t h e f i x e d
a s s e t s e q u a l to t h e p r e v i o u s w r i t e down w i t h o u t s u c h a
w r i t e up b e i n g c o n s i d e r e d a p p r e c i a t i o n s u r p l u s .
a m p le , i f
it
For e x н
i s assum ed t h a t a f i r m had p u r c h a s e d f i x e d
a s s e t s worth $ 1 0 0 , 0 0 0 , s u b j e c t to d e p r e c i a t i o n a t th e r a t e
o f Q% p e r y e a r ,
t h e a s s e t s a t t h e end o f two y e a r s would be
c a r r ie d a t a n e t valu e o f $84,000
years d ep r e c ia tio n o f $ 1 6 ,0 0 0 ).
( c o s t $ 1 0 0 , 0 0 0 minus two
I f b ecau se o f a sharp f a l l
in the r e p r o d u c tio n c o s t s o f th e se a s s e t s t h e i r a p p ra ised
v a l u e on t h e b a s i s o f t h e t h e n e x i s t i n g p r i c e l e v e l were
$ 7 5 , 0 0 0 , the d i r e c t o r s m ight b y r e s o l u t i o n d e c id e to reduce
the c a r r y in g v a lu e o f the a s s e t s to $ 7 5 ,0 0 0 .
The a s s e t
a c c o u n t s w ould t h e n b e r e d u c e d by $ 9 , 0 0 0 and t h e l o s s would
o f n e c e s s i t y be c h a r g e d t o some s u r p l u s a c c o u n t , p r o b a b l y
the earned su rp lu s a c c o u n t.
T his e n t r y would t e n d t o r e d u c e
t h e d i v i d e n d s t o be p a i d t o t h e s t o c k h o l d e r d u r i n g t h i s
p e r i o d and v e r y l i k e l y d u r i n g s u c c e e d i n g p e r i o d s .
I f i t is
assum ed t h a t t h e c a r r y i n g v a l u e o f t h e a s s e t s re m a in u n н
c h a n g ed f o r t h e n e x t s i x y e a r s e x c e p t f o r p e r i o d i c d e p r e c i a н
t i o n c h a r g e s , a t t h e en d o f
e i g h t y e a r s t h e v a l u e would
be c a l c u l a t e d a s f o l l o w s :
F ixed a s s e t s a t c o s t
L e s s ; W rite down o f a s s e t s
$100,00 0.00
9 .0 0 0 .0 0
$ 91,000.00
L ess: Reserve f o r D e p r e c ia tio n ;
2 y e a r s a t $8 , 0 0 0 . 0 0
$16 ,0 0 0 .0 0
6 years at
7 ,1 4 2 .8 6
4 2 .8 5 7 .1 6
5 8 .8 57 .16
C a r r y i n g v a l u e o f a s s e t s a t en d
o f t h e e i g h t h y e a r .............................. .....
$ 52,1 4 2 .8 4
I f t h e a s s e t s a r e a p p r a i s e d a t t h e en d o f t h e e i g h t h y e a r
a f t e r p u r c h a s e and i f , b e c a u s e o f a r i s e
le v el,
in g e n er a l p rice
the r e p r o d u c tio n v a lu e i s found to be $ 4 1 ,1 4 2 .8 4 ,
d i r e c t o r s m i g h t w i s h t o w r i t e up the a s s e t s
to b r in g the
the
223
c a r r y i n g v a l u e up t o t h e a p p r a i s e d v a l u e .
I f th is
i s done
t h e a s s e t a c c o u n t s w i l l he i n c r e a s e d by # 9 , 0 0 0 , and a l s o
some s u r p l u s a c c o u n t
w i l l be in c r e a s e d .
The s t a t u t e p r o н
v i d e s t h a t s u c h an i n c r e a s e , p r o v i d e d t h e amount i s n o t i n
e x c e s s o f t h e p r e v i o u s w r i t e down, n e e d n o t b e c o n s i d e r e d
an a p p r e c i a t i o n s u r p l u s ; h e n c e ,
t h e c r e d i t m i g h t be c a r r i e d
t o t h e e a r n e d s u r p l u s a c c o u n t o r some o t h e r s p e c i a l l y named
su rp lu s.
I f the e n t r y i s c a r r i e d t o earned s u r p lu s , d i v i н
dends m i g h t b e p a i d from t h e s u r p l u s so c r e a t e d , w h ich s u r н
plus i s c l e a r l y n o t a true earned s u r p lu s .
However, the
argument f o r s u c h a p r a c t i c e m ig h t be t h a t t h e s t o c k h o l d e r s
had t o f o r e g o d i v i d e n d s when th e a s s e t s w ere w r i t t e n down,
and t h e s u r p l u s made a v a i l a b l e b y t h e s u b s e q u e n t w r i t e up
o f t h e a s s e t s h a s m e r e l y b e e n e q u a l t o the p r e v i o u s w r i t e
down; u n d e r a c c e p t e d a c c o u n t i n g p r i n c i p l e s the o r i g i n a l
w r i t e down was n o t n e c e s s a r y , and d i v i d e n d s m i g h t h av e b e e n
p a i d a t t h e en d o f t h e f i r s t
two y e a r s e q u a l t o t h e # 9 , 0 0 0
w r i t e down had t h e d i r e c t o r s so c h o s e n .
m i g h t h a v e some m e r i t , s t i l l ,
While t h i s argument
i t would seem t h a t s u c h a p r o н
c e d u r e m ig h t work a h a r d s h i p on some s t o c k h o l d e r s who, b e н
in g i n f l u e n c e d b y t h e w r i t e down o f t h e a s s e t s and the e n н
suin g d e c lin e
i n the book v a l u e o f t h e i r s t o c k , m i g h t h a v e
sold t h e ir sto c k .
Such a p r o c e d u r e and t h e s u b s e q u e n t d i v i н
dend o u t o f t h e w r i t e up would a p p e a r to be i n e q u i t a b l e .
E s p e c i a l l y would t h i s b e t h e c a s e i f t h e p r i c e f l u c t u a t i o n
224
t o o k p l a c e o v e r a s h o r t e r p e r i o d o f t i m e , and i f
the d i r e c t н
o r s were d e s i r o u s o f i n f l u e n c i n g t h e b ook v a l u e o f t h e
shares.
The n e x t p a r a g r a p h o f t h e M i c h i g a n la w a l l o w s any
s u r p l u s t o b e u s e d t o pay p r e f e r r e d d i v i d e n d s .
The q u e s t i o n
a r i s e s a s t o w h e t h e r t h i s means a p p r e c i a t e d s u r p l u s a s w e l l
' as donated s u r p lu s , p a i d - i n s u r p lu s , e t c .
I t w ould seem
t h a t a p p r e c i a t e d s u r p l u s would be j u s t a s a v a i l a b l e f o r
d iv id e n d s as o th e r s u r p lu s .
The Ohio s t a t u t e s p r o v i d e a s f o l l o w s :
(b) . . . . - I n co m p u tin g t h e e x c e s s o f a s s e t s f o r
t h e p u r p o s e o f d e t e r m i n i n g t h e fun d a v a i l a b l e f o r a
d iv id e n d payable o t h e r w is e than i n sh ares o f a c o r p o r н
a t i o n d e d u c t i o n s h a l l a l s o b e made f o r t h e u n r e a l i z e d
a p p r e c i a t i o n , i f a n y , appearin g- on i t s b o o k s , u n l e s s
t h e amount t h e r e o f s h a l l h ave b e e n t r a n s f e r r e d t o or
in clu d ed in s t a t e d c a p i t a l .
Any e x c e s s o f a s s e t s h e r e a f t e r a r i s i n g o t h e r w i s e
t h a n from t h e e a r n i n g s o f a c o r p o r a t i o n s h a l l be c l a s s i н
f i e d a c c o r d i n g to i t s d e r i v a t i o n and s o shown i n s e p a н
ra te accounts.
Whenever t h e b o a r d o f d i r e c t o r s o f a c o r p o r a t i o n
s h a l l be o f t h e o p i n i o n t h a t i t s a s s e t s , i n c l u d i n g
p a t e n t s , or g o o d w i l l , h a v e a f a i r v a l u e t o t h e c o r p o r н
a t i o n i n e x c e s s o f the amount a t w h i c h t h e y a r e c a r r i e d
on t h e b o o k s , and s h a l l d e t e r m i n e t h e amount o f s u c h
f a i r v a l u e , i t may o r d e r a l l or a p a r t o f t h e f a i r
v a l u e so d e t e r m i n e d to b e e n t e r e d on t h e books and
t h e r e b y c r e a t e an e x c e s s o f a s s e t s , w hich t h e b o a r d o f
d i r e c t o r s may a p p l y t o a d i v i d e n d i n s h a r e s o f t h e c o r н
p o r a t i o n and t r a n s f e r t o s t a t e d c a p i t a l o r a p p l y t o
any i n c r e a s e o f s t a t e d c a p i t a l r e p r e s e n t e d b y s h a r e s
w i t h o u t p ar v a l u e .
225
Any t r a n s f e r o f e x c e s s o f a s s e t s t o s t a t e d c a p i t a l
s h a l l be deemed t o h a v e b e e n made from t h a t p a r t o f the
e x c e s s , i f a n y , w hich r e s u l t e d from u n r e a l i z e d a p p r e c i a н
tio n . 9
Thus an Ohio c o r p o r a t i o n h a s a v e r y d e f i n i t e p r o v i s i o n to
governthe d e c l a r a t io n
in
o f . s h a r e d i v i d e n d s from an i n c r e a s e
the market v a lu e o f th e a s s e t s ,
b ein g in clu d ed .
p a t e n t s and g o o d w i l l
The p r o h i b i t i o n a g a i n s t u s i n g s u c h a s o u r c e
fo r cash d ivid en ds i s p o s i t i v e .
I t w i l l be n o t e d t h a t
u n d e r any c i r c u m s t a n c e s t h e c r e d i t a r i s i n g from the a p p r e н
c i a t i o n o f a s s e t s m ust be e n t e r e d i n a s e p a r a t e a c c o u n t t o
i n d i c a t e c l e a r l y t h e s o u r c e o f su c h c r e d i t s .
Cash d i v i d e n d s p r o h i b i t e d , b u t , b y i m p l i c a t i o n , s h a r e
d i v i d e n d s a l l o w e d from u n r e a l i z e d a p p r e c i a t i o n .
S tates that
make u n r e a l i z e d a p p r e c i a t i o n u n a v a i l a b l e f o r c a s h d i v i d e n d s
b u t , b y i m p l i c a t i o n , make s u c h a s o u r c e a v a i l a b l e f o r s h a r e
d iv id e n d s are r e p r e s e n t e d by fo u r s t a t e s :
Indiana,
P e n n s y l v a n i a , and W a sh in g to n .
n a m e ly , I d a h o ,
The U n ifo r m B u s i n e s s
C o r p o r a t i o n A c t a l s o . h a s a s i m i l a r p r o v i s i o n w h ic h may be
q u o t e d h e r e a s r e p r e s e n t a t i v e o f t h e g ro u p :
II.
Amounts o f s u r p l u s a r i s i n g from an u n r e a l i z e d a p н
p r e c i a t i o n o r r e v a l u a t i o n o f f i x e d a s s e t s s h a l l b e shown
on t h e b ooks o f t h e c o r p o r a t i o n a s a s e p a r a t e i t e m a p a r t
from s u r p l u s p r o f i t s o r p a i d - i n s u r p l u s .
9 G e n e r a l a nd F o r e i g n C o r p o r a t i o n A c t s o f the S t a t e
o f O h io , A n n o t a t e d 1 9 3 9 . T i t . IX, D i v . I , Ch. I , S e c . 8 6 2 3 - 3 8 .
226
IV. No c o r p o r a t i o n s h a l l pay d i v i d e n d s
(a) i n c a s h o r p r o p e r t y , e x c e p t from t h e s u r p l u s
o f t h e a g g r e g a t e o f i t s a s s e t s o v e r the a g g r e g a t e o f i t s
l i a b i l i t i e s , i n c l u d i n g i n the l a t t e r t h e amount o f i t s
c a p i t a l s t o c k , a f t e r d e d u c t i n g from s u c h a g g r e g a t e o f
i t s a s s e t s t h e amount b y w h ich s u c h a g g r e g a t e was i n н
cr ea se d by u n r e a liz e d a p p r e c ia tio n in value or r e v a lu a н
tio n o f fix e d a s s e ts ;
(b) i n s h a r e s o f t h e c o r p o r a t i o n , e x c e p t from
the su r p lu s o f th e a g g r e g a te o f i t s a s s e t s o v er the
a g g r e g a te o f I t s l i a b i l i t i e s , i n c l u d i n g i n the l a t t e r
t h e amount o f i t s c a p i t a l s t o c k .
V. Cash d i v i d e n d s s h a l l n o t be p a i d o u t o f s u r p l u s
due t o o r a r i s i n g from
(a) any p r o f i t on t r e a s u r y s h a r e s b e f o r e r e s a l e ;
or
(b) any u n r e a l i z e d p r o f i t s due to i n c r e a s e i n
v a l u a t i o n o f i n v e n t o r i e s b e f o r e s a l e ; or
{c ) t h e u n a c c r u e d p o r t i o n o f u n r e a l i z e d p r o f i t s
on n o t e s , b o n d s , o r o b l i g a t i o n s f o r t h e payment o f
money p u r c h a s e d o r a c q u i r e d a t a d i s c o u n t u n l e s s s u c h
n o t e s , bonds, or o b l i g a t i o n s are r e a d i l y m ark etable,
i n w h ic h c a s e , t h e y may be t a k e n a t t h e i r a c t u a l m a r k e t
v a lu e ; or
(d) t h e u n a c c r u e d o r u n e a r n e d p o r t i o n o f any
u n r e a l i z e d p r o f i t i n any form w h a t e v e r , w h e t h e r i n t h e
form o f n o t e s , b o n d s , o b l i g a t i o n s f o r t h e payment o f
money, i n s t a l m e n t s a l e s , c r e d i t s , o r o t h e r w i s e .
V I. S u b j e c t to t h e l i m i t a t i o n s c o n t a i n e d i n t h i s Sec-r
t i o n , a d i v i d e n d may be d e c l a r e d i n s h a r e s o f t h e c o r н
p o r a t i o n whenever t h e b o a r d o f d i r e c t o r s s o d e t e r m i n e ,
*
*
*
?
?
*
10
?
In t h i s p a s s a g e i t
i s re q u ir ed t h a t the u n r e a liz e d a p p r e c ia н
t i o n b e shown s e p a r a t e l y from t h e o t h e r t y p e s o f s u r p l u s .
Cash d i v i d e n d s are. n o t a l l o w e d from t h e i n c r e a s e i n v a l u a н
tio n or r e v a lu a tio n o f a s s e t s .
^
U n iform B u s i n e s s
The p h r a s e , '?r e v a l u a t i o n o f
C orp oration A p t.
Sec.
24.
227
a s s e t s , 1* p r e v e n t s t h e w r i t i n g down i n v a l u e o f t h e a s s e t s
and t h e s u b s e q u e n t w r i t i n g up i n v a l u e o f t h e a s s e t s , making
t h e c o n t r a to s u c h a w r i t e up a v a i l a b l e f o r d i v i d e n d s .
T his
p r o v i s i o n t h u s p r e v e n t s t h e p r a c t i c e a l l o w e d b y M ich ig a n
s t a t u t e . 1 1 There i s one e x c e p t i o n to t h e g e n e r a l s t a t e m e n t
t h a t u n r e a l i z e d a p p r e c i a t i o n cannot be u sed f o r cash d i v i н
dends.
The e x c e p t i o n i s f o u n d i n su b p a r a g r a p h V.
a llow s s e c u r i t i e s ,
( c ) , w h ic h
i f r e a d i l y m a r k e ta b le , t o be v a lu ed a t
m a r k e t v a l u e i r r e s p e c t i v e o f t h e f a c t t h a t t h e y may h ave
b e e n a c q u i r e d a t a l o w e r f i g u r e and t h a t no income h a s b e e n
e s ta b lis h e d thereby.
i n g , by i m p l i c a t i o n ,
T h is a c t h a s b e e n c l a s s i f i e d a s a l l o w н
s h a r e d i v i d e n d s from u n r e a l i z e d a p p r e н
c i a t i o n because w hile i t does not d e f i n i t e l y s t a t e
s h a r e d i v i d e n d s c a n b e p a i d from su c h a s o u r c e ,
that
i t provides
t h a t a p p r e c i a t i o n m ust be e x c l u d e d i n d e t e r m i n i n g t h e fu n d s
a v a i l a b l e f o r cash d i v i d e n d s , but i t d oes n o t in c lu d e such
a p r o h i b i t i o n i n s t a t i n g the so u rc e o f share d i v i d e n d s .
T h is a s s u m p t i o n i s more d e f i n i t e l y r e i n f o r c e d b y s t a t i n g
t h a t s h a r e d i v i d e n d s may be p a i d s u b j e c t o n l y to t h e l i m i t a н
t i o n s m entioned in t h e s e c t i o n .
The s t a t e s o f I d a h o ,
12
P en n sylvan ia,
1 '5
and W ashin g-
11
Supra'.
12
Idaho C ode. 1 9 3 2 . T i t . 2 9 , Ch. 1 , S e c . 2 9 - 1 2 9 .
1J5 Pur d o n ╗s P e n n s y l v a n i a S t a t u t e s . A n n o t a t e d Permanн
e n t E d i t i o n , 1 9 3 8 . T i t . 1 3 - 1 5 . T i t . 1 5 , Ch. 49 B , A r t . V I I ,
Sec. 2852-701.
228
t o n ^ f o l l o w t h e U niform B u s i n e s s C o r p o r a t i o n A c t .
Indiana,
h o w e v e r , w h i l e i t b e l o n g s t o t h e same g e n e r a l c l a s s , words
th e p r o v i s i o n a s f o l l o w s :
D i v i d e n d s may be p a i d i n c a s h , i n p r o p e r t y o r i n
s h a r e s o f t h e c a p i t a l s t o c k o f t h e c o r p o r a t i o n , b u t no
d i v i d e n d s p a y a b l e i n c a s h o r p r o p e r t y s h a l l be p a i d
o u t o f s u r p l u s due t o o r a r i s i n g from u n r e a l i z e d a p p r e н
c i a t i o n i n v a l u e , - o r from r e v a l u a t i o n o f a s s e t s . 15
Cash and s h a r e d i v i d e n d s a l l o w e d from u n r e a l i z e d
ap p recia tio n .
In t h e f o u r t h c l a s s b e l o n g s t h e s t a t e o f
W i s c o n s i n , f o r t h i s s t a t e a l l o w s b o t h c a s h and s h a r e d i v i н
dends from u n r e a l i z e d a p p r e c i a t i o n i n t h e f o l l o w i n g s p e c i f i c
p ro v isio n :
(2). But an y c o r p o r a t i o n w h ich h a s i n v e s t e d n e t e a r n н
i n g s o r income i n perm anent a d d i t i o n s t o i t s p r o p e r t y ,
o r whose p r o p e r t y s h a l l h ave i n c r e a s e d i n v a l u e , may
d e c l a r e a d i v i d e n d e i t h e r i n money or i n s t o c k t o the
e x t e n t o f t h e n e t e a r n i n g s o r income so i n v e s t e d o r o f
th e s a i d i n c r e a s e in the v a lu e o f i t s p r o p e r ty ; b u t the
t o t a l amount o f s u c h d i v i d e n d s h a l l n o t e x c e e d t h e
a c t u a l c a s h v a l u e o f t h e a s s e t s owned b y t h e c o r p o r a t i o n
in ex c e ss o f i t s t o t a l l i a b i l i t i e s , in clu d in g i t s c a p iн
t a l stock .Iо
C e r t a i n f e a t u r e s o f t h i s r a t h e r u n iq u e la w h a v e ' b e e n d i s c u s н
s e d a b o v e , 1^ b u t i t m e r i t s m e n t i o n h e r e .
^
The i n v e s t m e n t o f
la w s C o n c e r n in g P r i v a t e C o r p o r a t i o n s . S e c . 3 8 0 3 - 2 4 .
15 C e r t a i n Laws C o n c e r n in g C o r p o r a t i o n s F o r P r o f i t , 1 9 3 7 . Ch. 2 1 5 , P t . I I , A r t . 1 , S e c . 1 2 .
^
S t a t u t e s o f W i s c o n s i n Rela t i n g t o P r i v a t e C orp orat i o n s , 1937. S ec. 182.18 (2) .
17 Cг?
Chapter IV.
229
income i n a s s e t s or the i n c r e a s e i n v a l u e o f a s s e t s d o e s n o t
.per s e i n c r e a s e o r improve the a b i l i t y o f a company to pay
d i v i d e n d s , and t h e payment o f d i v i d e n d s .in c a s h on s u c h i n н
t a n g i b l e and u n e a r n e d i t e m s i s q u e s t i o n a b l e .
Moreover, the
d e t e r m in a tio n o f the c a s h v a lu e o f a s s e t s o f a g o in g c o n н
c e r n i s a . v e r y d i f f i c u l t ' p r o b l e m and one w h ich p e r h a p s s h o u ld
n o t have been c r e a t e d by the i n c l u s i o n o f such a s t a t u t o r y
p rovis ion .
S ectio n B
P a i d - I n S u r p l u s and D i v i d e n d Payments
Im p o r ta n ce o f d e t e r m i n i n g t h e u s e s
s u r p l u s may be p u t .
ca p ita l,
t o w h ic h p a i d - i n
Prom t h e d i s c u s s i o n o f t h e s t a t u t o r y
i t i s e v i d e n t t h a t n o t a l l o f the c o n s i d e r a t i o n
r e c e iv e d f o r the s a le o f s t o c k , p a r t i c u l a r l y shares w ithou t
par v a l u e , n e e d be i n c l u d e d i n the l e g a l c a p i t a l j
j u r is d ic t io n a la rg e p art,
i f not a l l o f the c o n s id e r a tio n ,
may be i n c l u d e d i n t h e p a i d - i n s u r p l u s a c c o u n t .
im perative,
of th is
therefore,
i n many
I t becomes
t h a t an a n a l y s i s o f t h e a v a i l a b i l i t y
s u r p l u s f o r d i v i d e n d s and o t h e r p u r p o s e s i s m a d e . ^
I t h a s become q u i t e common f o r b o t h t h e n e w ly o r g a n i z e d
To a c e r t a i n e x t e n t t h e d i s c u s s i o n i n t h i s s e c t i o n
w i l l d u p l i c a t e c e r t a i n s t a t e m e n t s i n t h e two p r e v i o u s c h a p н
t e r s b u t i n t h i s s e c t i o n t h e y a r e o r g a n i z e d and au gm ented .
230
company and t h e o l d , w e l l e s t a b l i s h e d com panies t o c r e a t e a
la r g e p a id - in su r p lu s .
Such a p r a c t i c e o f i t s e l f
is not
d a n g e r o u s , b u t i f d i v i d e n d s a r e a l l o w e d o u t o f su ch a s u r н
p l u s and i f
th e re are s e v e r a l c l a s s e s o f s h a r e s ,
l e a d t o d e f i n i t e a b u s e s and i n e q u i t i e s .
i t may
For e x a m p l e , d i v i н
dends may be p a i d on one c l a s s o f s h a r e s from c o n t r i b u t i o n s
made b y o t h e r c l a s s e s o f s h a r e h o l d e r s .
This p r a c t i c e i s
commonly c a r r i e d on by a n e w ly o r g a n i z e d c o n c e r n i n o r d e r
t h a t d i v i d e n d s may be p a i d on p r e f e r r e d s h a r e s d u r i n g t h e
ea rly l i f e
o f th e concern.
should r e a l i z e
However,
the h o ld e r s o f e q u i t i e s
t h a t t h e i r d i v i d e n d s a r e d e p e n d e n t on e a r n н
i n g s n o t on c o n t r i b u t e d s u r p l u s .
A p o s itiv e d ifferen ce
s h o u l d be made b e t w e e n e a r n e d s u r p l u s and s u r p l u s p a i d - i n .
S t a t u t e s a l l o w i n g d i v i d e n d s from p a i d - i n s u r p l u s . i n
some c a s e s w i t h r e s t r i c t i o n s .
L o u i s i a n a , 1 9 New
J
e
r
s e
y
,
20
V i r g i n i a , 2 -*- and W i s c o n s i n 2 ^ a l l o w c a s h an d s h a r e d i v i d e n d s
-*-9 G e n e r a l C o r p o r a t i o n Laws o f t h e S t a t e o f L o u i s i н
ana 1 9 3 8 .
Sec. 26.
20 The- G e n e r a l C o r p o r a t i o n Law o f New J e r s e y , i n c l u d н
i n g a l l s u p p l e m e n t s and amendments t h e r e t o to t h e end o f the
L e g i s l a t i v e S e s s i o n o f 1 9 3 8 . T i t . 1 4 , Ch. 8 , S e c . 1 4 : 8 - 1 9
and S e c . 1 4 : 8 - 6 .
2 -*- V i r g i n i a C o r p o r a t i o n Law, w i t h a l l amendments to
June 2 1 , 1 9 3 8 . Ch. 1 4 7 , S e c . 3 8 4 0 .
S t a t u t e s o f W i s c o n s i n R e l a t i n g t o P r i v a t e C orp oraн
t i o n s , 1 9 3 7 . S e c . 1 8 2 . 1 4 ( 1 ) . See S e c . 1 8 2 . 1 9 w h ic h i s i n
c o n f l i c t w ith the ab ove.
22
231
o u t o f p a i d - i n s u r p l u s . 2 5 L o u isia n a m o d i f i e s the g e n e r a l i t y
o f t h i s s t a t e m e n t b y r e q u i r i n g t h a t i f any p a r t o f a c a s h
d i v i d e n d i s p a i d o u t o f su ch a s u r p l u s ,
s h a l l be n o t i f i e d ; V i r g i n i a s t i p u l a t e s
the s h a r e h o ld e r s
t h a t no d i v i d e n d
s h a l l be p a i d o u t o f c o n t r i b u t e d s u r p l u s u n l e s s w r i t t e n
n o t i c e i s g i v e n t o the s h a r e h o l d e r s a t t h e tim e o f payment.
D i v i d e n d s may be p a id o n l y t o p r e f e r r e d s t o c k h o l d e r s
o u t o f p a i d - i n s u r p l u s i n the j u r i s d i c t i o n s o f C a l i f o r n i a ,
Illin o is,
M i c h i g a n , and P e n n s y l v a n i a .
The C a l i f o r n i a law
?reads a s f o l l o w s :
A c o r p o r a t i o n may d e c l a r e d i v i d e n d s p a y a b l e 3h c a s h
or in p rop erty o n ly as f o llo w s :
(2 )
o u t o f p a i d - i n s u r p l u s or s u r p l u s a r i s i n g from
the r e d u c t io n o f s t a t e d c a p i t a l s u b j e c t to the p r o v iн
s i o n s o f S e c t i o n 348b o f t h e C i v i l Code, o n l y upon
s h a r e s e n t i t l e d to p r e f e r e n t i a l d i v i d e n d s ; p r o v i d e d ,
t h a t n o t i c e s h a l l be g i v e n t o t h e s h a r e h o l d e r s r e c e i v н
i n g su ch d i v i d e n d s o f t h e s o u r c e t h e r e o f p r i o r t o o r
c o n c u r r e n t l y w i t h the payment t h e r e o f . 24
In a l a t e r s e c t i o n s h a r e d i v i d e n d s may be d e c l a r e d On a l l
c l a s s e s o f s h a r e s w i t h the same l i m i t a t i o n s . 2 5 I l l i n o i s 2 5
23 A l l o f t h e d i s c u s s i o n i n t h i s s e c t i o n i s p r e d i c a t н
ed upon t h e g e n e r a l r e s t r i c t i o n s o f c a p i t a l im pairm ent a n d /
or in s o lv e n c y , e t c . .
1937.'
P e e r i n g *s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a .
D i v . 1 , P t . I V , T i t . 1 , Ch. X I , S e c . 3 4 6 .
25
Ib id .,
Sec. 346a.
26
The B u s i n e s s C o r p o r a t i o n A c t . 1 9 3 7 . S e c . 4 1 ( b ) .
232
has a s e c t i o n th a t i s v er y s im ila r to th a t o f C a lif o r n ia ;
i t a llo w s d iv id e n d s o u t o f p a i d - i n su rp lu s provided n o t i c e
i s given*
In a ' l a t e r s e c t i o n / d e s p i t e - t h e s ta te m e n t th a t
t h e r e i s no c o n f l i c t b e t w e e n the two s e c t i o n s ,
such d i v i н
d ends seem t o be t r e a t e d a s a t y p e o f l i q u i d a t i n g d i v i d e n d .
The s e c t i o n i s worded a s f o l l o w s :
P a i d - i n s u r p l u s , w h e th e r c r e a t e d b y r e d u c t i o n o f s t a t н
ed c a p i t a l or o t h e r w i s e , may be d i s t r i b u t e d In c a s h or
i n kind to the s h a r e h o ld e r s e n t i t l e d t h e r e t o , s u b j e c t to
t h e f o l l o w i n g a d d i t i o n a l r e s t r i c t i o n s and i n t h e f o l l o w н
i n g manner:
(a.) No such d i s t r i b u t i o n s h a l l be made t o any c l a s s o f
s h a r e h o l d e r s u n l e s s a l l c u m u l a t i v e d i v i d e n d s a c c r u e d on
p r e f e r r e d or s p e c i a l c l a s s e s o f sh a re s e n t i t l e d to p r e н
f e r e n t i a l d iv id e n d s s h a l l have been f u l l y p a id .
(b) No s u c h d i s t r i b u t i o n s h a l l be made t o any c l a s s o f
s h a r e h o l d e r s w h ic h w i l l r e d u c e the r e m a i n i n g n e t a s s e t s
b e l o w t h e a g g r e g a t e p r e f e r e n t i a l amount p a y a b l e i n e v e n t
o f v o lu n t a r y l i q u i d a t i o n to the h o ld e r s o f sh a r e s h a v in g
a p r e f e r e n t i a l r i g h t to the a s s e t s o f t h e c o r p o r a t i o n
in the even t o f l i q u i d a t i o n .
( c ) Each su c h d i s t r i b u t i o n , when made, s h a l l be i d e n t i н
f i e d a s a l i q u i d a t i n g d i v i d e n d and t h e amount p e r s h a r e
s h a l l be d i s c l o s e d to the h o l d e r s r e c e i v i n g the same,
c o n c u r r e n t l y w i t h the payment t h e r e o f .
(d) The b o a r d o f d i r e c t o r s s h a l l a d o p t a r e s o l u t i o n r e н
commending t h e payment o f a l i q u i d a t i n g d i v i d e n d , s p e c i н
f y i n g t h e c l a s s or c l a s s e s o f s h a r e h o l d e r s e n t i t l e d
t h e r e t o and t h e amount t h e r e o f , and d i r e c t i n g t h a t t h e
q u e s t i o n o f s u c h d i s t r i b u t i o n be s u b m i t t e d to a v o t e a t
a m e e t i n g o f s h a r e h o l d e r s , w h ich may be e i t h e r an a n n u a l
or s p e c i a l m eetin g .
( f ) At su ch m e e t i n g a v o t e o f t h e s h a r e h o l d e r s e n t i t l e d
to v o t e t h e r e a t s h a l l be t a k e n by c l a s s e s on t h e q u e s t i o n
o f the proposed d i s t r i b u t i o n .
The a f f i r m a t i v e v o t e o f
t h e h o l d e r s o f a t l e a s t t w o - t h i r d s o f the o u t s t a n d i n g
s h a r e s o f e a c h c l a s s s h a l l be r e q u i r e d f o r t h e a u t h o r i z a н
t i o n o f such d i s t r i b u t i o n .
T his s e c t i o n ,
in a l l p r o b a b ility ,
27 I b i d . . S e c .
60.
i s n ot a p p lic a b le to a l l
233
c o n d i t i o n s , f o r i t seems t o d e a l w i t h t h e p rob lem o f l i q u i н
d a tin g d iv id en d s.
P ennsylvania
,^ 8
s u b j e c t t o n o t i f i c a t i o n a t t h e tim e
o f s u c h paym ent, a l l o w s c a s h and s h a r e d i v i d e n d s on p r e f e r н
red sh a r e s .
I n a s i m i l a r manner M i c h i g a n ^ c o r p o r a t i o n s may
pay c a s h or s h a r e d i v i d e n d s on p r e f e r r e d s t o c k o u t o f any
s u r p l u s p r o v i d e d tba t i f
it
i s p a i d from o t h e r t h a n e a r n e d
s u r p l u s , n o t i c e m ust be g i v e n and t h e n e x t a n n u a l s t a t e m e n t
m ust show t h e s o u r c e from w h i c h i t was p a i d .
t i o n t h e law i n t h i s s t a t e
in another s e c н
i n d i s c u s s i n g t h e p rob lem o f a l н
l o c a t i n g a p o r t i o n o f t h e c o n s i d e r a t i o n r e s u l t i n g from t h e
i s s u a n c e o f s h a r e s w i t h o u t par v a l u e c o n c l u d e s the p a ra g ra p h
w ith the se n te n c e :
'^Nothing i n t h i s a c t c o n t a i n e d s h a l l p r e н
v e n t a c o r p o r a t i o n from d e c l a r i n g a s t o c k d i v i d e n d from s u r н
plus c r e a te d as in t h i s s e c t i o n p r o v id e d .
,t30
T his t h e n m e r e н
l y b r i n g s d e f i n i t e l y t o t h e f o r e t h e power t o I s s u e s h a r e
d i v i d e n d s from p a i d - i n s u r p l u s .
M i n n e s o t a 3 ^ p e r m i t s c a s h d i v i d e n d s from p a i d - i n s u r н
p lu s,
provided n o t i f i c a t i o n
is given , but i f
there are shares
28
Purdon* s P e n n s y l v a n i a S t a t u t e s . A n n o t a te d Permanн
e n t E d i t i o n , 1938* T i t l e 1 3 - 1 5 . T i t . 1 5 , Ch. 4 9 B , S e c . 7 0 4 .
S t a t e o f M i c h i g a n , G e n e r a l Corpora t i o n Law, 1 9 3 8 .
Sec. 22.
3░ ib id . . Sec. 20.
3 ^- M i n n e s o t a B u s i n e s s C o r p o r a t i o n A c t , 1933 as amendн
ed t o 1 9 3 5 , S e c . 2 1 , 1 1 ( b ) .
234
o u tsta n d in g e n t i t l e d to p r e f e r e n t i a l d iv id e n d s, cash d ivid en d s
may be d e c l a r e d from p a i d - i n s u r p l u s o n l y upon s u c h p r e f e r r e d
shares.
T his a c t t h e n d i f f e r s from t h e p r e v i o u s a c t w h ich
a l l o w e d d i v i d e n d s from p a i d - i n s u r p l u s on p r e f e r r e d s h a r e s .
The M i n n e s o t a a c t w ould a l l o w d i v i d e n d s from p a i d - i n s u r p l u s
t o be p a i d on common s h a r e s a s s u m in g t h e r e were no p r e f e r r e d
shares o u tsta n d in g .
states
The q u e s t i o n a r i s e s a s t o w h e t h e r the
p r e v io u s ly m entioned, i . e . ,
C alifo rn ia,
Illin o is,
Michн
i g a n , and P e n n s y l v a n i a , m ig h t n o t . a l l o w s u c h d i v i d e n d s u nd er
sim ila r circu m stan ces, e s p e c ia ll y i f
c l a s s o f common s t o c k o u t s t a n d i n g .
t h e r e were o n l y one
M innesota p erm its sh are
d i v i d e n d s from p a i d - i n s u r p l u s on a l l s h a r e s .
O h io^ s t ip u la t e s
tba t i f d i v i d e n d s a r e p a i d o u t o f
o th e r than earned e x c e s s o f a s s e t s ,
n o t i c e m u st be g i v e n .
T h is w ould seem t o s a n c t i o n the payment o f d i v i d e n d s from
p a i d - i n s u r p l u s e v e n th o u g h the s t a t e m e n t i s n o t made d i r e c t н
ly .
C o lo ra d o a f t e r d i s c u s s i n g p a i d - i n s u r p l u s makes t h i s
sta tem ent;
The e x c e s s , I f a n y , a t any g i v e n t im e o f t h e t h e n
a c t u a l valu e o f th e t o t a l n et a s s e t s o f the corp o ra tio n
o v e r t h e amount s o d e t e r m i n e d t o be c a p i t a l , s h a l l be
s u r p l u s a v a i l a b l e f o r g e n e r a l c o r p o r a t i o n p u r p o s e s and
d i s t r i b u t i o n a s e a r n e d s u r p l u s . 33
^ G e n e r a l and F o r e i g n C o r p o r a t i o n A c t s o f the S t a t e
o f O h io, A n n o t a te d 1 9 3 9 .
Sec. 8623-38 ( d ) .
rz*z
1, 1937.
C o r p o r a t i o n h a w s , a s r e v i s e d and amended t o O c to b e r
Ch. 4 1 , A r t . 1 , S u b d i v . 1 , S e c . 12 ( f ) .
235
T h is s e c t i o n would seem t o make s u r p l u s o f any k i n d e a r n e d
su rp lu s.
T h is law d o e s n o t u s e t h e term " e a r n e d ? i n the
usual sense.
F in a lly ,
there r e m a in
t o be c o n s i d e r e d o t h e r s t a t e s
th a t are r a th e r l e n i e n t in t h e ir r e g u la t io n o f d iv id en d s
from p a i d - i n s u r p l u s .
S u b je c t to r e s t r i c t i o n s
the c h a r t e r , In diana a llo w s the d i r e c t o r s
con tained in
t o pay d i v i d e n d s
"out o f th e su rp lu s ea r n in g s or n e t p r o f i t s or su rp lu s p aid
in in cash o f the c o r p o r a tio n . ? 3 4
problem i n d i c a t e s
Maine i n d i s c u s s i n g t h e
t h a t t h e s t o c k h o l d e r s o r d i r e c t o r s may
d e t e r m i n e what p a r t o f t h e c o n s i d e r a t i o n r e c e i v e d f o r s h a r e s
w i t h o u t par v a l u e s h a l l be c a p i t a l and "what p a r t o f s a i d
c o n s i d e r a t i o n s h a l l be p a i d - i n s u r p l u s a v a i l a b l e f o r d i v i н
dends and o t h e r c o r p o r a t e p u r p o s e s . " 3 3
S tates
t h a t , b y i n t e r p r e t a t i o n , p r o h i b i t or a l l o w
d i v i d e n d s from p a i d - i n s u r p l u s .
I n th e above d i s c u s s i o n c o n н
s i d e r a t i o n has b een g i v e n to th o se s t a t e s t h a t m en tio n the
payment o f d i v i d e n d s from p a i d - i n s u r p l u s o r d i s c u s s t h e p r o н
b lem o f d i v i d e n d s i n s u c h term s a s t o i n d i c a t e c l e a r l y t h a t
d i v i d e n d s m i g h t be p a i d from s u c h a s o u r c e , w i t h c e r t a i n r e -
1937.
34 C e r t a i n Laws C o n c e r n in g C o r p o r a t i o n s f o r P r o f i t ,
Ch. 2 1 5 , P t . I I , A r t . I , S e c . 1 2 .
S t a t e o f M aine, P r o v i s i o n s o f Law i n F o r c e R e l a t н
i n g t o B u s i n e s s C o r p o r a t i o n a . 1930 a s amended, Ch. 5 6 , S e c .
19.
33
strictio n s.
The r e m a i n i n g s t a t e s o f f e r s o m e t h i n g o f a p r o н
b lem i n c l a s s i f i c a t i o n .
In t h e f o l l o w i n g d i s c u s s i o n an
a t t e m p t w i l l be made t o i n t e r p r e t the la w s o f t h e s e s t a t e s .
I t m u st b e u n d e r s t o o d t h a t t h i s a n a l y s i s
but i t
i s b e l i e v e d t h a t the a n a l y s i s i s
is h yp o th etica l,
sound and l o g i c a l on
t h e b a s i s o f t h e w o r d in g o f the s t a t u t e s .
t o make t h i s
^.t i s n e c e s s a r y
t y p e o f i n t e r p r e t a t i o n s i n c e t o f a i l t o do so
w ould i g n o r e many s t a t e s and w ou ld o v e r l o o k a g r e a t p o t e n н
t i a l w ea k n e ss i n t h e c o r p o r a t i o n l a w s .
Many o f t h e s t a t e s ,
w h i l e t h e y make no m e n t i o n o f t h e s p e c i f i c p rob lem r e g a r d н
in g t h e a v a i l a b i l i t y o f p a i d - i n s u r p l u s f o r d i v i d e n d p u r p o s e s ,
cause c e r t a i n q u e stio n s to a r i s e :
(1)
I f a s t a t e b y la w a l l o w s d i v i d e n d s o n l y from p r o f i t or
e a r n i n g s , o r some s u c h s i m i l a r te r m , d o e s t h a t n o t I n н
d i r e c t l y b y i n f e r e n c e p r e v e n t the payment o f d i v i d e n d s
from p a i d - i n s u r p l u s ?
C le a r ly , p a i d - i n su rp lu s cannot
be c o n s i d e r e d e i t h e r p r o f i t o r e a r n i n g s .
group m ight be in c lu d e d s t a t e s
I n t h e same
t h a t u s e an a d j e c t i v e
t o m o d i f y t h e term s u r p l u s , t o i n d i c a t e t h a t a s u r p l u s
o th er than c o n t r ib u t e d su rp lu s i s b e in g c o n s id e r e d ;
e .g .,
(2 )
earned su r p lu s.
I f the la w p e r m i t s d i v i d e n d s from s u r p l u s or a c t u a l s u r н
p lu s,
e t c . , d o e s t h i s n o t p er s e e x c l u d e p a i d - i n s u r н
p lu s as a so u rce o f d iv id e n d s ?
(3 )
I f t h e s t a t u t e s a l l o w d i v i d e n d s from p r o f i t s a n d / o r an
237
e x c e s s o f the a g g r e g a t e o f a s s e t s o v e r t h e a g g r e g a t e
lia b ilitie s
plus s t a t e d c a p i t a l
( t h i s c o n c e p t may be
worded i n many d i f f e r e n t w a y s ) , o r i f o n l y a c a p i t a l
im pairm ent a n d / o r i n s o l v e n c y t e s t i s u s e d , and i f
t h e s t a t e d c a p i t a l i s n o t d e f i n e d as t h e c o n s i d e r a н
t i o n r e c e i v e d f o r s h a r e s , b u t r a t h e r a s the sum o f
t h e a g g r e g a t e amount o f t h e c o n s i d e r a t i o n r e c e i v e d
f o r s h a r e s h a v i n g par v a l u e and t h e a g g r e g a t e p o r н
t io n o f the c o n s id e r a tio n r e c e iv e d fo r shares w ith н
o u t par v a l u e as d e t e r m i n e d by t h e d i r e c t o r s ;
then
c a n n o t s u c h a p r o v i s i o n by i m p l i c a t i o n be v ie w e d a s
a l l o w i n g a d i v i d e n d from p a i d - i n s u r p l u s ?
p o sitiv ely ,
Q u ite
s u c h a s u r p l u s would be i n c l u d e d i n s u r н
p l u s a v a i l a b l e f o r d i v i d e n d s on t h e b a s i s o f t h e
c r i t e r i o n s e t f o r t h i n the l a w .
I n c o n s e q u e n c e o f t h e a s s u m p t i o n t h a t e a c h o f t h e above
q u e s t i o n s may be a n s w e r e d i n t h e a f f i r m a t i v e ,
s t a t e s may be c l a s s i f i e d
the rem aining
i n t o t h r e e g r o u p s . 3о The f i r s t
g r o u p , com posed o f A r i z o n a , New M e x i c o , M i s s o u r i , Montana,
N e b r a sk a , N orth D a k o t a , Oklahoma, S o u t h C a r o l i n a ,
k ota,
T e x a s , U ta h , and West V i r g i n i a , would n o t a l l o w d i v i н
dends from p a i d - i n s u r p l u s .
cut,
S o u th Daн
The s t a t e s
o f Alabama, C o n n e c t i н
Iow a, K e n t u c k y , M aryland, M a s s a c h u s e t t s , M i s s i s s i p p i ,
For d o c u m e n t a t i o n s u p p o r t i n g t h i s c l a s s i f i c a t i o n
s e e t h e c h a p t e r on d i v i d e n d s .
238
New Y o rk , N o r t h C a r o l i n a , Oregon, Rhode I s l a n d , Vermont and
t h e D i s t r i c t of* C olu m b ia, b e l o n g i n g t o t h e s e c o n d g r o u p ,
h a v e d i v i d e n d p r o v i s i o n s which make I t I m p o s s i b l e to make
any i n f e r e n c e r e g a r d i n g t h e s t a t u s o f . p a i d - i n s u r p l u s . L a s t н
ly ,
t h e t h i r d group., a p p a r e n t l y s a n c t i o n i n g , b y i n t e r p r e t a н
t i o n o f t h e d i v i d e n d p r o v i s i o n , d i v i d e n d s from p a i d - i n s u r - ,
p lu s in c lu d e s th e f o l l o w i n g : A rkansas, D elaw are, F l o r i d a ,
G e o r g i a , I d a h o , K a n s a s , Nevada, T e n n e s s e e ,
and W a s h in g to n .
A v a i l a b i l i t y o f p a id - in surplus f o r m isc e lla n e o u s
purposes.
Some o f t h e s t a t e s p r o v i d e f o r o t h e r u s e s to
w hich t h e b a l a n c e i n p a i d - i n s u r p l u s may be p u t .
a m p le , O h i o ^ a l l o w s
the b o a rd o f d i r e c t o r s
For e x н
to a p p l y p a i d - i n
s u r p l u s , o r any e x c e s s o f a s s e t s h ow e ver c r e a t e d , e x c e p t s u r н
p l u s from r e v a l u a t i o n ,
to t h e r e d u c t i o n or w r i t i n g o f f
any d e f i c i t i n t h e e a r n e d s u r p l u s a c c o u n t , o r to t h e w r i t i n g
o f f o f any p a r t i c u l a r l o s s .
n
i a
^
a n c i
In a s i m i l a r f a s h i o n , C a l i f o r н
I l l i n o i s ' - ^ a l l o w the b a la n c e i n the p a i d - i n
surн
p l u s a c c o u n t t o b e u s e d f o r w r i t i n g o f f any d e f i c i t a r i s i n g
from o p e r a t i o n s o r o t h e r l o s s e s o r from d i m i n u t i o n i n v a l u e
^ G e n e r a l and F o r e i g n C o r p o r a t i o n A c t s o f the S t a t e
o f O h i o , A n n o t a te d 1 9 3 9 .
Sec. 8623-38 ( e ) .
P e e r i n g 1s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a .
1 9 3 7 . D i v . 1 , P t . IV, T i t . 1 , Ch. X I , S e c . 346 ( c ) .
39 The B u s i n e s s C o r p o r a t i o n A c t ,
1937.
Sec. 60.
239
of its a ssets.
C a l i f o r n i a makes i t m and atory f o r d i s c l o н
s u r e s t o be made i n th e n e x t a n n u a l s t a t e m e n t i f
plus
su c h s u r н
is used.
S ection C
D e p l e t i o n and D i v i d e n d Payments
D e d u c t i o n f o r d e p l e t i o n o f was t i n g a s s e t s and t h e
payment o f d i v i d e n d s .
w h ic h s t a t e s
F ourteen sta te s^ о have a p r o v i s i o n
t h a t c o m p a n ie s e n g a g e d i n th e e x p l o i t a t i o n o f
w a s t i n g a s s e t s n e e d n o t d e d u c t t h e amount o f the d e p l e t i o n
o f such a s s e t s
dends.
i n d e t e r m i n i n g th e f u n d s a v a i l a b l e f o r d i v i н
T h is s t a t e m e n t may, o f c o u r s e , be m o d i f i e d by t h e i n н
so lv en cy t e s t .
The law p e r m i t s a c o r p o r a t i o n t o pay d i v i н
dends w i t h o u t making a c h a r g e f o r d e p l e t i o n u n d er t h e assum pн
t i o n t h a t t h e company w i l l d e p l e t e t h e a s s e t and w i l l n o t
n e e d t o r e t a i n c a s h or o t h e r a s s e t s t o b uy new a s s e t s .
The
e l i m i n a t i o n o f the charge f o r the d e p l e t i o n o f a p a r t i c u l a r
w a s t i n g a s s e t may be j u s t i f i e d l o g i c a l l y i f
t h a t the c o r p o r a t i o n h a s a s i t s
p l o i t a t i o n o f s u c h an a s s e t . '
p oration is
40
i t i s assumed
p r i n c i p a l p u r p o se t h e e x н
On t h e o t h e r h and,
if
the c o r н
t o c o n t i n u e o p e r a t i o n s by a c q u i r i n g new w a s t -
A rkansas, C a l i f o r n i a , D elaw are, G eorgia, Idaho,
I n d i a n a , K a n sa s, L o u i s i a n a , M i c h i g a n , M i n n e s o t a , Ohio,
P e n n s y l v a n i a , W a sh in g to n , and West V i r g i n i a .
240
ing a s s e t s
to e x p l o i t ,
the e l i m i n a t i o n o f such a charge
would h a r d l y seem j u s t i f i e d .
The e x a c t w o r d in g o f t h e s e
p ro v isio n s vary w id elyj fo r in sta n c e , f i r s t ,
in regard to
w h e th e r t h e c o r p o r a t i o n i s a l l o w e d t o e l i m i n a t e t h e d e p l e н
t i o n ch arge; such v a r i a t i o n s occur a s :
(a) o n ly i f
c l e s o f in c o r p o r a t io n a llo w such a c t i o n ;
(b)
if
the a r t i н
the a r t i c l e s
o f i n c o r p o r a t i o n do n o t r e s t r i c t t h e e l i m i n a t i o n o f su ch a
charge;
(c)
Secon d ly,
if
i t c a n be done w i t h o u t c h a r t e r p r o v i s i o n .
they vary in th e a d d it io n a l l i m i t a t i o n s
th a t are
im p o s e d , s u c h a s n o t i f i c a t i o n o f the s o u r c e o f t h e d i v i d e n d s ,
and i n t h e r i g h t s o f t h e c r e d i t o r s , a n d / o r s h a r e h o l d e r s .
T h irdly,
they d i f f e r
i n t h e r e g a r d t o t h e t y p e s o f a s s e t s to
be i n c l u d e d i n the term " w a s t i n g a s s e t s " o r " a s s e t s h a v i n g
a lim ited l i f e . "
The f i r s t b a s i s o f c l a s s i f i c a t i o n i s
lim ita tio n ;
that of charter
t h e s t a t e s may be d i v i d e d i n t o two g r o u p s : f i r s t ,
t h o s e t h a t p e r m i t the c h a r g e f o r d e p l e t i o n t o b e e l i m i n a t e d
when d e t e r m i n i n g s u r p l u s a v a i l a b l e f o r d i v i d e n d s , i f
c h a r t e r so p r o v i d e s , and s e c o n d ,
the
th o se t h a t a llo w the d e p l e н
t i o n c h a r g e to be o m i t t e d w i t h o u t m e n t i o n i n g t h e n e c e s s i t y
fo r charter p ro v isio n .
The group o f s t a t e s r e q u i r i n g t h a t
t h e c h a r t e r m ust s p e c i f i c a l l y p r o v i d e f o r t h e e l i m i n a t i o n of
th e d e d u c t i o n f o r d e p l e t i o n may be d i v i d e d i n t o
three subн
grou p s o r c l a s s e s , w hich w i l l be e x p l a i n e d i n the f o l l o w i n g
paragraph.
241
S ta te s re q u ir in g ch arter p r o v isio n b efo re p erm ittin g
the e x c l u s i o n o f d e p l e t i o n charge i n d e te r m in in g the sou rce
a v a ila b le for d iv id en d s.
The f i r s t c l a s s o f th e c h a r t e r
l i m i t a t i o n g r o u p i s composed o f f o u r s t a t e s , A r k a n s a s , 4 1
D e la w a r e ,K a n sa s
and West V i r g i n i a , 44 a l l o f whom have
t h e same i d e n t i c a l p r o v i s i o n , w h ic h r e a d s a s f o l l o w s :
S u b j e c t t o any r e s t r i c t i o n s i n i t s c h a r t e r , t h e
d i r e c t o r s o f any c o r p o r a t i o n e n g a g e d i n t h e e x p l o i t a t i o n
o f w a s t i n g a s s e t s may d e t e r m i n e t h e n e t p r o f i t s d e r i v e d ;
from t h e e x p l o i t a t i o n o f su c h w a s t i n g a s s e t s w i t h o u t
t a k i n g i n t o c o n s i d e r a t i o n t h e d e p l e t i o n o f su c h a s s e t s
r e s u l t i n g from l a p s e o f t im e o r from n e c e s s a r y consumpн
t i o n o f such a s s e t s i n c i d e n t a l to t h e i r e x p l o i t s t i o n . 45
Hence, i n t h e s e s t a t u t e s i f
t h e r e i s no p r o v i s i o n w h ich f o r н
b id s ig n o rin g the d e p l e t i o n ch arge,
d eterm in in g n e t p r o f i t s ;
i t may be i g n o r e d i n
in ad d itio n ,
t h e la w makes no a t н
tem pt t o i n d i c a t e o r d e f i n e t h e term " w a s t i n g a s s e t s . "
The s e c o n d c l a s s o f t h e c h a r t e r l i m i t a t i o n g r o u p i s
composed o f f o u r s t a t e s , whose common p r o v i s i o n i s s u c h t h a t .
P o p e 1s D i g e s t o f t h e S t a t u t e s o f A r k a n s a s , 1 9 3 7 .
Ch. 3 1 , A r t . IV, S e c . 2 1 8 3 .
4 2 G e n e r a l P r o v i s i o n s R e s p e c t i n g D o m e s t ic and F o r e i g n
C o r p o r a t i o n s C o n t a i n e d i n t h e G e n e r a l C o r p o r a t i o n Law o f th e
S t a t e o f D e l a w a r e , a s amended t o 1 9 3 7 . Ch. 6 5 , A r t . l , S e c . 3 4 .
43 s t a t e o f K a n s a s , S e s s i o n Laws. 1 9 3 9 . C h .1 5 2 , S e c . 82.
4 4 C o r p o r a t i o n Laws o f West V i r g i n i a . a d o p t e d b y th e
L e g i s l a t u r e , S p e c i a l S e s s i o n , March 1 9 3 0 w i t h amendments t o
d a t e o f i s s u e , J u l y 1 , 1 9 3 5 . Ch. 3 1 , A r t . 1 , S e c . 7 0 .
4 5 Loc c i t
242
t h e c h a r t e r must g i v e t h e d i r e c t o r s a u t h o r i t y t o i g n o r e d e н
p l e t i o n c h a r g e s i n d e t e r m i n i n g the amounts a v a i l a b l e f o r
d ivid en d s.
The s u p p l e m e n t a r y r e q u i r e m e n t s o f e a c h o f t h e s e
s t a t e s v a r y w i d e l y ; f o r e x a m p l e , G e o r g ia m e r e l y p r o v i d e s
that:
I f t h e c h a r t e r so p r o v i d e s , a c o r p o r a t i o n o r g a n iz e d '
s u b s t a n t i a l l y f o r the l i q u i d a t i o n o r e x p l o i t a t i o n o f
s p e c i f i c a s s e t s may pay d i v i d e n d s w i t h o u t ? making d e d u c н
t i o n f o r t h e d e p l e t i o n o f s u c h a s s e t s r e s u l t i n g from
t h e l a p s e o f tim e o r from the c o n s u m p t io n o r s a l e o f
such a s s e t s i n c i d e n t a l t o t h e i r e x p l o i t a t i o n . ^ 6
I t s h o u l d b e n o t i c e d t h a t t h i s p a s s a g e d o e s n o t expand o r
d e l i m i t t h e term ?^ s p e c i f i c a s s e t s ? , n o r d o e s i t
when a c o n c e r n i s
in d icate
t o be c o n s i d e r e d a s h a v i n g b e e n o r g a n i z e d
s u b s t a n t i a l l y f o r t h e l i q u i d a t i o n o r e x p l o i t a t i o n o f su ch
assets.
a
*y
O h i o ^ ' h a s a p r o v i s i o n somewhat s i m i l a r t o t h e q u o t a н
t i o n above e x c e p t t h a t t h e term ^ w a s t i n g a s s e t s ? I s u s e d ;
f u r t h e r m o r e , b e c a u s e o f an a d d i t i o n a l p a r a g r a p h ,
i t would
seem n e c e s s a r y f o r t h e d i r e c t o r s t o n o t i f y t h e s t o c k h o l d e r s
if
a d i v i d e n d were p a i d w i t h o u t t a k i n g i n t o c o n s i d e r a t i o n
the d ed u c tio n f o r d e p l e t i o n .
is
The la w r e g a r d i n g n o t i f i c a t i o n
as f o l l o w s :
A c t and R e s o l u t i o n s o f t h e G e n e r a l A ssembly o f t h e
S t a t e o f G e o r g i a , 1 9 3 7 - 1 9 3 8 . P t . I , T i t . I , S e c . 1 6 . Amendн
i n g S e c . 2 2 - 3 0 8 o f the Code o f G e o r g i a , 1 9 3 5 .
^
G e n e r a l and F o r e i g n C o r p o r a t i o n A c t s o f t h e S t a t e
o f O h i o , A n n o t a te d 1 9 3 9 . T i t . IX, D i v . I , c h . I , S e c . 8 6 2 3 - 3 8 b .
245
Whenever a d i v i d e n d i s p a i d , i n w hole o r i n p a r t ,
o u t o f o t h e r t h a n e a r n e d e x c e s s o f a s s e t s a p p e a r i n g on
t h e b o o k s o f t h e company a t t h e tim e o f t h e d e c l a r a t i o n
o f such d i v i d e n d s , the s h a r e h o l d e r s ' r e c e i v i n g such d i v i н
dend s h a l l be n o t i f i e d a s to i t s s o u r c e . 48
C learly,
t h e whole o f a d i v i d e n d p a i d w i t h o u t t a k i n g i n t o
c o n s i d e r a t i o n t h e d e p l e t i o n c h a r g e c o u l d n o t , u nd er a n y c i r н
c u m s t a n c e , be c o n s i d e r e d a d i v i d e n d o u t o f e a r n e d e x c e s s o f
a s s e t , f o r a p o r t i o n o f su c h a d i v i d e n d would be. m e r e l y an
amount r e p r e s e n t i n g an a l i q u o t p a r t o f t h e f i x e d a s s e t s c o n н
v e r te d into current a s s e t s
th e b u s i n e s s .
th r o u g h th e normal p r o c e s s o f .
C o n s e q u e n t l y , n o t i c e o f t h e s o u r c e o f the
d i v i d e n d would h av e t o be g i v e n to the s h a r e h o l d e r s .
L o u i s i a n a and I n d i a n a , c o m p o sin g t h e t h i r d c l a s s ,
in
a d d i t i o n t o the p r o v i s i o n r e g a r d i n g c h a r t e r l i m i t a t i o n h ave
two f e a t u r e s t h a t m e r i t c o n s i d e r a t i o n .
The L o u i s i a n a s t a t н
u te reads as fo llo w s:
I f t h e a r t i c l e s s o p r o v i d e , a c o r p o r a t i o n w hich owns
o r i s t o own w a s t i n g a s s e t s - i n t e n d e d f o r s a l e In the
o r d i n a r y c o u r s e o f b u s i n e s s , su ch f o r e x a m p le , as c o a l ,
o r o r e m i n e s , o r o i l , or g a s w e l l s , o r a c o r p o r a t i o n
w h ic h owns o r i s to own p r o p e r t y h a v i n g a l i m i t e d l i f e
s u c h a s a l e a s e f o r a term o f y e a r s , or p a t e n t s , may pay
d i v i d e n d s from t h e n e t p r o f i t s a r i s i n g from s u c h a s s e t s ,
w ith o u t d e d u c tio n f o r d e p r e c ia t io n or d e p l e t i o n o f
a s s e t s t h e r e b y s u s t a i n e d , s u b j e c t h o w e v e r , to t h e r i g h t s
o f s h a r e h o l d e r s o f d i f f e r e n t c l a s s e s . 49
48
49
Ib id . ,
Sec. 8623-38d.
G e n e r a l C o r p o r a t i o n Laws o f t h e S t a t e o f L o u i s i н
ana . 1 9 3 8 .
S e c . 26 ( V I ) .
T h is s t a t u t e i s much more p r e c i s e i n d e f i n i n g t h e term
" w a s t i n g a s s e t s , " and i n a d d i t i o n ' , adds t h e i t e m o f a s s e t s
having a lim it e d l i f e ,
and p a t e n t s .
su c h as l e a s e s f o r a term o f y e a r s
A lso t h i s s t a t e
as d e p l e t i o n as f a c t o r s
a tio n .
in clu d es d e p r e c ia tio n as w e ll
t h a t n e e d n o t he t a k e n i n t o c o n s i d e r н
I t i s assu m ed t h a t t h e u s e o f t h i s term d o e s n o t
a p p ly to the a s s e t s m en tion ed i n the b e g in n in g o f th e s e n н
t e n c e , f o r s u c h a s s e t s as m in e s and w e l l s do n o t , s t r i c t l y
sp ea k in g , d e p r e c ia t e , but are d e p le t e d .
For t h a t m a t t e r ,
t h e a c c o u n t a n t , when s p e a k i n g t e c h n i c a l l y , d o e s n o t s p e a k o f
the l o s s
i n v a l u e o f p a t e n t s and l e a s e h o l d s a s e i t h e r d e p r e н
c i a t i o n or d e p l e t i o n , but r a t h e r as a m o r t iz a t io n .
be a ssu m e d , h o w e v e r ,
I t m ust
t h a t the I n c l u s i o n o f t h e term d e p r e c i a н
t i o n i n t h e p o s i t i o n w h ich i t o c c u p i e s was m ean t to a p p l y to
the f i x e d й p eratin g a s s e t s u sed in e x p l o i t i n g the w a stin g
a s s e t s , and t h a t t h e d e p r e c i a t i o n o f s u c h a s s e t s n e e d n o t be
c o n sid e r e d in d eterm in in g d iv id e n d s .
The wisdom o f i n c l u d н
i n g ' l e a s e h o l d s and p a t e n t s as w a s t i n g a s s e t s m i g h t be q u e s н
t i o n e d , u n l e s s t h e company h a s a p a r t i c u l a r l e a s e o r a p a r t i н
c u l a r p a t e n t w h ich i s
so f u n d a m e n t a l , t o t h e o p e r a t i o n o f t h e
b u s i n e s s t h a t i t would have to l i q u i d a t e a t t h e e x p i r a t i o n
o f such a s s e t .
The l a s t p h r a s e o f t h e s e c t i o n ,
" s u b je c t to
the r i g h t s o f sh a r e h o ld e r s o f d i f f e r e n t c l a s s e s , " has not
b e e n i n c l u d e d i n any o f t h e p r e v i o u s s t a t u t e s d i s c u s s e d .
T h is i s an i m p o r t a n t r e s t r i c t i o n b e c a u s e i f t h e d i r e c t o r s
245
c a r r ie d out a d iv id en d p o lic y w ithou t ta k in g in to c o n sid e r a н
tio n th is r e s t r ic t io n ,
ing p r e f e r e n t i a l r i g h t s
it
i s p o s s ib le th a t sh arehold ers havн
t o t h e a s s e t s a t t h e tim e o f l i q u i d н
a t i o n o f t h e company m i g h t f i n d a t t h e time o f f i n a l s e t t l e н
ment t h a t t h e r e were no a s s e t s a v a i l a b l e t o pay s u c h s h a r e s .
T h is, o f c o u r s e ,
i s an e x t r e m e i l l u s t r a t i o n , b u t s t i l l
a c o n d i t i o n i s n o t e n t i r e l y im p o s s ib le or im probable.
su c h
It
m ust be remembered t h a t when d i v i d e n d s a r e p a i d w i t h o u t p r o н
v i d i n g a c h a r g e f o r d e p r e c i a t i o n o r d e p l e t i o n i n the p r o f i t
and l o s s s t a t e m e n t p r i o r to t h e d e t e r m i n a t i o n o f t h e p r o f i t ,
t h e r e w i l l be no r e s e r v e f o r d e p r e c i a t i o n o f t h e a s s e t s s e t
up o r d e d u c t e d from t h e a s s e t s a c c o u n t .
I f the a v a i l a b i l i t y
o f s u r p l u s f o r d i v i d e n d p u r p o s e s i s d e t e r m i n e d b y t h e form н
u la o f e x c e s s o f a g g r e g a te a s s e t s over the a g g r e g a te l i a b i l i н
ties
and s t a t e d c a p i t a l , d i v i d e n d s p a i d u n d e r s u c h c o n d i t i o n s
c o n s t i t u t e p a r t l y a d i s t r i b u t i o n o f the ea r n in g s or e x c e s s
a s s e t s w h ic h a r e presumed t o b e e a r n e d , e x c l u d i n g f o r the
moment su ch i t e m s a s d i v i d e n d s from u n r e a l i z e d a p p r e c i a t i o n
and p a i d - i n s u r p l u s , e t c . ,
and t h e r e m a i n d e r o f t h e d i v i d e n d
i s fundam entally a l i q u i d a t i n g d iv id en d .
fore,
I t w o u ld ,
thereн
seem a w i s e p r e c a u t i o n t o i n c l u d e some l i m i t a t i o n ,
s u c h a s t h e L o u i s i a n a la w h a s I n c l u d e d , r e g a r d i n g t h e r i g h t s
o f the sh areh old ers o f d i f f e r e n t c l a s s e s .
246
Indiana^о h a s a p r o v i s i o n s u b s t a n t i a l l y t h e same a s
t h a t o f L o u i s i a n a w i t h th e f o l l o w i n g e x c e p t i o n s :
1 . The term " d e p r e c i a t i o n " i s o m i t t e d , and the problem
of lo ss
i n v a l u e o f b o t h w a s t i n g a s s e t s and a s s e t s o f a
lim ited l i f e
i s c l a s s i f i e d as d e p l e t i o n in th e f o l l o w i n g
w ords: " d e p l e t i o n o f s u c h a s s e t s by s a l e or l a p s e o f t i m e . "
2.
The l i m i t a t i o n i n r e g a r d t o t h e payment? o f d i v i - -
dends u n d e r s u c h c i r c u m s t a n c e s i s
" s u b je c t to the r i g h t o f
s h a r e h o l d e r s o f d i f f e r e n t c l a s s e s and s u b j e c t to r i g h t s o f
cr ed ito rs."
T h is s t a t u t e
are l i a b l e
u te,
th u s e l i m i n a t e s c e r t a i n o f t h e p h r a s e s w hich
to c r e a t e m i s u n d e r s t a n d i n g i n t h e L o u i s i a n a s t a t н
and adds an a d d i t i o n a l l i m i t a t i o n w h ich s e e k s t o s a f e н
gu a r d t h e c r e d i t o r s as w e l l as t h e s t o c k h o l d e r s from e x c e s н
s i v e d i v i d e n d s , w h ic h m i g h t l e a d t o a weakened f i n a n c i a l c o n н
d i t i o n and u l t i m a t e i n s o l v e n c y o f t h e c o r p o r a t i o n .
S t a t e s n o t requiring: c h a r t e r p r o v i s i o n b e f o r e p erm itн
ting; e x c l u s i o n o f t h e d e p l e t i o n c h a r g e .
grou p c o m p r i s e s t h o s e s t a t e s
The s e c o n d main
t h a t h a v e no r e q u i r e m e n t r e g a r d н
i n g c h a r t e r l i m i t a t i o n s , b u t may or may n o t h a v e c e r t a i n
o t h e r r e s t r i c t i o n s l i m i t i n g t h e payment o f d i v i d e n d s when
'the c o s t o f d e p l e t i o n h a s n o t b e e n d e d u c t e d .
This g ro u p may
^ C e r t a i n Laws C o n c e r n in g Corpora t i o n s f o r P r o f i t ,
1 9 3 7 . Ch. 2 1 5 , P t . I I , A r t . 1 , S e c . 1 2 .
247
be d i v i d e d i n t o t h r e e c l a s s e s .
The f i r s t c l a s s i s r e p r e s e n t н
ed by t h e law s o f C a l i f o r n i a and M i n n e s o t a .
The e x a c t wordн
ing o f the C a l i f o r n i a p r o v i s i o n i s as i n d i c a t e d :
A w a s t i n g a s s e t c o r p o r a t i o n , tha t i s a c o r p o r a t i o n
engaged s o l e l y or s u b s t a n t i a l l y in the e x p l o i t a t i o n o f
m i n e s , o i l w e l l s , g a s w e l l s , p a t e n t s or o t h e r w a s t i n g
a s s e t s , or o rg a n ized s o l e l y or s u b s t a n t i a l l y to liq u id a te
s p e c i f i c a s s e t s , may d i s t r i b u t e the n e t income d e r i v e d
from t h e e x p l o i t a t i o n o f su ch w a s t i n g a s s e t s or the n e t
p r o c e e d s d e r i v e d from su c h l i q u i d a t i o n w i t h o u t making
any d e d u c tio n or a llo w a n ce f o r th e d e p l e t i o n o f such
a s s e t s i n c i d e n t a l to t h e l a p s e o f t i m e , c o n s u m p t i o n ,
l i q u i d a t i o n , o r e x p l o i t a t i o n ; s u b j e c t , however,- to a d e н
q u a t e p r o v i s i o n f o r m e e t i n g d e b t s and l i a b i l i t i e s and
t h e l i q u i d a t i o n p r e f e r e n c e s o f o u t s t a n d i n g s h a r e s and t o
n o t i c e t o s h a r e h o l d e r s t h a t no d e d u c t i o n s o r a l l o w a n c e
h a s b e e n made f o r su ch d e p l e t i o n . 51
T h is p r o v i s i o n d o e s n o t r e q u i r e a s p e c i a l c l a u s e In t h e a r t i н
c l e s o f i n c o r p o r a t i o n g i v i n g t h e b oard o f d i r e c t o r s
to ign ore d e p l e t i o n .
q u ite in c lu s iv e ;
the r i g h t
In i t s g e n e r a l f e a t u r e s t h e la w i s .
i t r e q u ir e s n o t o n ly the i n t e r e s t o f c r e d i н
t o r s and s t o c k h o l d e r s h a v i n g l i q u i d a t i o n p r e f e r e n c e s be c o n н
s i d e r e d , b u t a l s o r e q u i r e s n o t i c e t o be g i v e n to s t o c k h o l d e r s
as t o t h e f a c t t h a t t h e d i v i d e n d r e c e i v e d i s n o t e n t i r e l y an
earned d iv id e n d .
The M i n n e s o t a s t a t u t e ^ h a s e s s e n t i a l l y
t h e same m ean ing w i t h t h e ad ded s t a t e m e n t t h a t n o t i c e o f the
f a c t t h a t no d e d u c t i o n f o r d e p l e t i o n h a s b e e n made m ust be
Peering: *s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a ,
1 9 5 7 . D i v . 1 , P t . IV, T i t . 1 , Ch. X I , S e c . 5 4 6 .
1955.
52 M in n e s o t a B u s i n e s s
Ch. 5 0 0 , S e c . 2 1 V.
C o r p o r a t i o n A c t . a s amended t o
248
g i v e n a t t h e tim e o f e a c h d i s t r i b u t i o n .
The s e c o n d c l a s s
i n t h i s m ain g rou p I s r e p r e s e n t e d by-
P e n n s y l v a n i a and W a sh in g to n ;
t h e law o f t h e l a t t e r s t a t e i s
as f o l l o w s :
A c o r p o r a t i o n w hich owns w a s t i n g a s s e t s I n t e n d e d f o r
s a l e in the o r d in a r y cou rse o f b u s i n e s s , such as m in e s,
o r o i l or g a s w e l l s , or t i m b e r , o r a c o r p o r a t i o n w hich
owns p r o p e r t y h a v i n g a l i m i t e d l i f e , s u c h as a l e a s e
f o r a term o f y e a r s , o r p a t e n t s , n e e d n o t d e d u c t the
d e p l e t i o n o f s u c h a s s e t s by s a l e o r l a p s e o f tim e i n
t h e c o m p u t a t i o n o f the fund a v a i l a b l e f o r d i v i d e n d s , and
s u c h a c o r p o r a t i o n may pay d i v i d e n d s from the n e t p r o н
f i t s a r i s i n g from i t s b u s i n e s s w i t h o u t d e d u c t i o n o f s u c h
d e p l e t i o n , s u b j e c t , h o w e v e r , t o t h e r i g h t s o f the s h a r e н
h o l d e r s o f d i f f e r e n t c l a s s e s . 53
T h is p a s s a g e I s i d e n t i c a l w i t h t h e U n ifo r m B u s i n e s s C orporaн
t i o n A c t ^ and I n f a c t , v a r i e s v e r y l i t t l e
n i a and M i n n e s o t a a c t s ,
from the C a l i f o r н
e x c e p t t h a t i t d o e s n o t make su ch
d i v i d e n d s s u b j e c t tq the r i g h t s o f c r e d i t o r s and d o e s n o t
r e q u i r e t h a t n o t i c e be g i v e n t o t h e s t o c k h o l d e r s a t t h e tim e
o f payment o f s u c h d i v i d e n d s .
The P e n n s y l v a n i a s t a t u t e , о ^
xvhile i t d o e s n o t h a v e the same p h r a s e o l o g y , h a s a m eaning
essen tia lly
s i m i l a r t o t h a t o f W a s h in g to n .
The t h i r d c l a s s i n t h i s
55
s e c t io n in clu d es
those s t a t e s
Laws C o n c e r n in g P r i v a t e C o r p o r a t i o n s . S e c . 3 8 0 3 -
24 ( 7 ) .
U n ifo r m B u s i n e s s C o r p o r a t i o n A c t .
55
Sec. 24, VII.
Purdon* s P e n n s y l v a n i a S t a t u t e s . A n n o t a te d Permanн
ent E d itio n 1938.
T i t . 1 3 - 1 5 , T i t . 1 5 , Ch. 49B, A r t . V I I ,
Sec. 2852-701.
249
t h a t h a v e no c h a r t e r r e q u i r e m e n t s c o n c e r n i n g s h a r e h o l d e r s
o r c r e d i t o r s r i g h t s or n o t i f i c a t i o n o f t h e s o u r c e o f the
d ivid en d s.
M i c h i g a n has' p r o b a b l y t h e m o st s u c c i n c t s t a t e н
ment o f any s t a t e ;
i t appears as f o l l o w s :
N o t h in g i n t h i s ' a c t 'c o n t a i n e d s h a l l p r e v e n t a c o r p o r н
a t i o n , whose b u s i n e s s c o n s i s t s s u b s t a n t i a l l y o f the e x н
p l o i t a t i o n o f w a s t i n g a s s e t s , from p a y i n g d i v i d e n d s
w i t h o u t making d e d u c t i o n f o r t h e d e p l e t i o n o f s u c h
a s s e t s r e s u l t i n g from l a p s e o f t im e o r from the consumpн
t i o n or s a l e o f such a s s e t s i n c i d e n t a l to t h e i r e x p l o i t - '
ation.56
T h is s e c t i o n h a s no e x c e p t i o n s and i n d i c a t e s no n e e d f o r
charter p r o v isio n s.
In o t h e r w o r d s ,
it
is
the m o st a l l i n н
c l u s i v e o f any s e c t i o n r e v i e w e d so f a r .
F in a lly ,
c o n s i d e r a t i o n m ust be g i v e n t o t h e p r o v i s i o n s
o f Idaho w h ic h h a s one r a t h e r u n u s u a l f e a t u r e a s i n d i c a t e d
below :
7 . The d i r e c t o r s o f any c o r p o r a t i o n e n g a g e d i n t h e
e x p l o i t a t i o n o f w a s tin g a s s e t s such as m in e s, o i l o r gas
w e l l s , s t a n d i n g t i m b e r , or owning p r o p e r t y h a v i n g a
l i m i t e d l i f e s u c h as l e a s e s f o r y e a r s , or p a t e n t s , o r
o w ning o t h e r w a s t i n g a s s e t s i n t e n d e d f o r l i q u i d a t i o n and
s a l e i n th e o r d i n a r y c o u r s e o f b u s i n e s s , may d e t e r m i n e
t h e a n n u a l n e t p r o f i t s d e r i v e d from t h e e x p l o i t a t i o n o f
such w a stin g a s s e t s w ith o u t ta k in g i n t o c o n s id e r a t i o n
t h e d e p l e t i o n o f s u c h a s s e t s r e s u l t i n g from l a p s e o f
tim e o r from n e c e s s a r y c o n s u m p t io n o f s u c h a s s e t s i n c i н
d e n t a l to t h e i r e x p l o i t a t i o n , and w i t h o u t t a k i n g i n t o
c o n s i d e r a t i o n d e p r e c i a t i o n o f p l a n t and e q u ip m en t o t h e r
t h a n t o make p r o v i s i o n f o r i t s m a i n t e n a n c e d u r i n g th e
l i f e or e x p e c te d l i f e o f the o p e r a t i o n s .
. I n t h e c a s e o f a c o r p o r a t i o n e n g a g e d i n the e x н
p l o i t a t i o n o f w a s t i n g a s s e t s , a f t e r t h e p l a n t and e q u i p 8
S e c .22.
56 s t a t e
o f M ic h ig a n , G e n e r a l C o r p o r a t io n Laws. 1 9 3 8 .
250
ment h as b e e n d e p r e c i a t e d , t h e d e p r e c i a t i o n r e s e r v e may
be u s e d b y t h e d i r e c t o r s f o r t h e payment o f d i v i d e n d s ,
p r o v i d e d t h e d i r e c t o r s may s e t a s i d e o u t o f any f u n d s
o f the c o r p o r a t io n a v a i l a b l e f o r d iv id e n d s a r e s e r v e or
r e s e r v e s f o r any p r o p e r p u r p o se and may a b o l i s h s u c h
r e s e r v e s by r e s o l u t i o n . о ?
T h is s t a t u t e names s p e c i f i c a l l y s t a n d i n g t im b e r w h i c h , w h i l e
n o t named i n t h e o t h e r s t a t u t e s ,
im p lica tio n .
i s p r o b a b l y i n c l u d e d by
The L o u i s i a n a p r o v i s i o n m akin g i t u n n e c e s s a r y
to take i n t o c o n s i d e r a t i o n d e p r e c i a t i o n has been spoken o f
a b o v e , and i n the s t a t u t e o f Id aho t h e r e a p p e a r s a r e c u r r e n c e
o f t h e same i d e a , b u t t h e r e i n i t
p o s i t i v e l y and d e f i n i t e l y .
i s e x p r e s s e d much more
The law s t i p u l a t e s
that depreн
c i a t i o n o f the a s s e t s u sed i n the e x p l o i t a t i o n o f th e w a s tн
in g a s s e t s need n o t be ta k en in t o c o n s i d e r a t i o n , b u t p r o v iн
s i o n must b e made f o r m a i n t a i n i n g t h e a s s e t s d u r i n g t h e e x н
pected l i f e
o f th e-w astin g a s s e ts
th at are b ein g e x p l o i t e d .
The n e x t p a r a g r a p h , S e c t i o n 2 9 ?1 2 9 ( 8 ) , c o n t a i n s a m o s t u n н
usual p ro v ision .
A f t e r the p l a n t and e q u ip m e n t o f a c o r p o r н
a t i o n engaged in e x p l o i t a t i o n o f w a stin g a s s e t s has been
c o m p l e t e l y d e p r e c i a t e d , the' d i r e c t o r s may pay d i v i d e n d s o u t
o f the d e p r e c i a t i o n r e s e r v e s .
fo r d ep reciation is
The u s u a l method o f p r o v i d i n g
to d e b i t or charge the D e p r e c ia t io n
A c c o u n t , an e x p e n s e a c c o u n t w h ich i s d e d u c t e d i n t h e p r o f i t
and l o s s a c c o u n t t o d e t e r m i n e the n e t p r o f i t s ,
57 Idaho C od e. 1 9 3 2 .
T it.
29,
C h .l,
and t h e c o n t r a
Sec.
2 9 - 1 2 9 ( 7 and 8).
251
en try to
t h i s d e b i t i s a c r e d i t to t h e R e s e r v e f o r D e p r e c i a н
t i o n A c c o u n t , a v a l u a t i o n r e s e r v e a c c o u n t w h ich i s d e d u c t e d
from t h e c o s t v a l u e o f t h e a s s e t to d e t e r m in e , t h e d e p r e c i a t н
ed v a l u e o f t h e a s s e t .
However, i f t h e c o r p o r a t i o n i s n o t
g o in g to d ed u c t the d e p r e c i a t i o n to determ in e the p r o f i t s ,
a s a l l o w e d b y t h e l a w q u o t e d , s u c h an e n t r y as d i s c u s s e d
above i s u s e l e s s and w o u ld n o t be made.
H e n c e , the d e p r e н
c i a t i o n r e s e r v e would n o t b e on the b o o k s , and c o u l d n o t be
used fo r d ivid en d purposes.
I t would a p p e a r t h a t the l a w н
makers h a v e c o n f u s e d . t h e R e s e r v e f o r D e p r e c i a t i o n w i t h a
su rp lu s r e s e r v e .
A ctu ally , of course,
it
is
pay a d i v i d e n d o u t o f a v a l u a t i o n r e s e r v e .
im p o s s ib le to
Such a r e s e r v e
h a s b e e n s e t up f o r the p u r p o s e o f sh o w in g a d e c r e a s e i n t h e
v a lu e o f the a s s e t ,
and t h e e n t r y h a s b e e n made t o a s e p a r a t e
r e s e r v e acc o u n t i n s t e a d o f b e in g c a r r i e d to the a s s e t a c н
count as a d e d u c tio n .
This r e s e r v e a c c o u n t i s n o t a fun d o f
cash a v a ila b le fo r d iv id en d s, rath er i t s
s o l e purpose i s
to
v a l u e an a s s e t b y b e i n g d e d u c t e d from the c o s t v a l u e o f t h e
assert.
T h is e i g h t h s e c t i o n ,
t h e n , c o u l d o n l y be u s e d i f a
c o r p o r a t i o n had n o t a v a i l e d i t s e l f o f t h e r i g h t t o i g n o r e
d e p r e c i a t i o n o f t h e o p e r a t i n g p l a n t and had d e p r e c i a t e d comн
p l e t e l y t h e p l a n t and t h e n had t r a n s f e r r e d t h e c r e d i t i n t h e
d e p r e c ia t io n r e s e r v e to the su rp lu s a c c o u n t.
An e n t r y o f
t h a t k i n d would be m o st u n u s u a l and a t th e b e s t w o u ld seem
to w a r r a n t n o t i f i c a t i o n t o t h e s t o c k h o l d e r s ; y e t t h i s i s n o t
252
req u ired .
S t a t e s h a v i n g no p r o v i s i o n c o n c e r n i n g d e p l e t i o n o f
w asting a s s e t s .
T h i r t y - f o u r s t a t e s ^ о and t h e D i s t r i c t o f
Columbia have no p r o v i s i o n d e a l i n g w i t h the d e p l e t i o n o f
w a stin g a s s e t s or a s s e t s h aving a l i m i t e d l i f e .
S ectio n D
M iscellan eou s P ro v isio n s
and D i v i d e n d Payments
A d d i t i o n a l l i m i t a t i o n s on t h e payment o f d i v i d e n d s .
I n a d d i t i o n t o th e l i m i t a t i o n s p r e v i o u s l y d i s c u s s e d r e l a t i n g
to t h e payment o f d i v i d e n d s ; v i z . ,
l i m i t a t i o n s b a s e d on c a p i н
t a l im pairm en t a n d / o r i n s o l v e n c y , named s o u r c e s o f d i v i d e n d
paym ent, t h e a v a i l a b i l i t y o f s p e c i a l s u r p l u s e s su ch a s p a i d i n s u r p l u s , l i m i t a t i o n b a s e d on t h e e x c l u s i o n o f u n r e a l i z e d
ap p reciation o f a s s e t s ,
p r o v i s i o n p e r m i t t i n g d i v i d e n d p ayн
m ents w i t h o u t p r o v i d i n g f o r d e p l e t i o n o f w a s t i n g a s s e t s and
the need f o r n o t i f i c a t i o n r e g a r d in g the so u r c e o f d iv id e n d s
58
Alabama, A r i z o n a , C o l o r a d o , C o n n e c t i c u t , F l o r i d a ,
I l l i n o i s , Iow a , K e n t u c k y , M aine, M arylan d, M a s s a c h u s e t t s ,
M i s s i s s i p p i , M i s s o u r i , Montana, N e b r a s k a , Nevada, New Hampн
s h i r e , New J e r s e y , New M e x ic o , New York, N o r t h ^ C a r o l i n a ,
N orth D a k o t a , Oklahoma, Oregon, Rhode I s l a n d , S o u t h C a r o l i n a ,
S o u t h D a k o t a , T e n n e s s e e , T e x a s , U t a h , Vermont, V i r g i n i a ,
W i s c o n s i n , and Wyoming.
255
u n d er c e r t a i n c a s e s ,
there are o th e r r e s t r i c t i o n s
p l a c e d on t h e payment o f d i v i d e n d s .
th a t are
While t h e r e i s l i t t l e
u n if o r m it y or u n an im ity r e g a r d in g t h e s e m is c e lla n e o u s p roн
v isio n s,
t h e y a r e i m p o r t a n t from the v i e w p o i n t o f t h e i r u n н
usual ch aracter.
P ro v isio n s regard in g r e s e r v e s .
Some s t a t u t e s p r o v i d e
l e g a l s a n c t i o n f o r t h e common c o r p o r a t e p r a c t i c e o f a p p r o н
p r i a t i n g or s e t t i n g a s i d e o u t o f t h e s u r p l u s a c c o u n t s p e c i a l
reserves.
The p u r p o se o f s u c h a p r o c e d u r e i s t o r e d u c e t h e
b a l a n c e o f t h e e a r n e d s u r p l u s a c c o u n t and i n t h i s way r e н
duce to some e x t e n t the s t o c k h o l d e r s demands f o r d i v i d e n d s ,
which,
i n t h e o p i n i o n o f t h e d i r e c t o r s , m i g h t n o t be w a r r a n t н
ed b e c a u s e o f an u n s a t i s f a c t o r y c a s h p o s i t i o n , or b e c a u s e o f
a n eed f o r c a s h to a c q u i r e ?c e r t a i n f i x e d o r c u r r e n t a s s e t s .
The e a r m a r k i n g , o r s e t t i n g a s i d e o f a s p e c i a l s u r p l u s may
a l s o be r e q u i r e d b y a bond i n d e n t u r e t o s e r v e a s an a d d i н
t i o n a l p r o t e c t i o n f o r the h o l d e r s o f t h e l o n g tim e f i x e d
o b l i g a t i o n s o f t h e company.
Seven s t a t e s , A rkansas, D elaw are, Idaho, Kansas,
M i c h i g a n , O h io, and S o u t h C a r o l i n a , p r o v i d e f o r the
a s i d e o f r e s e r v e s ou t o f the s u r p l u s .
settin g
The s t a t e s o f Arkan-
254
s a s ^ 9 and D e l a w a r e , 60 h a v e p r o v i s i o n s as f o l l o w s :
N o th in g c o n t a i n e d i n t h e S e c t i o n s h a l l p r e v e n t t h e
s t o c k h o ld e r s o f any c o r p o r a t io n , o r the d i r e c t o r s t h e r e н
o f i f the C e r t i f i c a t e o f I n c o r p o r a t io n s h a l l so p r o v id e ,
from s e t t i n g a p a r t o u t o f any o f t h e f u n d s o f t h e c o r н
p o r a t i o n a v a i l a b l e f o r d i v i d e n d s a r e s e r v e or r e s e r v e s
f o r any p r o p e r p u r p o s e o r from a b o l i s h i n g any s u c h r e н
s e r v e i n t h e manner i n w hich i t was c r e a t e d . b l
The s t a t e s o f I d a h o , K a n s a s , M i c h i g a n , and Ohio have e s s e n н
tia lly
t h e same p r o v i s i o n a s above e x c e p t t h a t t h e power i s
g r a n t e d t o t h e s t o c k h o l d e r s o r d i r e c t o r s s u b j e c t to r e s t r i c н
t i o n s c o n t a i n e d i n the a r t i c l e s o f i n c o r p o r a t i o n i n the
K a n s a s ^ l a w , and t o t h e d i r e c t o r s and s t o c k h o l d e r s ,
a rticles
so p r o v i d e ,
i n t h e Michiganо^ s t a t u t e .
if
the
The la w i n
Idahoо^ and Ohioо^ g r a n t s t h e power to t h e d i r e c t o r s .
The
la w o f t h e s t a t e o f S o u t h C a r o l i n a i s n o t a s d e f i n i t e a s i s
^
P o p e15 D i g e s t o f t h e S t a t u t e s o f t h e S t a t e o f
Arkansas, 1957.
Ch. 3 1 , A r t . IV, S e c . 2 1 8 3 .
60 G e n e r a l P r o v i s i o n s R e s p e c t i n g D o m e s t ic and F o r e i g n
C o r p o r a t i o n s C o n t a i n e d i n t h e Genera1 C o r p o r a t i o n Law o f t h e
S t a t e o f D e l a w a r e ,? a s amended t o 1 9 3 7 . Ch. 6 5 , A r t . 1 , S e c .
?61 L o c . c i t .
83.
62 s t a t e o f K a n s a s , S e s s i o n Laws. 1 9 3 9 . Ch. 1 5 2 , S e c .
----------------------
Sec 22
^
S t a t e o f M i c h i g a n , G e n e r a l C o r p o r a t i o n Laws, 1 9 3 8 .
64
Idaho C ode. 1 9 3 2 . T i t . 2 9 , -Ch. 1 , S e c . 2 9 - 1 2 9 .
65 G e n e r a l and F o r e i g n C o r p o r a t i o n A c ts o f the S t a t e
o f O h i o . A n n o t a t e d 1 9 3 9 . T i t . IX, D i v . I , Ch. 1 , S e c . 8 6 2 3 38(f).
255
the p r o v is io n in the o th er s t a t e s .
The p r o v i s i o n a p p e a r s
as f o l l o w s :
I t s h a l l b e u n l a w f u l f o r any i n c o r p o r a t e d company t o
pay any d i v i d e n d on t h e c a p i t a l s t o c k o f su ch company,
u n l e s s t h e same s h a l l h a v e b e e n a d e q u a t e l y e a r n e d o r
a r e p a i d o u t o f s u r p l u s h e r e t o f o r e e a r n e d and n o t s e t
a s i d e f o r a s p e c i a l p u r p o s e , upon the a p p r o v a l o f the
s t o c k h o l d e r s o f the i n c o r p o r a t e d company t o be a f f e c t н
ed. 66
The manner i n w h ich t h e p r o v i s i o n i s made a l l o w i n g
th e s e t t i n g a p a r t o f a r e s e r v e o u t o f t h e s u r p l u s a v a i l a b l e
f o r d i v i d e n d s seems t o i n d i c a t e t h a t t h e terms fu n d and r e н
s e r v e a r e t h o u g h t t o be synonym ous.
The words a r e n o t u s e d
i n t h e t e c h n i c a l s e n s e i n w h ic h t h e y w ould be c u s t o m a r i l y
u n d er sto o d by the a c c o u n t a n t .
What i s a c t u a l l y meant i s
t h a t a c e r t a i n p o r t i o n o f t h e s u r p l u s may be t r a n s f e r r e d t o
a s p e c i a l s u r p l u s a c c o u n t , w h ich s u r p l u s , p r e s u m a b l y , w i l l
n o t be a v a i l a b l e f o r d i v i d e n d s .
The p o i n t o f c o n f u s i o n i s
one t h a t p r o b a b l y i n v o l v e s n o t o n l y t h e c o n f u s i o n ' - b e tw een a
r e s e r v e and a f u n d , b u t i n a l l l i k e l i h o o d a r i s e s o u t o f th e
l e g i s l a t o r s v i e w tba t s u r p l u s and c a s h a r e one and the same;
that i s ,
t h a t a l l p r o f i t s an d i t s
a c c u m u l a t i o n i n the s u r н
p l u s a c c o u n t i s h e l d i n t h e form o f c a s h .
T h is f a l s e a s н
s u m p t io n i s one o f t h e m o s t common and one o f t h e m o st p e r н
n ic io u s types o f e r r o r s , f o r i t
i n e v i t a b l y l e a d s to a m i s -
Code o f haws o f S o u t h C a r o l i n a . 1 9 3 2 .
Ch. 7 0 , S e c . 1 3 5 3 .
T it. 21,
256
u n d e r s t a n d i n g o f t h e a b i l i t y o f a f i r m t o pay a d i v i d e n d .
I n the b a s i c a c c o u n t i n g e q u a t i o n ,
A s s e t s ? L i a b i l i t i e s +- Net Worth
C apital
Stock
i t is
S u r p lu s
im p o s s ib le to c r o s s the e q u a l i t y s i g n in the e q u a tio n
and d e t e r m i n e what p a r t i c u l a r d e b i t c o r r e s p o n d s to a g i v e n
c r e d i t In t h e s u r p l u s a c c o u n t .
The s u r p l u s may h a v e b e e n
r e i n v e s t e d i n i n v e n t o r y o r f i x e d a s s e t s and t h e r e f o r e n o t
a p p e a r i n the form o f c a s h .о ^
P r o v i s i o n s r e g a r d i n g w ork in g c a p i t a l .
Three s t a t e s
h ave s p e c i f i c p r o v i s i o n s making q u i t e d e f i n i t e the r i g h t o f
t h e s t o c k h o l d e r s o r d i r e c t o r s t o d e t e r m i n e t h e w ork in g c a p i н
t a l o f a concern;
i.e .,
t h e amount o f t h e e x c e s s o f t h e c u r н
r e n t a s s e t s over the c u rr en t l i a b i l i t i e s .
While t h e power
i s u n d o u b t e d l y i m p l i e d i n the la w s o f t h e o t h e r s t a t e s ,
it
i s made v e r y e x p l i c i t i n t h e la w s o f New J e r s e y , New M e x ic o ,
and N orth C a r o l i n a .
The p r o v i s i o n i s worded a s f o l l o w s i n
t h e s t a t u t e o f New J e r s e y :
67 I t m ust be remembered t h a t i n o r d e r to pay a
l e g a l c a s h d i v i d e n d t h e c o r p o r a t i o n m u st have an e x c e s s o f
a s s e t s , o r s u r p l u s , a n e t p r o f i t ( a c c o r d i n g t o the s t a t e
law ) and a l s o m ust h a v e c a s h a v a i l a b l e .
A c r e d it b alance
i n t h e s u r p l u s a c c o u n t d o e s n o t p er s e i n d i c a t e t h a t t h e r e
Is a s a t i s f a c t o r y b a la n c e in the cash a cc o u n t.
257
U n less o th e r w ise provided in the c e r t i f i c a t e o f i n н
co r p o r a tio n * or i n a b y -la w adopted by a v o t e o f a t
l e a s t a m a j o r i t y o f t h e s t o c k h o l d e r s , the d i r e c t o r s o f
e v e r y c o r p o r a t i o n o r g a n i z e d u n d e r t h i s t i t l e may, i n
t h e i r d i s c r e t i o n , from tim e to t i m e , f i x and v a r y th e
amount o f t h e w ork in g c a p i t a l o f t h e c o r p o r a t i o n and
d e t e r m i n e w h a t , i f a n y , d i v i d e n d s s h a l l be d e c l a r e d and
p a i d to s t o c k h o l d e r s o u t o f i t s s u r p l u s or n e t p r o f i t s . 6о
While a p r o v i s i o n o f t h i s k i n d would n o t n e c e s s a r i l y r e d u c e
t h e p r e s s u r e e x e r t e d .by t h e s t o c k h o l d e r s on t h e d i r e c t o r s
when t h e s u r p l u s o r a c c u m u l a t e d p r o f i t s were l a r g e ,
i t would,
however, p o s i t i v e l y e s t a b l i s h the d i r e c t o r s r i g h t to l i m i t
d ivid en ds d e s p it e a la r g e su r p lu s.
The New Mexico p r o v i s i o n
i s q u i t e s i m i l a r i n many r e s p e c t s , b u t i t d o e s c o n t a i n one
u n u su al p r o v i s i o n r e g a r d in g the n e c e s s i t y f o r p ayin g the e x н
c e s s o v e r t h e w ork in g c a p i t a l t o the s t o c k h o l d e r s
5
it
is
worded a s f o l l o w s ; .
U n l e s s o t h e r w i s e p r o v i d e d i n t i e o r i g i n a l o r amended
c e r t i f i c a t e o f in c o r p o r a tio n , or in a b y-law or r e s o l u н
t i o n a d o p t e d b y a v o t e o f a t l e a s t a m a j o r i t y o f the
s t o c k h o l d e r s , the d i r e c t o r s o f e v e r y c o r p o r a tio n c r e a t н
ed u n d e r t h i s a r t i c l e s h a l l , i n Jan u ar y i n e a c h y e a r ,
a f t e r r e s e r v i n g o v e r and ab ove i t s c a p i t a l s t o c k p a i d
i n , a s a w o rk in g c a p i t a l f o r s a i d c o r p o r a t i o n , su ch sum,
i f a n y , a s s h a l l have b e e n f i x e d b y the s t o c k h o l d e r s ,
d e c l a r e a d i v i d e n d among i t s s t o c k h o l d e r s o f t h e w hole
o f i t s a c c u m u l a t e d p r o f i t s e x c e e d i n g t h e amount s o r e Q
s e r v e d , and pay t h e same t o su c h s t o c k h o l d e r s on demand.
T h is p r o v i s i o n , u n l e s s
the c e r t i f i c a t e n u l l i f i e s
the e f f e c t ,
6 о The G e n e r a l C o r p o r a t i o n Law o f New J e r s e y , i n c l u d н
i n g a l l s u p p le m e n t s an d amendments t h e r e t o ' to t h e end o f t h e
L e g i s l a t i v e S e s s i o n o f 1 9 3 8 . T i t . 1 4 , Ch. 8 , S e c . 1 4 ; 8 - 2 0 .
C o r p o r a t i o n Laws o f t h e S t a t e o f New M e x i c o . 1 9 2 8 .
Ch. I I , A r t . 1 , S e c . 8 0 .
2J5 8
w i l l d e f i n i t e l y r e t a r d t h e e x p a n s i o n o f t h e p l a n t th r ou gh
t h e p l o u g h i n g b a ck o f p r o f i t s ,
p a r t i c u l a r l y i f t h e amount o f
t h e w o rk in g c a p i t a l i s k e p t a t a b a r e minimum b y the s t o c k н
h o ld ers.
M o r eo v e r, i t would seem r a t h e r d i f f i c u l t
to o b t a i n
a u n a n i m i t y o f o p i n i o n r e g a r d i n g t h e amount o f w o r k in g c a p i н
t a l n e c e s s a r y f o r a b u s i n e s s during the en su in g p e r io d .
North C a r o l i n a goes' one s t e p f a r t h e r i n i t s
p rovision regardн
i n g w o rk in g c a p i t a l i n ?t h e f o l l o w i n g s e c t i o n :
The d i r e c t o r s o f e v e r y c o r p o r a t i o n c r e a t e d u n d e r t h i s
c h a p t e r s h a l l , i n Jan u ar y o f e a c h y e a r , u n l e s s some
s p e c i f i c t im e f o r t h a t p u r p o se i s f i x e d i n i t s c h a r t e r ,
o r b y - l a w s , and i n t h a t c a s e a t t h e t im e so f i x e d , a f t e r
r e s e r v i n g , o v e r and above i t s c a p i t a l s t o c k p a i d i n , as
a w o r k in g c a p i t a l f o r t h e c o r p o r a t i o n , w h a t e v e r sum h as
b e e n f i x e d by the s t o c k h o l d e r s , d e c l a r e a d i v i d e n d among
i t s s t o c k h o l d e r s o f th e w hole o f i t s a c c u m u l a t e d p r o f i t s
e x c e e d i n g t h e amount r e s e r v e d , and pay i t t o the s t o c k н
h o l d e r s on demand.
The c o r p o r a t i o n , may i n i t s c e r t i f i н
c a t e o f i n c o r p o r a t io n or by b y - l a w s , g iv e the d i r e c t o r s
power t o f i x t h e amount to be r e s e r v e d a s a w ork in g
ca p ita l. 70
The n o t a b l e d i f f e r e n c e b e t w e e n t h e s t a t u t e s o f New J e r s e y
and New Mexico a s compared w i t h t h a t o f N orth C a r o l i n a i s
t h a t t h e f i r s t two s t a t e s a l l o w a n u l l i f i c a t i o n o f t h e
e f f e c t o f th e p r o v i s i o n through c h a r t e r p r o v i s i o n ; w hereas,
t h e N orth C a r o l i n a s t a t u t e g i v e s no s u c h o p t i o n and r e q u i r e s
the d e c l a r a t i o n o f th e e x c e s s p r o f i t s
in e x c e s s o f the
amount o f r e s e r v e d f o r w ork in g c a p i t a l .
A ctu ally,
the N orth
S t a t e o f N orth C a r o l i n a , C o r p o r a t i o n Laws, Ch. 22
o f t h e C o n s o l i d a t e d S t a t u t e s o f 1 9 5 5 . Ch. 2 2 , A r t . 6 ,
Sec. 1178.
259
C a r o l i n a la w g i v e s t h e s t o c k h o l d e r s i n s t e a d o f t h e d i r e c t o r s
t h e r i g h t t o d e t e r m i n e t h e amount o f d i v i d e n d s , b e c a u s e t h e
sto ck h o ld ers, u n less
t h e r i g h t i s g r a n t e d to t h e d i r e c t o r s ,
d e t e r m i n e t h e amount t o be r e s e r v e d f o r t h e w o r k in g c a p i t a l
and b y , l a w t h e b o a rd o f d i r e c t o r s
i s r e q u i r e d t o pay p u t a l l
the e x c e s s o v e r t h e amount s o r e s e r v e d .
T h is i s c e r t a i n l y
an u n u s u a l p r o v i s i o n .
S ta tu to r v p r o v is io n s concerning d e p r e c ia t io n , oth er
l o s s e s , and d e f e r r e d a s s e t s .
As f a r a s c o u l d be d e t e r m i n e d
o n l y t e n s t a t u t e s make a d i r e c t r e f e r e n c e
A c o n c i s e and s u c c i n c t s t a t e m e n t i s
o f Vermont w h i c h s t i p u l a t e s
to d e p r e c i a t i o n .
t o be f o u n d i n th e law
that,
The v a l u e o f t h e a s s e t s an d t h e amount o f t h e l i a b i l н
i t i e s a r e t o be d e t e r m i n e d b y the d i r e c t o r s , a c t i n g i n
accordance w ith the p r o v is io n s o f s e c t i o n 5853, b u t they
may v a l u e t h e a s s e t s , makin g p r o p e r a l l o w a n c e f o r d e p r e н
c i a t i o n or l o s s , a t the v a lu e f i x e d by the in c o r p o r a to r s
o r s t o c k h o ld e r s pursuant to th e p r o v is i o n s o f s e c t i o n
5830.71
T h is r e q u i r e m e n t i s n o t q u i t e a s d e f i n i t e a s i s
s t a t u t e s o f three s t a t e s ,
I d a h o , 7^ P e n n s y l v a n i a ,
th a t o f the
and Wash-
P u b l i c Laws o f t h e S t a t e o f Vermont R e l a t i n g to
C orp oration s. 1934.
Ch. 2 3 9 , S e c . 5 8 5 0 .
72
Idaho C ode. 1 9 3 2 . T i t . 2 9 , Ch. 1 , S e c . 2 9 - 1 2 9
(3).
73
P u r d o n ^ P e n n s y l v a n i a S t a t u t e s , A n n o t a t e d Permanн
e n t E d i t i o n , 1 9 3 8 . T i t . 1 3 - 1 5 . T i t . 1 5 , Ch. 49B, A r t . V I I ,
Sec. 2852-701 (B ).
260
i n g t o n , 7^ w h ich f o l l o w r a t h e r c l o s e l y t h e p r o v i s i o n o f the
U n ifo r m B u s i n e s s C o r p o r a t i o n A p t ,
w h ic h on t h i s p o i n t i s
7 *5
worded a s f o l l o w s t
III.
I n com p u tin g t h e a g g r e g a t e o f t h e a s s e t s o f t h e
c o r p o r a t i o n , t h e b o a r d o f d i r e c t o r s s h a l l d e t e r m i n e and
make p r o p e r a l l o w a n c e f o r d e p r e c i a t i o n and d e p l e t i o n
s u s t a i n e d , and l o s s e s o f e v e r y c h a r a c t e r .
D e f e r r e d and
p r e p a i d e x p e n s e s s h a l l be w r i t t e n o f f a t l e a s t a n n u a l l y
i n p r o p o r t i o n t o t h e i r u s e a s may b e d e t e r m i n e d b y t h e
board o f d i r e c t o r s . 7 6 .
The p r o v i s i o n r e g a r d i n g t h e meed f o r a l l o w i n g f o r d e н
p l e t i o n w o u l d , o f c o u r s e , be n u l l i f i e d
states
i f th e c o r p o r a t io n has as i t s
e x p l o i t a t i o n o f w a s t i n g a s s e t s * . 7*7
i n some o f t h e s e
p r i n c i p a l p u r p o se t h e
The la w o f L o u i s i a n a i s
v e r y s i m i l a r t o t h a t g i v e n a b o v e , b u t c o n t a i n s some q u a l i f y н
in g p h r a s e s w h i c h r e a d a s f o l l o w s :
IV.
I n com p utin g t h e a g g r e g a t e o f t h e a s s e t s o f t h e
c o r p o r a t i o n , f o r th e p u r p o s e o f d i v i d e n d s , w h e t h e r p a y н
ab le in c a sh , p ro p erty or s h a r e s , proper a llow an ce s h a l l
be made f o r d e p r e c i a t i o n and d e p l e t i o n s u s t a i n e d , and
a s c e r t a i n e d o r known l o s s e s o f e v e r y c h a r a c t e r .
D eferн
r e d a s s e t s an d p r e p a i d e x p e n s e s s h a l l b e c o n s i d e r e d a s
a s s e t s o n l y t o t h e amounts n o t u s e d o r n o t a c c r u e d . 7 6
I t s h o u l d be n o t e d i n t h e above s e c t i o n t h a t d e p r e c i a t i o n
*74 .
Laws C o n c e r n in g P r i v a t e C o r p o r a t i o n s . S e c . 3 8 0 3 - 2 4
(5).
76
U n ifo r m B u s i n e s s C o r p o r a t i o n A c t , S e c . 2 4 ,
G e n e r a l Corpora
a n a . 1 9 3 8 . S e c . 26 (IV ) .
III.
261
m ust be a l l o w e d f o r .
r e g a r d le s s o f th e type o f d iv id e n d ,
and t h a t a l l a s c e r t a i n e d o r known l o s s e s m ust be p r o v i d e d
for.
In a d d it io n ,
t h i s s e c t i o n a ttem p ts to p rev en t the u se
o f a c c r u e d income t h a t a s ye t h a s n o t b e e n e a r n e d a s a
s o u r c e o f d i v i d e n d paym ent.
T h is, a t l e a s t ,
is b elie v ed to
be t h e m e a n i n g ?o f t h e l a s t t h r e e words i n t h e l a s t s e n t e n c e
o f the q u o ta tio n .
T h is p h r a s e c o u l d h a r d l y be I n t e r p r e t e d
i n any o t h e r way s i n c e i t i s
im p o ssib le f o r d e fe r r e d a s s e t s
or p rep a id ex p en ses to be a cc ru ed .
D e f e r r e d a s s e t s or p r e н
p a i d e x p en se s^ о a r e i t e m s t h a t h a v e b e e n b r o u g h t on t h e books
b u t h a v e n o t b e e n e n t i r e l y u s e d up i n t h e p e r i o d u n d er c o n н
s i d e r a t i o n , and t h e la w s e e k s t o h a v e w r i t t e n o f f t h e u s e d
v a l u e i n o r d e r t h a t t h e p r o f i t s and u l t i m a t e l y th e s u r p l u s
w i l l n o t be o v e r s t a t e d .
The term ??a c c r u e d ? means a c c u m u l a t н
e d and r e f e r s e i t h e r t o t h e income e a r n e d i n t h i s p e r i o d
b u t n o t y e t c o l l e c t e d , o r t o th e c o s t o f m a t e r i a l s o r s e r н
v i c e s u s e d i n t h i s p e r i o d b u t n o t y e t r e c o r d e d on t h e b o o k s .
Ohio p r o v i d e s t h a t :
?I n c o m p u t in g t h e e x c e s s o f th e
a s s e t s , d e d u c t i o n s s h a l l b e made f o r d e p l e t i o n , d e p r e c i a н
tio n ,
l o s s e s and bad d e b t s . ?1оо
T h is i s
the on ly s t a t u t e
There i s a m inor t e c h n i c a l d i s t i n c t i o n b e t w e e n d e н
f e r r e d a s s e t s an d p r e p a i d e x p e n s e s ; t h i s d i s t i n c t i o n , howн
e v e r , i s n o t germane t o t h e d i s c u s s i o n .
Q Q
G e n e r a l and F o r e i g n C o r p o r a t i o n A c t s o f t h e S t a t e
o f O h io, A n n o t a te d 1 9 3 9 .
S ec. 8623-38 ( b ) .
262
t h a t m e n t i o n s bad d e b t s d e f i n i t e l y .
M innesota r e q u ir e s th a t
" p r o p e r d e d u c t i o n s h a l l be made f o r d e p r e c i a t i o n and d e p l e н
t i o n and f o r l o s s e s o f e v e r y c h a r a c t e r w h e t h e r o r n o t r e a l н
i z e d . "83In the d is c u s s i o n o f sources a v a i l a b l e f o r d ivid en d s
comment was made i n r e g a r d to some s t a t e s t h a t a l l o w d i v i н
dends t o b e p a i d o u t o f n e t a s s e t s i n e x c e s s o f t h e c a p i t a l ,
and i n c a s e no s u c h n e t a s s e t s e x i s t , o u t o f t h e n e t p r o f i t s .
The p ro b lem o f t h e d e p r e c i a t i o n o f a s s e t s w o u ld , o f c o u r s e ,
be o f v i t a l i m p o r ta n c e when th e d i v i d e n d p r o v i s i o n i s so
w ord ed .
T h e r e f o r e , comment s h o u l d be made o f t h e la w i n t h e
s t a t e o f C a l i f o r n i a , D e l a w a r e , and K a n s a s .
In C a lifo r n ia
the p r o v i s i o n r e g a r d in g d e p r e c i a t i o n r e a d s as f o l l o w s :
I f t h e v a l u e o f t h e n e t a s s e t s amounts to l e s s ,
th r o u g h d e p r e c i a t i o n , d e p l e t i o n , l o s s e s or o t h e r w i s e ,
t h a n t h e a g g r e g a t e amount o f t h e s t a t e d c a p i t a l a t t r i н
b u ted to sh ares having l i q u i d a t i o n p r e f e r e n c e s , the
c o r p o r a tio n s h a l l n o t d e c la r e d iv id e n d s out o f n e t proн
f i t s pursuant to s u b d iv is io n (2 ) o f t h i s s e c t i o n , e x н
c e p t upon s u c h s h a r e s , u n t i l t h e v a l u e o f t h e n e t a s s e t s
h a s b e e n r e s t o r e d t o s u c h a g g r e g a t e amount o f the s t a t н
e d c a p i t a l a t t r i b u t e d t o o u t s t a n d i n g s h a r e s h a v in g .
l i q u i d a t i o n p r e f e r e n c e s .9 2
B oth
Delawareо^ and Kansasо^ have t h e same i d e n t i c a l p r o v i -
M in n e s o t a B u s i n e s s C o r p o r a t i o n A c t , as amended t o
1 9 3 5 . Ch. 3 0 0 , S e c . 2 1 .
1937.
P e e r i n g 1s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a .
D i v . 1 , P t . IV , T i t . 1 , Ch. X I , S e c . 3 4 6 .
G e n e r a l P r o v i s i o n s R e s p e c t i n g Domes t i c and Fore i g n
C o r p o r a t i o n s C o n t a in e d i n t h e G e n e r a l C o r p o r a t i o n Law o f t h e
S t a t e o f D e l a w a r e . a s amended t o 1 9 3 7 . Ch. 6 5 , A r t . l , S e c . 3 4 .
94 S ta te o f K ansas,
Seas io n Laws. 1 9 3 9 .
C h .1 52,
S e c .S L .
263
a io n r e g a r d in g d e p r e c i a t i o n which p r o v i s i o n i s v e r y s i m i l a r
t o t h a t of* C a l i f o r n i a w i t h the s i n g l e e x c e p t i o n t h a t i f t h e
c a p i t a l o f th e c o r p o r a tio n s h a l l have been d im in is h e d by d e н
p r e c i a t i o n or l o s s e s
t o an amount l e s s
than the l i q u i d a t i o n
p r e fe r e n c e o f the s t o c k h aving l i q u i d a t i o n p r e f e r e n c e ,
d irecto rs
the
s h a l l n o t pay d i v i d e n d s o u t o f p r o f i t s on any
c l a s s o f s t o c k u n t i l t h e d e f i c i e n c y s h a l l have b e e n r e p a i r e d . I t w i l l be n o t e d t h a t u n d e r t h e same c i r c u m s t a n c e s i n C a l i н
f o r n i a d i v i d e n d s may b e p a i d on t h e s t o c k h a v i n g l i q u i d a t i o n
p reference.
M iscellan eou s p r o v is io n r e s t r i c t i n g d iv id e n d s .
W i s c o n s i n 8 5 p r o v i d e s t h a t no d i v i d e n d s h a l l be p a i d u n t i l a t
l e a s t f i f t y per c e n t o f t h e a u t h o r iz e d c a p i t a l s t o c k s h a l l
have b een f u l l y p aid i n ,
and t h e n o n l y o u t o f n e t p r o f i t .
It
s h o u l d be remembered t h a t t h i s s t a t e a l l o w s a c o r p o r a t i o n
w h ic h h a s i n v e s t e d n e t income i n perm anent a d d i t i o n s , o r
whose p r o p e r t y h a s i n c r e a s e d i n v a l u e ,
t o pay a d i v i d e n d i n
cash or s t o c k to the e x t e n t o f such in v e stm e n t or such i n н
crease in valu e.
New York 8 5 p r o v i d e s t h a t no d i v i d e n d s s h a l l b e p a i d
8 5 Statutes
o f W i s c o n s i n R e l a t i n g t o P r i v a t e C orp oraн
tio n s , 1937.
Sec. 1 8 2 .1 9 .
E x t r a c t s from t h e S t o c k C o r p o r a t i o n Law. G e n e r a l
C o r p o r a t i o n Law, Tax Law, E x e c u t i v e Law and P e n a l , E d i t i o n
o f 1 9 3 8 . S t o c k C o r p o r a t i o n , Ch. 6 0 , A r t . 6 , S e c . 5 8 .
264
u n less
t h e v a l u e o f I t s a s s e t s r e m a i n i n g a f t e r t h e payment
o f s u c h d i v i d e n d s s h a l l be a t l e a s t e q u a l t o t h e a g g r e g a t e
amount o f i t s d e b t s . a n d l i a b i l i t i e s ,
in clu d in g c a p i t a l .
This
i s f o l l o w e d t o some d e g r e e b y t h e C a l i f o r n i a law w h ic h i s
worded a s f o l l o w s t
No d i v i d e n d s s h a l l be d e c l a r e d when t h e r e
a b l e ground f o r b e l i e v i n g t h a t t h e r e u p o n t h e
t i o n ? s d e b t s and l i a b i l i t i e s would e x c e e d i t s
o r t h a t i t would b e u n a b l e t o m eet i t s d e b t s
i t i e s as th e y m a tu re.87
i s reasonн
corporaн
assets,
and l i a b i l н
The C a l i f o r n i a p r o v i s i o n d o e s n o t i n c l u d e c a p i t a l a s w e l l a s
lia b ilitie s
i n l i m i t i n g t h e d i v i d e n d s a s d o e s New Y ork.
T h is d i f f e r e n c e i s ,
o f c o u r s e , due t o the f a c t t h a t C a l i f o r н
n ia . a l l o w s a d i v i d e n d d e s p i t e a c a p i t a l im p a ir m e n t.
N e b r a s k a , 8о New
H
a m
p s h i r e ,
Iowa,
88
90 and Ohioо-*- l i k e w i s e h a v e p r o v i н
s i o n s r e g a r d i n g the payment o f d i v i d e n d s w h ic h l e a v e i n s u f н
f i c i e n t f u n d s to m eet t h e l i a b i l i t i e s o f t h e company.
sta tes are,
These
in t h is p a r t ic u la r s e c t i o n , concerned o n ly w ith
t h e p r o t e c t i o n o f t h e c r e d i t o r s o f t h e company, and t h e r e f o r e
1937.
8 7 P e e r i n g ? s G i v i l Code o f t h e S t a t e o f C a l i f o r n i a ,
D i v . 1 , p t . IV, T i t . 1 , Ch. X I, S e c . 3 4 6 .
88
Code o f Iow a, 1 9 3 5 . T i t . XIX, Ch. 3 8 4 , S e c . 8 3 7 8 .
8 о Compiled S t a t u t e s o f N e b r a s k a . 1929 w i t h cumulaн
t i v e s u p p le m e n t s t o 1 9 3 7 .
Ch. 2 4 , S e c . 2 4 - 2 1 8 .
8 8 B u s i n e s s C o r p o r a t i o n Law and R e g u l a t i o n o f F o r e i g n
C o rp o ra tio n s, 1937.
Ch. 2 2 5 , S e c . 7 9 .
о-*- G e n e r a l and F o r e i g n C o r p o r a t i o n A c t s o f t h e S t a t e '
o f O h io, A n n o t a t e d 1 9 3 9 . T i t . IX, D i v . I , C h . . I , - S e c : 8 6 2 3 - 3 8 c .
265
r e q u i r e t h a t th e a s s e t s r e m a i n i n g a f t e r a d i v i d e n d payment
be e q u a l o n l y t o the l i a b i l i t i e s .
ing l i a b i l i t i e s
is a lso
The l i m i t a t i o n c o n c e r n н
i n c l u d e d i n t h e North C a r o l i n a . s t a t н
u t e , w h ich r e a d s as f o l l o w s :
No c o r p o r a t i o n may d e c l a r e and pay d i v i d e n d s , e x c e p t
fro m the s u r p l u s o r n e t p r o f i t s a r i s i n g from i t s b u s i н
n e s s , o r when i t s d e b t s , w h e t h e r due o r n o t , e x c e e d tw ot h i r d s o f i t s a s s e t s , . . . .92
C o n c e r n in g t h e v a l u a t i o n o f a s s e t s , e s p e c i a l l y ,
th e
p rob lem a r i s i n g from t h e c h a n g i n g v a l u e o f a s s e t s a s a r e н
s u l t o f a f l u c t u a t i n g p r i c e l e v e l and i t s
tion s
attendant v a r ia н
i n t h e r e p r o d u c t i o n c o s t o r m ark et v a l u e o f a s s e t s ,
t h e s t a t e o f M in n e so t a h a s a t t e m p t e d to p r o t e c t t h e d i r e c t н
o r s from t h e l i a b i l i t y
t h a t m i g h t a r i s e b e c a u s e o f such
ch an ge by t h e f o l l o w i n g s e c t i o n :
I f t h e payment o f a d i v i d e n d or the p u r c h a s e b y a
co rp oration o f i t s shares i s o th erw ise la w fu l, i t s h a l l
n o t be u n l a w f u l b e c a u s e o f f a i l u r e t o d e t e r m i n e the
f a i r v a l u e o f a l l i t s a s s e t s . 93
T h is p r o v i s i o n i s c e r t a i n l y uncommon, b u t t h e r e a r e some
s t a t e s where a d h e r e n c e t o sound a c c o u n t i n g p r a c t i c e w i l l r e н
liev e
the d i r e c t o r s o f l i a b i l i t y ;
u p 'la te r.
t h i s p o in t w i l l be taken
The p r o v i s i o n q u o t e d above i s m e r e l y a f o r m a l
c o g n it io n o f a w e ll e s t a b lis h e d accoun ting con ven tion;
reн
that
S t a t e o f N orth C a r o l i n a , C o r p o r a t i o n Laws, Ch. 22
o f t h e C o n s o l i d a t e d S t a t u t e s o f 1 9 5 5 . Ch. 2 2 . A r t . 6 , S e c . 1179.
1935.
93 M in n e so ta B u s i n e s s
Ch. 3 0 0 , S e c . 2 1 .
C orp oration A c t , as
a m en d e d t o
266
is*
t h a t c o s t l e s s d e p r e c i a t i o n i s th e g e n e r a l r u l e f o r the
v alu a tio n of fix ed a s s e ts .
Ohio s t i p u l a t e s
t h a t no d i v i d e n d s h a l l be p a i d t o
th e h o l d e r s o f one c l a s s o f s h a r e s i n v i o l a t i o n o f t h e
r i g h t s o f t h e h o l d e r s o f any o t h e r c l a s s o f s h a r e s . ^
s t a t e a ls o provid es
T his
t h a t the c h a r t e r may r e q u i r e a s i n k i n g
fu n d o u t
o f e a r n i n g s or o t h e r w i s e f o r t h e payment o f d i v i н
d ends on
p r e f e r r e d s h a r e s ; and a l s o
the d i r e c t o r s
are not
n e g l i g e n t i f t h e y c o n s i d e r t h e a s s e t s w o r t h the book v a l u e d
The f i n a l g e n e r a l p r o v i s i o n s l i m i t i n g d i v i d e n d p a y н
m ent may be summarized i n t o b road c l a s s e s :
1)
S t a t e s t h a t p r o v i d e t h a t no d i v i d e n d s h a l l be p a i d
contrary
t o th e l a w .
provided
by
( T h is i s f r e q u e n t l y worded; ??e x c e p t as
t h i s t i t l e . ? ) The s t a t e s t h a t may be
in clu d ed
i n t h i s g ro u p a r e : Arizona,оо A r k a n s a s ,о 1^ C a l i f o r n i a , о о
о^ G e n e r a l and F o r e i g n C o r p o r a t i o n A c t s o f t h e S t a t e
o f O h i o . A n n o t a te d 1 9 3 9 . T i t . IX, D i v . I , Ch. 1 , S e c . 8 6 2 3 38 ( f ) .
95
I b id , . Sec. 8623-4
(b) and S e c . 8 6 2 3 - 1 2 3 b .
/
96
R e v i s e d Code o f A r i z o n a . 1 9 2 8 .
Ch. 1 0 8 , A r t . 9 ,
Sec. 4804.
97
Pope? a D i g e s t o f the S t a t u t e s o f A rk an sas. 1937.
Ch. 3 1 , A r t . IV , S e c . 2 1 8 4 .
оо P e e r i n g *s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a .
1 9 3 7 . D i v . 1 , P t . IV, T i t . 1 , Ch. XIV, S e c . 3 6 3 .
267
I o w a , " N evada ,
100
New M e x i c o ,
101
and U t a h .
102
2) S t a t e s t h a t p r o v i d e t h a t no d i v i d e n d s h a l l be p a i d
c o n tra ry to th e r e s t r i c t i o n s
con tain ed in the a r t i c l e s o f
i n c o r p o r a t i o n r e p r e s e n t e d by the s t a t e s o f :
I l l i n o i s , 10^
I n d i a n a ,10о
G eorgia,
and V i r g i n i a . 10о
3) S t a t e s w h ich p r o v i d e t h a t no d i v i d e n d s h a l l be
p a i d c o n t r a r y t o t h e la w or t h e r e s t r i c t i o n s c o n t a i n e d i n
the a r t i c l e s o f i n c o r p o r a t i o n ,
t h i s g ro u p b e i n g r e p r e s e n t e d
" Code o f I o w a . 1 9 3 5 .
8379 and 8 3 8 1 .
T i t . XIX, Ch. 3 8 4 , S e c . 8 3 7 8 ,
S t a t e o f Nevada, D o m e s t ic and F o r e i g n C o r p o r a t i o n
Laws, a s amended t o 1 9 3 7 .
Sec. 75.
100
C o r p o r a t i o n Laws o f t h e S t a t e o f New M e x i c o , 1 9 2 8 .
Art. I , S ec. 60.
101
Ch. I I ,
1C2 R e v i s e d S t a t u t e s o f U t a h , 1 9 3 3 . T i t . 1 8 ,
Sec. 18-
2-17.
A c t s and R e s o l u t i o n s o f the G e n e r a l A sse m b ly o f
t h e S t a t e o f G e o r g i a , 1 9 3 7 - 1 9 3 8 . P t . I , T i t . I , S e c . 16
amending S e c . 2 2 - 3 0 8 o f t h e Code o f G e o r g i a . 1 9 3 5 .
l 0 ^ The B u s i n e s s C o r p o r a t i o n A c t , 1 9 3 7 . S e c . 41 ( H ) .
1 0 о C e r t a i n Laws C o n c er n in g C o r p o r a t i o n s f o r P r o f i t ,
1937. Sec. 12.
1 0 о V i r g i n i a C o r p o r a t i o n Law, w i t h a l l amendments t o
June 2 1 , 1 9 3 8 .
Ch. 1 4 7 , S e c . 3 8 4 0 .
268
b y: D e l a w a r e , 3-07 Kansas,-*-0 о M i c h i g a n , 3-09 and P e n n s y l v a n i a .3-3-0
The l i m i t a t i o n c o n c e r n i n g i l l e g a l i t y o f d i v i d e n d s
b e c a u s e o f a c t i o n c o n t r a r y to t h e p r o v i s i o n s o f the a c t or
o f t h e p r o v i s i o n s o f t h e c h a r t e r a r e n o t o f v i t a l im portance,,
f o r as i s e v i d e n t ,
t h e w hole p u r p o se o f t h e la w i s t o g o v e r n
the.' payment o f d i v i d e n d s and a p o s i t i v e s t a t e m e n t o f s o u r c e s
a v a i l a b l e f o r d i v i d e n d payment w i t h o u t a p r o h i b i t i o n would
by i t s v e r y n a t u r e im p l y t h a t th e u s e o f s o u r c e s o t h e r t h a n
t h o s e named i n t h e a c t would u n q u e s t i o n a b l y make the d i v i н
dend i l l e g a l .
I t .is s i g n i f i c a n t , h o w e v e r ,
t h a t some s t a t e s
have a p r o v i s i o n a l l o w i n g t h e c o r p o r a t i o n t o m o d i f y t h e
g e n e r a l a p p l i c a t i o n o f the d i v i d e n d p r o v i s i o n a s c o n t a i n e d
in the s t a t u t e .
This m o d i f i c a t i o n w o u l d seem to r e q u i r e
more c o n s e r v a t i v e d i v i d e n d p r o v i s i o n s t h a n t h o s e c o n t a i n e d
in the g e n e r a l s t a t u t e .
U n d o u b t e d l y , when t h e lav/ r e q u i r e s
G e n e r a l P r o v i s i o n s R e s p e c t i n g Domes t i c and F o r e i g n
C o r p o r a t i o n C o n t a i n e d i n t h e G e n e r a l C o r p o r a t i o n Law?o f t h e
S t a t e o f D e l a w a r e . a s amended t o 1 9 3 7 . Ch. 6 5 , A r t . 1 , S e c .
34 and 3 5 .
3-08 s t a t e o f K a n s a s , S e s s i o n Laws, 1 9 3 9 . Ch. 1 5 2 , S e c .
80.
3-09 S t a t e o f M i c h i g a n , G e n e r a l Corpora t i o n Law, 1 9 3 8 .
Sec. 48.
3.10 -purdon* s P e n n s y l v a n i a Sta t u t e s , A n n o t a t e d Permanн
ent E d itio n 1938.
T i t . 1 3 - 1 5 . T i t . 1 5 , Ch. 4 9 B , S e c . 2 8 5 2 701 and 2 8 5 2 - 7 0 7 .
269
d i v i d e n d s to be made s u b j e c t t o l i m i t a t i o n s c o n t a i n e d i n
b o t h t h e s t a t u t e s and t h e c h a r t e r , t h e s t a t u t o r y p r o v i s i o n
w o u l d be t h e minimum c o n d i t i o n s .
I t w i l l be n o t e d t h a t t w e n t y states^ --1-^ and t h e D i s н
t r i c t o f Columbia h a v e p r o v i s i o n s g o v e r n i n g d i v i d e n d s o t h e r
t h a n t h o s e m e n t i o n e d i n the p r e v i o u s c h a p t e r ; an a d d i t i o n a l
e i g h t s t a t e s l l ^ have o n ly a p r o v i s i o n l i m i t i n g d iv id e n d s
p a i d c o n t r a r y t o the i n c o r p o r a t i o n a c t a n d / o r t h e c h a r t e r ,
which, as has b een m en tion ed , i s n o t im portan t, s i n c e i t i s
a t a c i t assum ption in a l l
the l a w s .
Section E
Summary
Summary.
Some o f t h e more i m p o r t a n t ' s t a t u t o r y r e q u i r e '
ments d i s c u s s e d i n t h i s c h a p t e r may now be su m m arized.
The ?
For e x a m p le , t h e Nevada Law p r o v i d e s t h a t t h e
" c e r t i f i c a t e may c o n t a i n any p r o v i s i o n w h ich the i n c o r p o r a н
t o r s may c h o o s e to i n s e r t . . . .
p r o v id in g . fo r governing
the d i s t r i b u t i o n or d i v i s i o n o f th e p r o f i t s o f s a i d c o r p o r a н
t i o n ; p r o v i d e d , s u c h p r o v i s i o n s a r e n o t c o n t r a r y t o the law s
o f the s t a t e .
S t a t e o f Nevada, D o m e s t ic a n d - F o r e i g n Gorpor.a t i o n s Laws a s amended t o 1 9 5 7 .
Sec. 4 (1 0 ).
Alabama, C o l o r a d o , 'C o n n e c t i c u t , F l o r i d a , K e n t u c k y ,
Maine, M aryland, M a s s a c h u s e t t s , M i s s i s s i p p i , Montana, New
H am p sh ir e, N orth D a k o t a , Oklahoma, O regon , Rhode I s l a n d ,
S o u t h D a k o t a , T e n n e s s e e , Texas-, West V i r g i n i a , and Wyoming.
115
A rizon a, G eorgia, I l l i n o i s ,
U t a h , and V i r g i n i a .
I n d i a n a , Iowa, Nevada,
270
m a jo rity o f the s t a t e s ,
i n f a c t t h i r t y - s e v e n , make no menн
t i o n o f th e a v a i l a b i l i t y o f u n r e a l i z e d a p p r e c i a t i o n a s a
sou rce o f d i v id e n d s , e i t h e r cash or s h a r e .
By i n t e r p r e t a н
t i o n o f t h e d i v i d e n d p r o v i s i o n i t may be d ed u ced t h a t o f
t h i s number t h i r t e e n s t a t e s would d e c l a r e s u c h d i v i d e n d s
i l l e g a l and n i n e s t a t e s m ight, be assu m ed t o a l l o w s u c h d i v i н
dends .
Of t h e s t a t e s h a v i n g a p r o v i s i o n c o n c e r n i n g u n r e a l i z н
ed a p p r e c i a t i o n tw o, C a l i f o r n i a and M i n n e s o t a , p r o h i b i t b o t h
c a s h and s h a r e d i v i d e n d s from s u c h s o u r c e s .
n everth eless,
C alifo rn ia,
a l l o w s d i v i d e n d s o u t o f t h e v a l u e r e c o r d e d as
an e x c e s s a t t h e tim e o f t h e e x c h a n g e o f a s s e t s ,
a s s e t s are r e a l i z a b l e
in cash.
i f such
M in n e so ta p e r m i t s s e c u r i t i e s ,
o t h e r t h a n t h e company? s own, t o b e v a l u e d a t m a rk et v a l u e
in d eterm in in g the su rp lu s a v a ila b le f o r d iv id e n d s .
Cash d i v i d e n d s a r e f o r b i d d e n , b u t s h a r e d i v i d e n d s a r e
a l l o w e d from u n r e a l i z e d a p p r e c i a t i o n o f a s s e t s b y t h e s t a t e s
of I llin o is ,
L o u i s i a n a , M i c h i g a n , and O h io .
In the L o u i s i н
ana la w v e r y d e t a i l e d c o n s i d e r a t i o n i s g i v e n t o the many
t y p e s o f u n e a r n e d income i t e m s t h a t s h o u l d n o t be i n c l u d e d
when d e c l a r i n g c a s h d i v i d e n d s .
Under
the j u r i s d i c t i o n o f
t h e s t a t e o f M i c h i g a n , p r e f e r r e d d i v i d e n d s may b e d e c l a r e d
from any t y p e o f s u r p l u s .
Furthermore,
t h e M i c h i g a n law
d o e s n o t c o n s i d e r t h e r e a d j u s t m e n t o f a p r e v i o u s w r i t e down
o f a s s e t s as u n r e a l i z e d a p p r e c i a t i o n ; h e n c e , a s u r p l u s
271
c r e a t e d i n s u c h a manner w o u ld be c o n s i d e r e d a v a i l a b l e f o r
d iv id en d s.
B e sid e s th o se m entioned, fo u r oth er s t a t e s
in н
c l u d i n g I d a h o , I n d i a n a , P e n n s y l v a n i a , and W a sh in g to n a l l o w
a c o r p o r a tio n to c a p i t a l i z e
the u n r e a l i z e d in crem ent in
a s s e t va lu e by g r a n t in g share d iv id e n d s , b u t by a very i n н
c l u s i v e e n u m e r a t i o n o f t h e t y p e s o f a s s e t s and t h e u n e a r n e d
income t h a t m i g h t p o s s i b l y a r i s e t h e r e f r o m ,
these s t a te s exн
c l u d e c a s h d i v i d e n d s from s u c h s o u r c e s .
F in a lly ,
t h e r e r e m a i n s t o be c o n s i d e r e d t h e la w o f
W i s c o n s i n ; the la w o f t h i s s t a t e s t i p u l a t e s
th at e ith e r cash
o r s h a r e d i v i d e n d s may be d e c l a r e d from u n r e a l i z e d a p p r e c i a н
tio n ,
i f t h e p r o p e r t y o f t h e c o r p o r a t i o n h a s i n c r e a s e d In
v a l u e o r i f i t s n e t e a r n i n g s have b e e n i n v e s t e d i n permanent
a d d itio n s,
so l o n g a s the
amount o f s u c h d i v i d e n d s d o e s n o t
e x c e e d t h e a c t u a l - c a s h v a l u e o f t h e a s s e t s o v e r the l i a b i l i н
t i e s and c a p i t a l .
S ection B d isc u sse s
plus f o r d iv id e n d s.
W isconsin by s p e c i f i c
the a v a i l a b i l i t y o f p a i d - i n s u r н
L o u i s i a n a , New J e r s e y , V i r g i n i a , and
s t a t u t o r y p r o v i s i o n make a v a i l a b l e ,
under c e r t a i n r i g i d r e s t r i c t i o n ,
the p a i d - i n su r p lu s as a
s o u r c e o f c a s h and s h a r e d i v i d e n d s .
The common l i m i t a t i o n
i s t h a t n o t i c e be g i v e n to the s h a r e h o l d e r s a t t h e t im e o f
paym ent.
C aliforn ia,
Illin o is,
M i c h ig a n , M in n e s o t a and
P e n n s y l v a n i a a l l o w c a s h o r s h a r e d i v i d e n d s from su ch a source
t o be p a i d to t h e p r e f e r r e d s t o c k h o l d e r s ,
s u b j e c t to c e r t a i n
272
named l i m i t a t i o n s .
Ohio and G o lo r & d o y a l t h o u g h n o t m e n t i o n н
ing p a i d - i n su rp lu s d i r e c t l y ,
i n one c a s e r e q u i r e s n o t i c e
o f sou rce i f d iv id e n d s are p a id in o th e r than earned e x c e s s
o f a s s e t s an d i n the o t h e r c a s e ,
the e x c e s s o f th e a c t u a l
valu e o f the t o t a l n et a s s e t s i s a v a ila b le f o r d is t r ib u t io n
as e a r n e d s u r p l u s .
I n d i a n a and Maine v e r y d e f i n i t e l y s a n c н
t i o n t h e payment o f d i v i d e n d s from p a i d - i n s u r p l u s ,
l i m i t a t i o n b ein g p r a c t i c a l l y n e g l i g i b l e .
th e
The o t h e r s t a t e s ,
e v e n thou gh no p o s i t i v e s t a t e m e n t s a r e made, may, b y i n t e r н
p r e t a t i o n o f t h e g e n e r a l d i v i d e n d p r o v i s i o n , be assumed t o
a llo w the u se o f such a su r p lu s as f o l l o w s :
A rizona,
New
M e x ic o , M i s s o u r i , Montana, N e b r a sk a , N orth D a k o t a , Oklahoma, S o u th C a r o l i n a , S o u t h D a k o t a , T e x a s , U t a h , and West V i r g i n i a
would n o t a l l o w d i v i d e n d s from p a i d - i n s u r p l u s ;
the next
grou p a p p a r e n t l y s a n c t i o n t h e u s e o f d i v i d e n d s from p a i d - i n
s u r p l u s o f d i v i d e n d s from p a i d - i n s u r p l u s i n c l u d e A r k a n s a s,
D elaw are, F l o r i d a ,
G e o r g i a , I d a h o , K a n s a s , Nevada,
Tennessee,
and W a sh in g to n ; and t h e l a s t grou p o f s t a t e s have d i v i d e n d
p r o v i s i o n s s o worded as t o make i t
i m p o s s i b l e t o draw any
c o n c l u s i o n r e g a r d i n g d i v i d e n d s from c o n t r i b u t e d s u r p l u s ,
these s t a t e s
i n c l u d e Alabama, C o n n e c t i c u t , Iow a, K e n t u c k y ,
M aryland, M a s s a c h u s e t t s , M i s s i s s i p p i , New Y ork , N orth Caroн
lin a ,
Oregon, Rhode I s l a n d , Vermont, and the D i s t r i c t o f
C o lu m b ia .
C alifo rn ia,
I l l i n o i s and Ohio p e r m i t t h e u s e o f the
273
p a i d - i n s u r p l u s f o r t h e p u r p o se o f w r i t i n g o f f a d e f i c i t .
Summarizing S e c t i o n C, f o u r s t a t e s , A r k a n s a s , D e l a н
w a r e , K a n s a s , and West V i r g i n i a , p e r m i t a c o r p o r a t i o n t o
d i s r e g a r d t h e d e p l e t i o n c h a r g e , s u b j e c t to any r e s t r i c t i o n s
con tain ed in the ch a rter; four s t a t e s ,
G eorgia, In d ia n a ,
L o u i s i a n a , and O h i o , p r o v i d e t h a t s u c h a c t i o n m u st be a p p r o v н
ed b y s p e c i f i c
fo rn ia ,
c h a r t e r p r o v i s i o n ; and i n s i x s t a t e s ,
I d a h o , M i c h ig a n , M i n n e s o t a , P e n n s y l v a n i a ,
i n g t o n , no c h a r t e r p r o v i s i o n i s n e c e s s a r y .
l i m i t a t i o n on t h i s r i g h t ,
three s t a t e s ,
C a liн
and Washн
As f o r the o t h e r
C a l i f o r n i a , Minneн
s o t a , and O h io , c o n d i t i o n s u c h a payment o f d i v i d e n d s on
t h e n o t i f i c a t i o n o f t h e s h a r e h o l d e r s a s to t h e s o u r c e o f
su ch d i v i d e n d s .
Three s t a t e s , L o u i s i a n a , P e n n s y l v a n i a , and
W a s h in g to n , make t h e d i v i d e n d s u b j e c t t o the r i g h t s o f the
sh arehold ers o f variou s c l a s s e s ,
and one s t a t e ,
Indiana,
makes su ch a d i v i d e n d s u b j e c t t o t h e r i g h t s o f s h a r e h o l d e r s
o f v a r i o u s c l a s s e s and a l s o s u b j e c t to t h e r i g h t o f c r e d i н
tors.
F in a lly ,
two s t a t e s ,
C a l i f o r n i a and M i n n e s o t a , make
su ch a d i v i d e n d l e g a l o n l y i f a d e q u a t e p r o v i s i o n i s made f o r
the payment o f l i a b i l i t i e s
and a l s o the l i q u i d a t i o n p r e f e r н
e n c e o f s t o c k h a v i n g su ch p r e f e r e n c e s .
S e c t i o n D may now be summarized a s f o l l o w s :
Seven
s t a t e s p r o v i d e by la w f o r t h e s e t t i n g a s i d e o f a r e s e r v e o u t
of
the s u r p l u s f o r any c o r p o r a t e p u r p o s e .
I n the d i s c u s s i o n
i t was i n d i c a t e d t h a t t h e r e i s a p p a r e n t l y some c o n f u s i o n i n
274
t h e law s c o n c e r n i n g t h e meaning o f t h e term s " r e s e r v e " and
" fu n d .?
Three s t a t e s ,
New J e r s e y , New M e x ic o , and North
C a r o l i n a , p e r m i t th e d i r e c t o r s ,
o r t h e s t o c k h o l d e r i n some
i n s t a n c e s , t o d e t e r m i n e t h e amount o f w o r k i n g c a p i t a l t h a t
is
t o h e r e s e r v e d b e f o r e p a y in g d i v i d e n d s .
In the case of
one o f t h e s t a t e s t h e d i r e c t o r s a r e . t o pay t h e e x c e s s o v e r
t h e c a p i t a l s t o c k and w ork in g c a p i t a l t o . t h e
as a d i v i d e n d .
shareholders
A s i m i l a r t y p e o f p r o v i s i o n may b e m o d i f i e d
b y c h a r t e r p r o v i s i o n i n the s t a t e s o f New J e r s e y and New
M exico.
One o f t h e m o s t v i t a l p r o b l e m s - - t h e a d j u s t m e n t f o r
d ep recia tio n , lo sse s
and a c c r u e d and d e f e r r e d i t e m s - - i s
s p e c i f i c a l l y p r o v i d e d f o r i n t h e law s o f C a l i f o r n i a ,
Idaho,
L o u i s i a n a , M i n n e s o t a , O h io, P e n n s y l v a n i a , Vermont, and Washн
in g to n .
The- la w o f ' t h e s e s t a t e s v a r i e s
i n the d e t a i l g iv e n
c o n c e r n i n g the v a r i o u s a d j u s t m e n t s t h a t must be made; a l l , ?
however, concur i n regard to the d e p r e c i a t i o n a d ju stm e n t.
As f o r t h e o t h e r l i m i t a t i o n s , t h e y may b e s t be shown
by a t a b u l a t i o n !
1) W i s c o n s i n d o e s n o t a l l o w d i v i d e n d s u n t i l f i f t y p e r
. c e n t o f th e c a p i t a l s to c k i s paid i n .
2 ) C a l i f o r n i a , Iow a, N e b r a sk a , New H am pshire, New
Y ork, and Ohio' p r o h i b i t t h e payment o f d i v i d e n d s t h a t l e a v e
i n s u f f i c i e n t f u n d s t o pay t h e l i a b i l i t i e s
o f th e company.
3 ) M in n e so ta d o e s n o t r e q u i r e t h e d i r e c t o r s t o d e t e r -
275
mine t h e f a i r v a l u e o f t h e a s s e t s b e f o r e p a y i n g d i v i d e n d s .
Illin o is
and Ohio w ould n o t h o l d the d i r e c t o r s
t o be n e g l i н
gent i f th e y co n sid er a s s e t s , a t t h e ir book v a lu e .
4)
class
Ohio e n j o i n s t h e payment o f d i v i d e n d s
t o one
o f s h a r e h o l d e r s t o t h e d e t r i m e n t o f any o t h e r c l a s s
o f s h a r e s and a l s o
t h i s s t a t e a l l o w s a s i n k i n g f u n d ou t o f
e a r n i n g s t o be e s t a b l i s h e d t o pay p r e f e r r e d d i v i d e n d s .
5} F i n a l l y ,
a b ro a d s t a t e m e n t was made c o n c e r n i n g
t h o s e s t a t e s t h a t l i m i t e d d i v i d e n d s on the b a s i s o f a d h e r н
ence t o t h e c o r p o r a t io n la w , an d/or the req u irem en ts i n the
charter.
CHAPTER V I I
STATUTORY PROVISIONS RELATING TO
A CORPORATION'S RIGHT TO ACQUIRE ITS OWN SHARES
P urpose o f t h e c h a p t e r .
T h is c h a p t e r h a s a s i t s
p u r p o se a d i s c u s s i o n o f t h e l e g a l r i g h t t h a t a c o r p o r a t i o n
may h a v e t o p u r c h a s e i t s own s h a r e s o f s t o c k .
T h is p rob lem
i s o f v i t a l Im portan ce b e c a u s e o f t h e p o t e n t i a l p o s s i b i l i н
t i e s f o r m isu se o f the p r i v i l e g e .
T h is d i s c u s s i o n w i l l e x н
c l u d e a s f a r as i s p r a c t i c a l any r e f e r e n c e t o t h e p roblem
o f t h e a c q u i s i t i o n o f a com pany's own s t o c k f o r r e d e m p t i o n
o f s u c h s h a r e s o r f o r the r e d u c t i o n o f the c a p i t a l o f t h e
company.
These two p rob lem s a r e s e p a r a t e and d i s t i n c t
p h a s e s o f c o r p o r a t i o n f i n a n c e and s h o u l d n o t be c o n f u s e d
w i t h t h e c u r r e n t p ro b lem o f t h e r i g h t o f a company t o p u r - .
chase i t s
own s h a r e s .
The s t o c k so a c q u i r e d i s commonly
c a l l e d t r e a s u r y s t o c k and may b e d e f i n e d a s s t o c k i s s u e d
and p a i d f o r and t h e r e a f t e r a c q u i r e d b y t h e c o r p o r a t i o n i f
n o t r e q u ir e d by the a r t i c l e s
t o be c a n c e l l e d .
Such s t o c k
may be a c q u i r e d by g i f t , by b e q u e s t , o r b y p u r c h a s e .
This,
c h a p t e r w i l l c o n c e r n I t s e l f w i t h t h e a c q u i s i t i o n o f the
sto ck by purchase.
The t r e a t m e n t w i l l a d h e re t o the f o l l o w н
in g o u t l i n e :
. I . S t a t u t e s t h a t perm it a c o r p o r a tio n to a c q u ir e i t s
own s h a r e s i f s u c h a c q u i s i t i o n i s n e c e s s a r y to
277
prevent l o s s ,
t h i s p r o v i s i o n b e i n g th e s o l e p r o н
v i s i o n concerning tr ea s u r y s h a r e s .
I I . S t a t u t e s t h a t p e r m it a c o r p o r a t i o n t o a c q u i r e i t s
own s h a r e s s u b j e c t o n l y t o c a p i t a l im pairm en t.
I I I . S t a t u t e s t h a t p e r m it a c o r p o r a t i o n . t o a c q u i r e i t s
own s h a r e s if* s p e c i f i e d t y p e s o f s u r p l u s a re
a v a ila b le.
IV. S t a t u t e s
that perm it a c o r p o r a tio n t o a cq u ire i t s
own s h a r e s i f an e x c e s s o f n e t a s s e t s
is a v a ilн
ab le .
V. S t a t u t e s t h a t p e r m it a c o r p o r a t i o n to a c q u i r e i t s
own s h a r e s b y i n t e r p r e t a t i o n o f g e n e r a l p o w e r s.
V I. R e c a p i t u l a t i o n .
S t a t u t e s t h a t p e r m it a, c o r p o r a t i o n t o a c q u i r e i t s own
s h a r e s i f su c h a c q u i s i t i o n i s n e c e s s a r y t o p r e v e n t l o s s ,
t h i s p r o v is io n b e in g the s o l e p r o v is io n concerning tr ea s u r y
shares.
The laws o f some s t a t e s d e a l w i t h t h e problem o f
t h e a c q u i s i t i o n by a c o r p o r a t i o n o f i t s
own s h a r e s s o l e l y
from the v i e w p o i n t o f p r o t e c t i n g th e c o r p o r a t i o n from l o s s
i n c a s e o f a d e b t . , or from t h e v i e w p o i n t o f non-paym ent o f
th e s u b s c r i p t i o n p r i c e o r o f an a s s e s s m e n t l e v i e d on s t o c k .
If title
t o s t o c k i s a c q u i r e d under s u c h c o n d i t i o n s , no r e н
s t r i c t i o n s a r e made a s t o t h e c o n d i t i o n o f t h e c a p i t a l and
surplus a c c o u n ts.
C o n n e c t i c u t , K e n t u c k y , and Vermont c o n -
278
a i d e r t h e p roblem from t h e d e b t p o i n t o f v i e w .
For e x a m p le ,
th e la w o f C o n n e c t i c u t p r o v i d e s t h a t :
No c o r p o r a t i o n s h a l l a c q u i r e , p u r c h a s e and h o l d i t s
own s t o c k u n l e s s t o p r e v e n t l o s s upon a d e b t p r e v i o u s l y
c o n t r a c t e d , e x c e p t w i t h the a p p r o v a l o f s t o c k h o l d e r s
ow ning t h r e e - f o u r t h s o f i t s e n t i r e o u t s t a n d i n g c a p i t a l
s t o c k g i v e n a t a s t o c k h o l d e r s ? m e e t i n g warned and h e l d
f o r t h a t p u r p o s e ; and s u c h c o r p o r a t i o n s h a l l n o t v o t e
upon s h a r e s o f i t s own s t o c k .
No c o r p o r a t i o n s h a l l p u r н
c h a s e any o f i t s own s t o c k when i t i s i n s o l v e n t , o r by
such purchase s h a l l ren d er i t s e l f im m ediately i n s o l v e n t .
I f a n y c o r p o r a t i o n s h a l l p u r c h a s e i t s own s t o c k when i t
i s i n s o l v e n t , o r b y s u c h p u r c h a s e r e n d e r i t s e l f im mediн
a t e l y i n s o l v e n t , the d i r e c t o r s a s s e n t i n g to s u c h p u r н
c h a s e s h a l l be p e r s o n a l l y l i a b l e f o r any d e b t s o f s u c h
c o r p o r a t i o n e x i s t i n g a t the t i m e o f s u c h p u r c h a s e . 1
The e x c e p t i o n t o t h e g e n e r a l r u l e i s q u i t e i m p o r t a n t , f o r
under i t
t h e s t o c k h o l d e r s c a n , s u b j e c t to the i n s o l v e n c y
r u l e and a t h r e e - f o u r t h v o t e , b u y t h e s h a r e s from any f u n d s .
- K entucky p r o v i d e s t h a t ,
,fNo c o r p o r a t i o n s h a l l t a k e ,
as s e c u r i t y f o r any d e b t , a l i e n u pon any p a r t o f i t s
ca p iн
t a l s t o c k o r be t h e h o l d e r or p u r c h a s e r o f any p a r t t h e r e o f ,
u n l e s s s u c h l i e n o r p u r c h a s e s h a l l be n e c e s s a r y to p r e v e n t
l o s s upon a d e b t p r e v i o u s l y c o n t r a c t e d , and s t o c k s o p u r c h a s н
ed s h a l l i n no c a s e be h e l d b y t h e c o r p o r a t i o n f o r a l o n g e r
t im e t h a n one y e a r . ?^
Vermont^ a d h e r e s t o t h i s g e n e r a l t y p e
1 C o r p o r a t i o n Laws o f t h e S t a t e o f C o n n e c t i c u t . Reн
v is e d 1937.
Ch. 1 9 1 , P t . I F ! , S e c . 5 7 .
o
C a r r o l l *s K e n tu c k y S t a t u t e s , A n n o t a te d B a l d w i n ? s
1936 E d i t i o n .
Ch. 3 2 , S e c . 5 4 4 .
^ P u b l i c Laws o f t h e S t a t e o f Vermont R e l a t i n g to
C orp oration s, 1934.
Ch. 2 3 9 , S e c . 5 8 1 4 .
279
o f lim ita tio n , but t i t l e
to s t o c k s o a c q u i r e d must b e t r a n s н
f e r r e d to a t r u s t e e who i s r e q u i r e d to d i s p o s e o f t h e s t o c k
w i t h i n f i v e y e a r s u n d er p e n a l t y o f d i s s o l u t i o n o f the c o r н
p oration .
The o t h e r s t a t e s i n t h i s gro u p c o n s i d e r t h e problem
a r i s i n g from the c o r p o r a t i o n ? s a c q u i s i t i o n o f i t s
own s h a r e s
from t h e v i e w p o i n t o f the n on-paym ent o f t h e s u b s c r i p t i o n
p r i c e o r o f t h e non-paym ent o f d e l i n q u e n t a s s e s s m e n t s . 4
If
no b i d s a r e r e c e i v e d a t th e time o f t h e s a l e o f t h e s h a r e s
f o r d e l i n q u e n t paym ent, t h e c o r p o r a t i o n i n t h e s t a t e s o f
Maine^ and Utahо may b i d i n the s t o c k and a c q u i r e t i t l e . ^
Maine l i m i t s
t h e r i g h t b y t h e p r o v i s i o n t h a t no r i g h t o f
c r e d i t o r s s h a l l be a f f e c t e d , and the s a l e o f s t o c k so a c q u i r н
ed i s
i n t h e h and s o f t h e d i r e c t o r s .
Utah p r o v i d e s t h a t
t h e s t o c k s h a l l b e d i s p o s e d o f by t h e m ethod named i n th e
4
I n some i n s t a n c e s t h e r e i s a d i f f e r e n c e i n t h e
l e g a l a c t i o n t o be t a k e n when t h e d e l i n q u e n c e a r i s e s from
n on-paym en t o f s u b s c r i p t i o n and when t h e d e l i n q u e n c e I s a
r e s u l t o f f a i l u r e t o pay a s s e s s m e n t .
However, t h i s d i f f e r н
e n c e n e e d n o t be t a k e n i n t o c o n s i d e r a t i o n a t t h i s t i m e .
c
S t a t e o f Maine, P r o v i s i o n o f Law i n F o r c e R e la t in g :
t o B u s i n e s s C o r p o r a t i o n s , 1930 a s a m e n d e d . . Ch. 5 6 , S e c . 4 6 .
R evised S ta tu te s o f U tah. 1933.
T i t . 1 8 , S e c . 18:
4 - 1 8 and S e c . 18: 4 - 1 9 .
7 L o u i s i a n a , N evada, N orth D a k o t a , and South Dakota
h ave s i m i l a r p r o v i s i o n s b u t t h e y a r e n o t c o n s i d e r e d i n t h i s
s e c t i o n b e c a u s e t h e y h a v e a more g e n e r a l p r o v i s i o n r e g a r d н
in g the a c q u i s i t i o n o f t r e a s u r y s t o c k .
See i n f r a .
6
280
a r t i c l e s o r b y - l a w s and i n t h e a b s e n c e o f s u c h p r o v i s i o n the
s t o c k i s s u b j e c t to t h e c o n t r o l o f t h e b o a r d o f d i r e c t o r s .
Arizonaо and I d a h o 9 make no m e n t i o n o f t h e l a c k o f a b i d ,
b u t m e r e l y a l l o w by s t a t u t e t h e c o r p o r a t i o n t o b i d a t t h e
s a l e and a c q u i r e t i t l e
and V i r g i n i a 1 ░% i f
. - 3-9
i n K e n t u c k y , M a s s a c h u s e t t s , 4о
t h e r e a r e no b i d s s u f f i c i e n t t o pay th e
amount due a t t h e t im e o f p u b l i c s a l e o r i f an a c t i o n a t law
d o e s n o t c o l l e c t t h e sum d u e ,
the s t o c k i s c o n s i d e r e d f o r н
f e i t e d t o t h e c o r p o r a t i o n . - 3-4 K entucky was i n c l u d e d i n the
p r e v i o u s s e c t i o n d e a l i n g w i t h t h e a c q u i s i t i o n o f s t o c k to
prevent lo s s ;
it
is a l s o c l a s s i f i e d in t h i s group.
The p r o н
v i s i o n r e g a r d in g s e l l i n g the s t o c k w i t h i n a y e a r i s r e q u ir e d
O
A r i z o n a C o r p o r a t i o n C o m m ission . Laws o f A r iz o n a
R e l a t i n g t o , o r Under i t s J u r i s d i c t i o n . 1 9 2 8 . Ch. 1 4 , A r t . 1,
S ec. 586.
9
Id aho C ode. 1 9 3 2 . T i t . 2 9 , S e c . 2 9 - 1 2 7 .
4 9 A rk ansas and M in n e s o t a h ave a s i m i l a r p r o v i s i o n ,
b u t they are c o n sid e r e d below .
C a r r o l l ? s K e n tu c k y S t a t u t e s . A n n o t a t e d B a l d w i n ? s
1936 E d i t i o n .
Ch. 3 2 , S e c . 5 4 3 .
4о G e n e r a l Laws o f t h e Commonwea 1 t h o f M a s s a c h u s e t t s ,
T e r c e n t e n a r y E d i t i o n , 1 9 3 2 . T i t . XXII, Ch. 1 5 6 , S e c . 2 0 .
'
"1
"Z
V i r g i n i a C o r p o r a t i o n Law, w i t h a l l Amendments t o
June 2 1 , 1 9 3 8 .
Ch. 1 4 7 , S e c . 3 8 0 7 .
44 C aliforn ia,
D e l a w a r e , K a n s a s , M ary lan d , M i c h i g a n ,
P e n n s y l v a n i a , and West V i r g i n i a m i g h t h a v e b e e n I n c l u d e d
b u t a r e d i s c u s s e d b e l o w i n a more g e n e r a l s e c t i o n .
C olorad o
p r o v i d e s t h a t t h e b y - l a w s may p r o v i d e f o r s a l e o r f o r f e i t u r e .
under b oth c ir c u m sta n c e s.
M o n ta n a ,^ T e x a s , a n d
t r i c t o f C olu m b ia-^ p r o v i d e t h a t i f ,
a c e r t a i n named p e r i o d ,
the D is н
a f t e r demand g i v e n f o r
su c h d e l i n q u e n t payment i s n o t made,
t h e s t o c k and a l l payments a r e f o r f e i t e d t o t h e c o r p o r a н
tion.^-о
S t a t u t e s t h a t perm it a c o r p o r a t io n to a c q u ir e i t s
own share's s u b .1e c t o n l y to c a p i t a l i m p a i r m e n t .
g rou p i n c l u d e s t h o s e s t a t e s
by the c o r p o r a tio n o f . i t s
concern i s
im paired.
The n e x t
th a t r e s t r i c t the a c q u i s i t i o n
own s t o c k when t h e c a p i t a l o f t h e
There i s a v e r y c l o s e a d h e r e n c e to a
common t y p e o f p h r a s e o l o g y i n t h i s grou p a l t h o u g h b y no
means a r e t h e p r o v i s i o n s i d e n t i c a l .
Indiana
1Q
in a very
b r i e f statem ent a llo w s a co rp o ra tio n to a cq u ire , but not
vote,
its
own s t o c k i f
the c a p i t a l i s n o t i m p a i r e d . C o l o r a -
R e v i s e d Codes o f M ontana, 1 9 3 5 .
17, Sec. 5967.
A n n o t a t e d . Ch.
V e r n o n 1s Texas S t a t u t e s . 1 9 3 6 ,
T i t . 3 2 , Ch. 3 , S e c . 1 3 3 6 .
C entennial E d itio n
Code o f Laws f o r t h e D i s t r i c t o f C o lu m b ia . 1 9 2 8 ,
w ith supplem ents.
T i t . 5 , Ch. 9 , S e c . 2 6 9 .
na
M i s s o u r i , New Y ork, Oklahoma, and Texas m i g h t
h ave b e e n i n c l u d e d b u t a r e d i s c u s s e d b e l o w .
C e r t a i n Laws C o n c e r n in g C o r p o r a t i o n s f o r P r o f i t ,
1937.
Ch. 2 1 5 ,
P t.
II,
A rt.
1,
S e c . 3b
(8).
282
d o , 2 3 D ela w a r e,2^ M ichigan,
22
M i s s o u r i , 2 3 N e v a d a ,2 ^ Rhode
I s l a n d 2 3 and West V i r g i n i a 2 3 a r e v e r y s i m i l a r .
The b a s i c
p r o v i s i o n i s as f o l l o w s :
E v e r y c o r p o r a t i o n o r g a n i z e d u n d e r t h i s c h a p t e r , or
e x i s t i n g u n d e r t h e la w s o f t h i s S t a t e , s h a l l h a ve the.
power to p u r c h a s e , h o l d , s e l l and t r a n s f e r s h a r e s o f i t s
own c a p i t a l s t o c k : P r o v i d e d , That no s u c h c o r p o r a t i o n
s h a l l u s e i t s fu n d s or p r o p e r t y f o r t h e p u r c h a s e o f i t s
own s h a r e s o f c a p i t a l s t o c k when s u c h u s e w ould c a u s e
any im pairm en t o f t h e c a p i t a l o f t h e c o r p o r a t i o n :
Proн
v i d e d f u r t h e r , That s h a r e s o f i t s own c a p i t a l s t o c k b e o n g i n g to t h e c o r p o r a t i o n s h a l l n o t be v o t e d upon,
d i r e c t l y or in d i r e c t l y : . . . . 2 7
A l l o f t h e s t a t e s m e n t io n e d above h a v e i n g e n e r a l t h e p r o v i н
s io n as in d ic a t e d , e x c e p t th a t M issou ri in a d d itio n provides
t h a t s u c h s t o c k s h a l l n o t be a c q u i r e d i f
i t would p e r p e t r a t e
C o r p o r a t i o n Laws, a s r e v i s e d and amended t o O c t o н
ber 1, 1937.
Ch. 4 1 , A r t . 1 , S u b d i v . 1 , S e c . 2 4 .
PI G e n e r a l P r o v i s i o n s R e s p e c t i n g D o m e stic and Forн
23
e i g n C o r p o r a t i o n s C o n t a in e d i n t h e G e n e r a l C o r p o r a t i o n Laws
o f t h e Sta t e o f D e l a w a r e . a s amended 1 9 3 7 . Ch. 6 5 , Art.. 1 ,
Sec. 19.
1938.
22
S t a t e o f M i c h i g a n , G e n e r a l C o r p o r a t i o n Lav/s,
S e c . 10 ( h ) .
G e n e r a l C o r p o r a t i o n Laws and M i s c e l l a n e o u s P roн
v i s i o n s o f t h e S t a t e o f M i s s o u r i , R e v i s e d S t a t u t e s o f 1929
and Amendments t h r o u g h 1 9 3 3 .
Ch. 3 2 , A r t . 7 , S e c . 4 9 4 0 ( 1 2 ) .
23
2 ^ S t a t e o f Nevada, D o m e s t ic and F o r e i g n Corporaн
t i o n Laws, as amended t o 1 9 3 7 . Sec . 9 ("3) .
23
G e n e r a l C o r p o r a t i o n Law o f t h e S t a t e o f Rhode
I s l a n d , a s amended 1 9 3 2 . Ch. 2 4 8 , A r t . I I , S e c . 5 ( g ) .
2 3 C o r p o r a t i o n Laws o f West V i r g i n i a , a d o p t e d b y t h e
L e g i s l a t u r e S p e c i a l S e s s i o n , March 1 9 3 0 , w i t h amendments to
d a t e o f I s s u e , J u l y 1 , 1 9 3 5 . Ch. 3 1 , Art:. 1 , S e c . 3 9 .
27 L oc. c i t .
283
a f r a u d upon i t s
c r e d i t o r s o r o t h e r s t o c k h o l d e r s ; Rhode
I s l a n d makes no m e n t i o n o f the
Nevada, i t
b a b l y
is
l i m i t a t i o n on v o t i n g t h e stock.
i n t e r e s t i n g to n o t e , w h i l e t h e m ean ing i s p r o н
i d e n t i c a l h a s r a t h e r an uncommon form o f e x p r e s s i o n .
The f i r s t c l a u s e r e a d s a s f o l l o w s : l*. . . . t o p u r c h a s e ,
h o ld ,
s e l l , and t r a n s f e r s h a r e s o f i t s
and u s e t h e r e f o r i t s
own c a p i t a l s t o c k ,
c a p i t a l , c a p i t a l s u r p l u s , s u r p l u s , or
o t h e r p r o p e r t y or f u n d s ; p r o v i d e d t h a t no s u c h c o r p o r a t i o n
s h a l l u s e i t s f u n d s o r p r o p e r t y f o r t h e p u r c h a s e when ,
. . .
prom t h i s q u o t a t i o n i t
i s apparent th a t there
was some c o n f u s i o n i n t h e minds o f t h e l e g i s l a t o r s c o n c e r n н
i n g t h e m eaning o f the term s c a p i t a l ,
p l u s , or o th e r p ro p erty or fu n d s.
c a p it a l su rp lu s, surн
I t would seem t h a t i t
was t h o u g h t t h a t t h e n e t w orth a c c o u n t s , c o n t a i n i n g a s t h e y
do c r e d i t b a l a n c e s , a r e t h e same as th e v a r i o u s a s s e t s a c н
counts,
su ch a s p r o p e r t y and f u n d s .
T h is i s a common m i s н
c o n c e p t i o n among p e r s o n s u n a c q u a i n t e d w i t h t h e t e c h n i c a l
phases o f a cco u n tin g tech n iq u e.
There i s no way u n d er t h e
a c c e p t e d a c c o u n t i n g p r o c e d u r e b y w h ich one ca n a t t r i b u t e
any one c r e d i t i n a s u r p l u s a c c o u n t t o a p a r t i c u l a r d e b i t
i n t h e a s s e t s a c c o u n t s o f a company.
M or eo v e r, t h e s t o c k
when p u r c h a s e d m ust be a c q u i r e d by the t r a n s f e r e n c e o f
a s s e t s , u s u a l l y i n t h e form o f c a s h , and n o r m a l l y no e n t r y
S t a t e o f Nevada, D o m e s t ic and F o r e i g n C o r p o r a t io n
L aw s, a s amended t o 1 9 3 7 . SecTI 9 ( 8 )'.
284
i s made i n a c a p i t a l s t o c k a c c o u n t a l t h o u g h u n d er t h e comн
m only a c c e p t e d p r a c t i c e t h e d e b i t b a l a n c e i n t h e t r e a s u r y
s t o c k a c c o u n t i s s u b t r a c t e d i n the n e t w orth s e c t i o n o f t h e
b alance s h e e t.
S tatutes
t h a t p e r m it a c o r p o r a t i o n t o a c q u i r e i t s
own s h a r e s ' i f s p e c i f i e d t y p e s o f s u r p l u s a r e a v a i l a b l e .
Many o f t h e s t a t e s g o v e r n t h e r i g h t o f a c o r p o r a t i o n c r e a t н
ed u n d e r t h e i r la w s t o a c q u i r e i t s own s t o c k b y r e f e r e n c e
to the c o n d i t i o n o f th e su rp lu s a cc o u n ts
5
i.e .,
s u r p l u s t h a t may be u s e d f o r t h a t p u r p o s e .
the t y p e o f
Oklahoma 2 9 and
N orth D akota 3 0 p e r m i t a company to p u r c h a s e i t s own s t o c k
from i t s
surplus p r o f i t s ,
w ritin g of a l l i t s
o r by t h e unanimous c o n s e n t i n
s t o c k h o l d e r s , i n su ch manner and f o r such
p r i c e or c o n s i d e r a t i o n as th ey unanim ously d e c id e upon.
T his would im p l y t h a t any s u r p l u s m i g h t be u s e d .
North Daн
k o t a adds a p r o v i s i o n m aking t h e ab o v e s u b j e c t t o o t h e r p r o н
v i s i o n s and a l s o a l l o w s t h e c o r p o r a t i o n t o a c q u i r e s h a r e s
a s t h e r e s u l t o f non-paym en t o f a s s e s s m e n t s .
?Z 1
The s t o c k н
h o l d e r s , b y a r e s o l u t i o n o r by t h e i r unanimous c o n s e n t i n
29
supplem ent.
Compiled S t a t u t e s o f Oklahoma. 1 9 2 1 , w i t h 1926
Ch. 3 4 , A r t . I I , S e c . 5 3 2 0 .
C o r p o r a t i o n Laws o f t h e S t a t e o f N orth D ak ota:
G e n e r a l and C o o p e r a t i v e . R e v i s e d to J u l y 1 , 1 9 2 5 , w i t h su p н
plem ents to 1937.
Ch. 1 2 , S e c . 4 5 3 1 .
30
31
I b i d . . Ch. 1 2 , S e c . 4 5 8 2 .
285
w r i t i n g , may d e t e r m i n e to p u r c h a s e t h e c o r p o r a t i o n ' s own
s t o c k from the " s u r p l u s f u n d s " o f t h e c o r p o r a t i o n i n t h e
s t a t e o f South D akota. 3 ^
its
M arylan d^ perm its the purchase o f
own s t o c k i f a u t h o r i z e d b y i t s
o f t w o - t h i r d s o f a l l the
ou tstan d in g,
shares
(if
c h a r t e r o r by t h e v o t e
two o r more c l a s s e s a r e
then tw o -th ir d s o f each c l a s s )
out of i t s
surн
p l u s i n c l u d i n g s u r p l u s c r e a t e d by a r e d u c t i o n o f t h e amount
of issu ed c a p ita l stock .
T h e .s ta t u t e s t i p u l a t e s , however,
that;
No s u c h c o r p o r a t i o n s h a l l p u r c h a s e any s h a r e s o f i t s
own s t o c k u n l e s s t h e a s s e t s r e m a i n i n g i m m e d i a t e l y a f t e r
s u c h p u r c h a s e s h a l l be n o t l e s s t h a n the d e b t s o f the
c o r p o r a t i o n p l u s t h e amount o f i t s i s s u e d c a p i t a l s t o c k ,
Kansas h a s a l e n g t h y and v e r y p r e c i s e s t a t e m e n t o f
c o n d itio n s as f o l l o w s ;
No c o r p o r a t i o n s h a l l p u r c h a s e o r a g r e e t o p u r c h a s e ,
o r c a u s e o r p e r m i t any c o r p o r a t i o n which i t c o n t r o l s t o
p u r c h a s e o r a g r e e t o p u r c h a s e , or em p loy o r a s s i s t any
p erson or c o r p o r a tio n to purchase or agree to purchase
f o r i t s a c c o u n t any o f i t s s h a r e s , e x c e p t as f o l l o w s ;
( 1 ) t o c o l l e c t o r compromise i n good f a i t h a d e b t ,
c l a i m , o r c o n t r o v e r s y w i t h any s h a r e h o l d e r ; ( 2 ) from
s h a r e h o l d e r s who b y r e a s o n o f d i s s e n t a r e e n t i t l e d t o
b e .paid t h e f a i r c a s h v a l u e o f t h e i r s h a r e s ; ( 3 ) from
one who, a s an em p loyee o t h e r t h a n a s an o f f i c e r o r
3 ^ C o r p o r a t i o n Laws o f S o u t h D a k o ta , 1 9 3 8 .
Ch. 9 2 , S e c . 8 7 7 7 .
P t. 17,
? 3 3 Laws o f Maryland R e l a t i n g t o B u s i n e s s ? o r p o r a t i o n s .
A nnotated T w elfth E d i t i o n , 1937.
A r t . 2 3 , S e c . 50 ( 3 ) .
34
I b i d . . A rt.
23,
Sec.
50
(7).
286
d i r e c t o r , h a s p u r c h a s e d s u c h s h a r e s from t h e c o r p o r a t i o n
u n d e r an a g r e e m e n t r e s e r v i n g t o the c o r p o r a t i o n t h e
o p t i o n to r e p u r c h a s e o r o b l i g a t i n g i t t o r e p u r c h a s e ;
( 4 ) to e l i m i n a t e f r a c t i o n a l s h a r e s ; ( 5 ) to p u r c h a s e
sh a r e s s u b j e c t to redem ption a t p r ic e s n o t e x c ee d in g
t h e r e d e m p t i o n p r i c e t h e r e o f ; ( 6 ) to c a r r y o u t p r o v i н
sio n s o f i t s a r t i c l e s a u th o riz in g con version o f i t s
s h a r e s ; and ( 7 ) s u b j e c t t o l i m i t a t i o n , I f a n y , i n i t s
a r t i c l e s o n l y from e a r n e d s u r p l u s .
A corporation s h a ll
n o t p u r c h a s e i t s own s h a r e s o f any c l a s s In any c a s e
when t h e r e i s r e a s o n a b l e ground f o r b e l i e v i n g tha t t h e
c o r p o r a t i o n i s u n a b l e , or b y such p u r c h a s e w i l l b e r e n н
d e r e d u n a b l e , t o s a t i s f y i t s d e b t s or l i a b i l i t i e s as
t h e y f a l l due . . .
In t h i s s t a t e th en ,
t h e p u r p o s e s f o r w hich t r e a s u r y s t o c k
may b e p u r c h a s e d a r e d e f i n i t e l y named.
From t h e manner i n
w h ich t h i s a c t i s w r i t t e n i t may be assum ed t h a t the la w i s
e s t a b l i s h i n g s e v e n a l t e r n a t i v e s under w h ich t r e a s u r y s h a r e s
may be p u r c h a s e d .
The f i r s t s i x would a p p a r e n t l y a l l o w su ch
p u r c h a s e from any s u r p l u s and u n d e r t h e s e v e n t h a l t e r n a t i v e
o n ly earned su rp lu s Is a v a i l a b l e f o r purchase o f tr e a s u r y
shares.
The C a l i f o r n i a
?za
la w I s p r a c t i c a l l y i d e n t i c a l t o t h a t
ab ove w i t h c e r t a i n m inor a d d i t i o n s
t h a t do n o t change t h e
s u b s t a n c e b u t r a t h e r r e i n f o r c e and make more d e f i n i t e c e r t a i n
features.
S h a r e s may b e a c q u i r e d o u t o f s t a t e d c a p i t a l or
from any s u r p l u s u n d e r s u b d i v i s i o n 1 t o 5 o f t h e above quotaн
tio n ,
and p u r c h a s e s from e a r n e d s u r p l u s a r e n o t l i m i t e d
.
35 s t a t e o f K a n s a s , S e s s i o n Laws. 1 9 5 9 . Ch. 1 5 2 ,
S ec. 24.
P e e r i n g 1s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a ,
1 9 3 7 . P i v . 1 , P t . IV, T i t . 1 , Ch. X, S e c . 3 4 2 .
287
a lo n e to c a s e s au th orized , under t h e s e s u b d i v i s i o n s .
I n ad н
d i t i o n , a t t h e tim e o f t h e p u r c h a s e o f s u c h s h a r e s e i t h e r
from e a r n e d o r p a i d - i n s r r p l u s ,
su c h a c c o u n t m ust be r e d u c н
ed b y an amount e q u a l t o t h e a g g r e g a t e p u r c h a s e p r i c e o f
the shares purchased.
T h is t y p e o f e n t r y would r e d u c e t h e
surplus a v a ila b le f o r d iv id e n d s.
A p o s s i b l e r e l e a s e o f one
o f the l i m i t a t i o n s i s fo u n d i n t h e s t a t e m e n t t h a t w h i l e a
c o r p o r a tio n cannot purchase i t s
s t o c k when su ch p u r c h a s e
w i l l r e n d e r i t u n a b l e to s a t i s f y i t s d e b t s a s t h e y f a l l d u e ,
if
su ch d e b t s h ave b e e n a d e q u a t e l y p r o v i d e d f o r . t h e
t i o n does n o t o p e r a t e .
lim ita н
The term " a d e q u a t e l y p r o v i d e d f o r "
i s d e f i n e d a s d e b t s whose "payment t h e r e o f s h a l l h a ve b e e n
assumed o r g u a r a n t e e d by a f i n a n c i a l l y r e s p o n s i b l e p e r s o n or
persons. '
L ou isiana3о is
s i m i l a r i n many r e s p e c t s t o t h e two
f o r e g o i n g s t a t e s , b u t - i t v a r i e s i n im portant p o i n t s s u f f i н
c i e n t to w a r r a n t c o n s i d e r a t i o n .
This s t a t e a l l o w s a c o r p o r н
a t i o n , u n l e s s the a r t i c l e s p ro v id e o t h e r w i s e ,
to purchase
i t s own s h a r e s o n l y o u t o f s u r p l u s a v a i l a b l e f o r d i v i d e n d s
and o n l y i f
su ch p u r c h a s e d o e s n o t v i o l a t e t h e c o n t r a c t u a l
r i g h t s o f a n y o t h e r c l a s s o f s h a r e s ; when t h e s h a r e s b y t h e
a r t i c l e s a r e s u b j e c t to r e d e m p t i o n and t h e a r t i c l e s r e l a t i n g
Lo c. c i t .
3 о G e n e r a l C o r p o r a t i o n Laws o f t h e S t a t e o f L o u i s i a n a . 1 9 3 8 . S e c . 23 ( I ) .
288
t h e r e t o do n o t p r o h i b i t the p u r c h a s e ; when i t
to c o l l e c t a d e b t ; when i t
e m p l o y e e s ; when i t . i s
is necessary
i s f o r t h e p urpo se o f r e s a l e
to
n e c e s s a r y to r e p u r c h a s e from an employн
e e who o r i g i n a l l y p u r c h a s e d u nd er a c o n t r a c t g r a n t i n g or
o b l i g a t i n g t h e c o r p o r a t i o n to r e p u r c h a s e s a i d s h a r e s ; o r
f i n a l l y , when' f o r any o t h e r p urpose w hich i s
a u th o riz ed by
an a f f i r m a t i v e . v o t e . o f t w o - t h i r d s o f t h e v o t i n g power o f
each c l a s s o f sh a res 'outstanding r e g a r d le s s o f r e s t r i c t i o n s
on v o t i n g power o f any c l a s s .
M in n e s o t a
i n naming the s o u r c e from w h ich a c o r p o r н
a t i o n may p u r c h a s e i t s
own s h a r e s i n c l u d e s b o t h e a r n e d s u r н
p l u s and p a i d - i n s u r p l u s , b u t c u r t a i l s
the u s e o f p a i d - i n
su r p lu s f o r such purposes i f t h e c o r p o r a tio n has sh a re s o u t н
sta n d in g p r e fe r r e d as to d iv id en d s or p r e fe r r e d a s to a s s e t s ,
a t t h e t im e o f l i q u i d a t i o n .
Under t h e s e c o n d i t i o n s p a i d - i n
s u r p l u s may be u s e d o n l y to p u r c h a s e s u c h p r e f e r r e d s h a r e s .
T his s t a t e v e r y d e f i n i t e l y c ir c u m s c r ib e s the a c q u i s i t i o n o f
s h a r e s b y s t a t i n g t h a t p r o p e r d e d u c t i o n s s h o u l d be made f o r
d ep recia tion , lo s s e s ,
w ise la w f u l,
e t c . , b u t i f the a c q u i s i t i o n i s o th e r н
i t s h a l l n o t be u n l a w f u l b e c a u s e o f the f a i l u r e
to d eterm in e the f a i r v a lu e o f the a s s e t s .
Wo s u r p l u s a r i s н
i n g from u n r e a l i z e d a p p r e c i a t i o n s h a l l b e u s e d a s t h e b a s i s
39
Sec.
21
M in nesota B u s i n e s s C o r p o r a tio n A c t , 1 9 3 3 ,
(V I).
* 40 I b id . . S ec.
21
(I).
Ch. 3 0 0 ,
289 ; '
f o r p u rch asin g tr e a s u r y s h a r e s , e x c e p t th a t m arketable s e c u н
r i t i e s may be' v a l u e d a t m ark et p r i c e .
?New York i n . i t s p e n a l code makes i t a m isdem eanor f o r
a d i r e c t o r t o v o t e f o r t h e p u r c h a s e o f a com pany's own s h a r e s
from any p a r t o f i t s
funds e x c e p t s u r p l u s . 4 4
S t a t u t e s tha t p e r m i t a_ c o r p o r a t i o n t o a c q u i r e i t s own
shares
i f an e x c e s s o f n e t a s s e t s
is a v a ila b le.
A rk an sas,4^
G e o r g i a , 4 3 F l o r i d a , 4 4 and T e n n e s s e e 4 5 a l l o w a c o r p o r a t i o n t o
acquire i t s
own s h a r e s ; p r o v i d e d , h o w e v e r , t h a t no s u c h c o r н
p o r a t i o n may p u r c h a s e i t s
its
a s s e t s over i t s
s h a r e s e x c e p t from t h e s u r p l u s o f
lia b ilitie s
and s t a t e d c a p i t a l , w i t h
c e r t a i n l i m i t a t i o n s regarding v o t in g .
Tennessee g ra n ts t h i s
r i g h t s u b j e c t to c h a r te r r e s t r i c t i o n s .
The g e n e r a l p r i n c i н
p l e i s r e s t r i c t e d u n d er c e r t a i n c o n d i t i o n s i n th e G e o r g ia
j u r i s d i c t i o n , f o r i f th e re i s o u tsta n d in g another c l a s s of
4 4 E x t r a c t s from t h e S t o c k C o r p o r a t i o n Law, G e n e r a l
C o r p o r a t i o n Law, Tax Laws. E x e c u t i v e Law, and P e n a l , E d i t i o n
o f 1 9 3 8 . P e n a l Code, S e c . 664 ( 5 ) .
P o p e 1 s Dice's t o f t h e S t a t u t e s o f A r k a n s a s , 1 9 3 7 .
A r t. I , S e c . 2 1 3 5 ( e ) and Ch. 3 7 , A r t . I V , S e c . 2 1 8 1 .
43 A c t s and R e s o l u t i o n s o f t h e G e n e ra l Assemb1v o f
t h e S t a t e o f G e o r g i a , 1 9 3 7 - 1 9 3 8 . P t . I , T i t . I . S e c . 10 (d)
amending S e c . 2 2 - 3 0 8 o f t h e Code o f G e o r g i a , 1 9 3 5 .
42
Ch. 3 7 ,
44
C o r p o r a t i o n Law, S t a t e o f F l o r i d a , 1925 a s amendн
ed t o J u l y 1 , 1 9 3 4 .
Ch. 1 0 0 9 6 , A r t . 4 , S e c . 8 ( 3 ) .
4- S
1936.
D o m e s t ic and F o r e i g n C o r p o r a t i o n Laws o f T e n n e s s e e ,
Ch. 5 , A r t . I , S e c . 3722 ( 9 ) .
290
s h a r e s h a v i n g a d i s t r i b u t i v e p r e f e r e n c e o v e r t h e s h a r e s purн
c h a s e d , s u c h p u r c h a s e may be made o n l y from e a r n e d s u r p l u s .
N u l l i f y i n g t h i s r e s t r i c t i o n t o a c e r t a i n e x t e n t , t h e law
p rovid es t h a t n otw ith stan d in g t h is l i m i t a t i o n a co rp oration
may a c q u i r e s h a r e s to c o l l e c t or compromise a d e b t o r c l a i m
when n e c e s s a r y t o p r e v e n t l o s s , o r t o d i s c h a r g e an o b l i g a н
t i o n o f t h e c o r p o r a t i o n to a s h a r e h o l d e r a r i s i n g o u t o f c o n versio n r ig h t s .
P en nsylvania
a r*
p l a c e s no l i m i t a t i o n on t h e
purchase o f t r e a s u r y s t o c k e x c e p t th a t i t
s h a l l n o t be a c н
q u i r e d when t h e n e t a s s e t s o f the c o r p o r a t i o n a r e l e s s
than
t h e s t a t e d c a p i t a l o r when s u c h s u r p h a s e would r e d u c e th e
n e t a s s e t s below the s t a t e d c a p i t a l .
A d o m e s t i c c o r p o r a t i o n o f O h i o ^ may p u r c h a s e i t s
own s h a r e s u n d e r t h e c o n d i t i o n s a s summarized b e l o w :
1) When t h e a r t i c l e s a u t h o r i z e t h e r e d e m p t i o n o f suCh
s h a r e s and d o e s n o t p r o h i b i t s u c h p u r c h a s e ;
2)
To s e t t l e a d e b t ;
3) For t h e p u r p o se o f r e s a l e
to em ployees;
4 ) To r e a c q u i r e from em p lo y e e w i t h whom an a g r e e m e n t
t o r e p u r c h a s e h a s b e e n made;
5) To e l i m i n a t e f r a c t i o n a l s h a r e s ;
46. p a y d o n ^ P e n n s y l v a n i a S t a t u t e s . A n n o t a t e d Permanн
e n t E d i t i o n . 1 9 3 S . T i t l e 1 3 - 1 5 , Tit." 1 5 , Ch. 49B, A r t . I l l ,
S e c . 30 2 ( 7 ) .
A-ry
General and F o re ig n C orporation A cts o f the S t a t e
o f O h i o . A n n o t a te d 1 9 3 9 , T i t . IX, D i v . I , Ch. I , S e c . 8 6 2 3 - 4 1 .
291
6
) For r e s a l e t o s h a r e h o l d e r s o r o t h e r s when the c o r н
p o r a t i o n h a s t h e - r i g h t o f p r e e m p t io n when a s h a r e h o l d e r i s
r e q u ir e d to s e l l h i s shares;7) From d i s s e n t i n g s h a r e h o l d e r s ;
8
its
) To t h e e x t e n t o f t h e s u r p l u s o f t h e a g g r e g a t e o f
a s s e ts over i t s l i a b i l i t i e s
p lus s ta te d c a p it a l
a) When a u t h o r i z e d b y t h e a f f i r m a t i v e v o t e o f
t w o - t h i r d s o f e a c h c l a s s o f s h a r e s o u t s t a n d i n g r e g a r d l e s s of
l i m i t a t i o n on t h e v o t i n g power; o r
b) I f t h e a r t i c l e s p e r m i t , a g r e a t e r o r l e s s e r
p rop ortion , not l e s s
th a n a m a j o r i t y o f s u c h c l a s s ; or
c ) I f t h e a r t i c l e s a u t h o r i z e , b y the b o a r d o f
d irecto rs.
The r e s t r i c t i o n s on t h e a p p l i c a t i o n o f t h e ab ove r u l e s a r e
that,
i n d eterm in in g the e x c e s s o f a s s e t s , t r e a s u r y sh ares
s h a l l n o t be c o n s i d e r e d an a s s e t , and a c o r p o r a t i o n s h a l l
n o t p u r c h a s e su ch s h a r e s when t h e r e i s r e a s o n a b l e ground f o r
b e l i e v i n g t h a t the c o r p o r a t i o n i s u n a b l e o r w i l l b e r e n d e r н
ed u n a b l e to s a t i s f y
i t s o b l i g a t i o n and l i a b i l i t i e s .
I l l i n o i s 4 8 p ro v id es t h a t a c o r p o r a tio n s h a l l not purн
c h a s e d i r e c t l y o r i n d i r e c t l y i t s own s h a r e s when i t s n e t
a s s e t s are l e s s
than o r w i l l be r e d u c e d b e l o w t h e sum o f i t s :
(1 ) stated c a p ita l,
AQ
The B u s i n e s s C o r p o r a t i o n A c t ,
1937.
Sec.
6
(2 ) p a i d - i n s u r p l u s ,
(3) any s u r p l u s a r i s i n g from u n r e a l i z e d a p p r e c i a t i o n ,
and
( 4) s u r p l u s a r i s i n g from t h e s u r r e n d e r o f any o f i t s
shares.
This s t a t u t e from t h e v i e w p o i n t o f p r a c t i c a l ' i n t e r p r e t a t i o n
makes e a r n e d s u r p l u s a v a i l a b l e f o r s h a r e p u r c h a s e s .
w i t h s t a n d i n g the f o r e g o i n g l i m i t a t i o n s ,
Notн
a c o r p o r a t i o n may
p u r c h a s e i t s own s h a r e s f o r t h e p u r p o se o f e l i m i n a t i n g f r a c н
t i o n a l s h a r e s , c o l l e c t i n g a d e b t, paying d i s s e n t i n g sh areн
h o l d e r s j, o r t h e r e d e m p t i o n o f p r e f e r r e d s h a r e s .
state
In t h is
t r e a s u r y s t o c k i s n o t to be c o n s i d e r e d an a s s e t i n
d e t e r m i n i n g the r i g h t o f a c o r p o r a t i o n t o pay d i v i d e n d s o r
acquire i t s
own s t o c k , ^
and s i n c e t r e a s u r y s h a r e s a r e to
be c o n s i d e r e d i s s u e d s h a r e s b u t n o t o u t s t a n d i n g s h a r e s , and
s i n c e s t a t e d c a p i t a l i s d e f i n e d i n terms o f i s s u e d s h a r e s ,
the f u n d a m e n t a l a f f e c t i s
t o make u n a v a i l a b l e f o r d i v i d e n d s
a p a r t o f t h e s u r p l u s e q u a l to t h e v a l u e o f t h e t r e a s u r y
shares purchased.
S t a t u t e s t h a t p e r m i t a. c o r p o r a t i o n t o a c q u i r e i t s
own s h a r e s b y i n t e r p r e t a t i o n o f g e n e r a l p o w e r s .
A lt h o u g h
some j u r i s d i c t i o n s s e t f o r t h no s p e c i f i c p r o v i s i o n r e g a r d in g
49 I b i d . , S ec.
2
(m ).
295
the r i g h t o f a c o r p o r a t i o n to a c q u ir e by purchase i t s
stock,
own
t h e r e i s no r e a s o n t o assume n e c e s s a r i l y t h a t i t
'forbidden.
R ather,
if it
is
i s not s p e c i f i c a l l y forb idd en ,
t h e c o r p o r a t i o n may and i n a l l p r o b a b i l i t y i s a l l o w e d so to
do' u n d e r some o t h e r g e n e r a l s e c t i o n .
For e x a m p le , a p r o v i н
s i o n fou n d i n many o f t h e s t a t e la w s u n d e r t h e s e c t i o n d e a l н
in g w i t h powers o f a c o r p o r a t i o n i s a s f o l l o w s :
E v e r y c o r p o r a t i o n s h a l l h a v e t h e power t o :
d . P u r c h a s e , t a k e by d e v i s e o r b e q u e s t , h o l d and c o n v e y su c h r e a l and p e r s o n a l p r o p e r t y a s t h e p u r p o s e s o f
t h e c o r p o r a t i o n may r e q u i r e , and a l l o t h e r r e a l and p e r н
s o n a l p r o p e r t y w hich h a s b e e n o r may be c o n v e y e d o r
m o r t g a g e d t o s u c h c o r p o r a t i o n b y way o f s e c u r i t y , o r i n
s a t i s f a c t i o n o f d e b t s , o r p u r c h a s e d a t s a l e s upon j u d g н
ment o r d e c r e e o b t a i n e d f o r su ch d e b t s ; and t o m ortgage
any su c h r e a l o r p e r s o n a l p r o p e r t y , and i t s f r a n c h i s e ; 5 0
This s e c t i o n u n d e r a l i b e r a l i n t e r p r e t a t i o n m i g h t v e r y w e l l
a l l o w a c o r p o r a t i o n t o p u r c h a s e i t s own s h a r e s .
R eca p itu la tio n .
The s t a t u t o r y p r o v i s i o n s c o n c e r n i n g
t h e r i g h t o f c o r p o r a t i o n s t o p u r c h a s e t h e i r own c a p i t a l
s t o c k may now be summarized.
The f i r s t p a r t o f t h e summary
w i l l e x c l u d e t h e r i g h t o f the c o r p o r a t i o n t o a c q u i r e i t s
own s t o c k f o r c e r t a i n named p u r p o s e s , s u c h as to c o l l e c t a
d e b t, or to e l i m i n a t e f r a c t i o n a l s h a r e s , e t c .
E ight s t a t e s ,
50 The G e n e r a l Corpora t i o n Law o f New J e r s e y , i n c l u d н
i n g a l l s u p p le m e n t s and amendments t h e r e t o to t h e end o f t h e
L e g i s l a t i v e S e s s i o n o f 1 9 3 8 . T i t . 1 4 , Ch. 3 , S e c . l , Subsec.d.
294
C o l o r a d o , D e l a w a r e , I n d i a n a , M i c h i g a n , M i s s o u r i , Nevada,
Rhode I s l a n d , and West V i r g i n i a , h a v e t h e g e n e r a l p r o v i s i o n
t h a t t h e c o r p o r a t i o n may p ur ch ase' i t s
c a p it a l stock except
t h a t s u c h s t o c k may n o t be p u r c h a s e d when t h e c a p i t a l s t o c k
is
i m p a i r e d o r t h e p u r c h a s e would r e n d e r I t i m p a i r e d .
These
a c t s d e s i g n a t e no p a r t i c u l a r s u r p l u s , and t h e r e f o r e , w o u ld
seem t o s a n c t i o n the p u r c h a s e from any s u r p l u s .
I t should
be n o t e d s p e c i f i c a l l y t h a t i n some o f t h e s e s t a t e s
t h e power
e x i s t s t o ap p ortion a part o f the c o n s id e r a tio n r e c e iv e d f o r
s h a r e s w i t h o u t par v a l u e t o p a i d - i n s u r p l u s .
W ith o u t d e t a i l e d l i m i t a t i o n s ,
sas,
t h e s t a t u t e s o f Arkanн
F l o r i d a , P e n n s y l v a n i a , and T e n n e s s e e a l l o w t h e p u r c h a s e
o f t r e a s u r y s h a r e s from th e s u r p l u s o f t h e a s s e t s o v e r t h e
lia b ilitie s
ed,
and s t a t e d c a p i t a l ,
o r , as I t i s
i f the n et a s s e ts are not l e s s
som etim es wordн
th a n t h e s t a t e d c a p i t a l .
T h is would make any s u r p l u s a v a i l a b l e f o r t h e p u r c h a s e o f
treasury sh ares.
New York p e r m i t s th e p u r c h a s e o f s u c h
s h a r e s from s u r p l u s .
Composing a s e p a r a t e grou p a r e t h o s e s t a t e s t h a t
e i t h e r a llo w su rp lu s or su r p lu s a v a i l a b l e f o r d iv id e n d s to
b e u s e d t o a c q u i r e t r e a s u r y s t o c k , or make no m e n t i o n o f t h e
s o u r c e b u t h ave c e r t a i n r e s t r i c t i o n s r e g a r d i n g v o t i n g and
other lim it a t i o n s .
C o n n e c t i c u t , n o t naming a s o u r c e , a l l o w s ,
when t h e c o r p o r a t i o n I s n o t i n s o l v e n t o r would b e r e n d e r e d
in so lv e n t,
t h r e e - f o u r t h s o f t h e s t o c k h o l d e r s t o approve t h e
295
p u r c h a s e o f su ch s h a r e s .
L ou isia n a p erm its such purchase
when a p p r o v e d b y t w o - t h i r d s o f e a c h c l a s s ; t h i s r i g h t , howн
e v e r , I s s u b j e c t to c o n t r a c t u a l r i g h t s o f any c l a s s o f s h a r e s.
Ohio s a n c t i o n s t h e a c q u i s i t i o n by a c o r p o r a t i o n of i t s own shares,
when a u t h o r i z e d b y the v o t e o f t w o - t h i r d s o f e a c h c l a s s ,
or
g r e a t e r o r l e s s v o t e a s d e t e r m i n e d by t h e c h a r t e r , n o t l e s s
t h a n a m a j o r i t y , o r when t h e b o a r d o f d i r e c t o r s h a v e the
a u t h o r i t y under c h a r t e r p r o v i s i o n .
Maryland p e r m i t s the
purchase o f t r e a s u r y shares out o f s u r p lu s ,
p l u s c r e a t e d by t h e r e d u c t i o n o f c a p i t a l ,
m aining are not l e s s
in clu d in g su rн
i f th e a s s e t s r e н
than t h e d e b t s p l u s the amount o f i s s u н
ed s t o c k , and i f a u t h o r i z e d by c h a r t e r or v o t e o f t w o - t h i r d s
o f each c l a s s .
A grou p o f s t a t e s t h a t a l l o w t h e p u r c h a s e o f t r e a s u r y
s t o c k from b o t h e a r n e d and o t h e r t y p e s o f s u r p l u s , w i t h
lim ita tio n ,
G eorgia.
i n c l u d e s Oklahoma, N orth D akota, M i n n e s o t a , and
The f i r s t two s t a t e s g r a n t t h e r i g h t t o u s e s u r н
p l u s p r o f i t s , b u t i f t h e unanimous c o n s e n t o f s h a r e h o l d e r s
i s o b t a i n e d any s u r p l u s may be u s e d .
M in n e s o t a a l l o w s b o t h
e a r n e d and p a i d - i n s u r p l u s t o be u s e d ; h o w e v e r , I f p r e f e r н
r e d s h a r e s a r e o u t s t a n d i n g , o n l y p r e f e r r e d s h a r e s may be
b o u g h t from p a i d - i n s u r p l u s .
i s the su rp lu s o f i t s
A v a il a b le f o r share purchase
a s s e t s over I t s l i a b i l i t i e s
in G eorgia,
but i f th ere i s p r e fe r r e d sh ares o u tsta n d in g o n ly earned s u r н
p l u s ca n be u s e d f o r t h a t p u r p o s e .
296
Earned s u r p l u s i s
the m ajor s o u r c e r e s t r i c t i o n p l a c н
ed. on c o r p o r a t i o n s o r g a n i z e d i n t h e n e x t g ro u p o f s t a t e s .
C a l i f o r n i a and
Kansas ( p r o v i d e d t h e c o r p o r a t i o n i s a b l e to
s a t i s f y i t s d e b ts ) l i m i t the a c q u i s i t i o n o f such sh ares t o
earned s u r p lu s .
Illin o is
a llo w s the purchase o f t r e a s u r y
s h a r e s when t h e n e t a s s e t s a r e n o t l e s s
t h a n t h e sum o f
s t a t e d c a p i t a l , p a i d - i n s u r p l u s , u n r e a l i z e d s u r p l u s , and
s u r p l u s from s u r r e n d e r o f s h a r e s .
T h is s t a t u t e h as i n
e f f e c t made a v a i l a b l e e a r n e d s u r p l u s .
S o u th Dakota r e q u i r e s
t h a t t h e p u r c h a s e be made from s u r p l u s f u n d s and e v e n t h e n
r e q u i r e s t h e unanimous c o n s e n t o f t h e s h a r e h o l d e r s .
As
the s t a t e s
an e x c e p t i o n to the above r e s t r i c t i o n s , many o f
i n c l u d i n g C a l i f o r n i a , G e o r g i a , I l l i n o i s , Kansas
and L o u i s i a n a , a l l o w t h e p u r c h a s e o f s h a r e s from any s u r p l u s
f o r c e r t a i n su n d ry r e a s o n s ,
s u c h as to c o l l e c t a d e b t ,
to
e l i m i n a t e f r a c t i o n a l s h a r e s , t o r e p u r c h a s e s h a r e s from emн
p loy ees, e t c .
C a l i f o r n i a a l l o w s s t a t e d c a p i t a l to b e u s e d
fo r t h is purpose, b ut r e q u ir e s a r e d u c tio n o f the s ta te d
ca p ita l..
The d e t a i l p r o v i s i o n s a r e n o t t h e same i n e a c h
s t a t e named.
In t h i s c o n n e c t i o n i t s h o u l d be remembered the t t h e r e
a r e some s t a t e s t h a t s a n c t i o n the a c q u i s i t i o n o f a c o r p o r a н
t i o n ? s own s h a r e s o n l y t o p r e v e n t a l o s s
to th e c o r p o r a t i o n
o r f o r non-paym en t o f s u b s c r i p t i o n or a s s e s s m e n t l i a b i l i t y .
T h is g r o u p o f s t a t e s
i s composed o f A r i z o n a , C o n n e c t i c u t
297.
( s e e e x c e p t i o n a b o v e ) , I d a h o , K e n tu c k y , M a s s a c h u s e t t s , Monн
t a n a , T e x a s , U t a h , Vermont and V i r g i n i a .
Two o f t h e s t a t e s
e v e n l i m i t t h e r i g h t t o h o l d ' su c h s t o c k b eyond a named
period o f tim e.
In a d d i t i o n to the f o r e g o i n g s t a t u t o r y p r o v i s i o n s
many o f t h e s t a t e s have s u p p l e m e n t a r y s e c t i o n s d e a l i n g w i t h
c e r t a i n problem s t h a t i n e v i t a b l y a r i s e a s a r e s u l t o f comн
pany o w n e r s h i p o f i t s
shares.
It is,
o f course,
commonly
p r o v i d e d t h a t t h e s h a r e s o f s t o c k s o h e l d s h a l l be c o n s i d e r н
ed i s s u e d b u t n o t o u t s t a n d i n g s h a r e s , and t h a t the s t o c k
s h a l l n o t be v o t e d or c o u n t e d i n d e t e r m i n i n g a quorum.
it is
A lso,
commonly p r o v i d e d t h a t such s h a r e s may be d i s p o s e d o f
f o r a c o n s i d e r a t i o n d e t e r m i n e d by t h e b o a r d o f d irectors,о -*u n l e s s o th e r w is e p rovid ed i n the a r t i c l e s .
I n some I n s t a n c e s
t h e c o n t r o l i s p l a c e d i n the hands o f t h e s t o c k h o l d e r s . о ^
L o u i s i a n a i s u n u s u a l i n t h a t su ch s h a r e s c a n n o t be s o l d a t
a p rice le s s
t h a n the p r i c e a t w h ich t h e y were p u r c h a s e d .
C o n c e r n in g c e r t a i n o t h e r a s p e c t s o f t h e problem t h e
s t a t u t e o f C a lif o r n ia о о c o n t a i n s t h e m o s t e x t e n s i v e p r o v i о-*- For exam ple s e e : A r k a n s a s , D e l a w a r e , I n d i a n a ,
I l l i n o i s , M a in e , O h io, and P e n n s y l v a n i a .
52 po r exam ple s e e r I d a h o , Montana, S ou th D a k o t a , and
Utah.
1939.
^ P e e r i n g 1s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a .
D I v . 1 , P t . IV , T i t . 1 , Ch. X, S e c . 3 4 2 a .
298
sio n s.
When any s h a r e s a r e p u r c h a s e d o u t o f e i t h e r e a r n e d
su rp lu s or p a i d - in s u r p lu s ,
the e a r n e d s u r p l u s or p a i d - i n
s u r p l u s as t h e c a s e may h e , must be r e d u c e d b y an amount
e q u a l t o t h e a g g r e g a t e p u r c h a s e p r i c e and t h e s t a t e d c a p i t a l
s h a l l n o t be a f f e c t e d t h e r e b y .
acq u ires i t s
A l s o , when t h e c o r p o r a t i o n
s h a r e s by the m ethods m e n t i o n e d a b o v e , or by
b e q u e s t or g i f t o r upon the d i s t r i b u t i o n o f t h e a s s e t s o f
a n o t h e r company, o r upon f o r f e i t u r e ,
such s h a r e s may be c a r н
r i e d a s t r e a s u r y s h a r e s or may a t the o p t i o n o f t h e b oard o f
d i r e c t o r s be r e t i r e d ,
b u t no change i n t h e s t a t e d c a p i t a l i s
to be made u n l e s s p r o c e e d i n g s a r e t a k e n t o r e d u c e t h e c a p i н
ta l.
However, when s h a r e s a r e a c q u i r e d by p u r c h a s e o r f o r н
f e i t u r e upon w h ich p a r t o f the a g r e e d s u b s c r i p t i o n p r i c e r e н
m ains u n p a i d ,
the s t a t e d c a p i t a l must be r e d u c e d b y the
amount u n p a i d upon s u c h s h a r e s w i t h o u t f u r t h e r p r o c e e d i n g s .
I f a company a c q u i r e d s t o c k o u t o f s t a t e d c a p i t a l ,
f o r the
p u r p o se a l l o w e d b y l a w , su ch s h a r e s a re t o be r e s t o r e d to
t h e s t a t u s o f a u t h o r i z e d b u t u n i s s u e d s h a r e s , and s t a t e d
c a p i t a l , by. r e s o l u t i o n o f t h e b oard o f d i r e c t o r s , may be r e н
du c ed by the amount o f s t a t e d c a p i t a l r e p r e s e n t e d b y su c h
s h a r e s , w hich amount s h a l l be d e t e r m i n e d by d i v i d i n g t h e
s t a t e d c a p i t a l a t t r i b u t a b l e to t h e c l a s s o r s e r i e s
to which
su c h s h a r e s b e l o n g by t h e number o f s h a r e s o u t s t a n d i n g immeн
d i a t e l y p r i o r t o t h e p u r c h a s e o f su ch s h a r e s .
law a l s o c o n t a i n s t h e f o l l o w i n g s e c t i o n ;
The C a l i f o r n i a -
299
When, a c o r p o r a t i o n a c q u i r e s i t s s h a r e s o u t o f s u r p l u s
a r i s i n g from r e d u c t i o n o f s t a t e d c a p i t a l , su c h s u r p l u s
s h a l l be r e d u c e d by th e amount o f t h e p u r c h a s e p r i c e
t h e r e o f and s u c h s h a r e s s h a l l be r e s t o r e d to the s t a t u s
o f au th orized but u n issu ed shares w ithou t r e d u c tio n o f
stated c a p ita l.
I f t h e a r t i c l e s p r o h i b i t t h e r e i s s u e o f any s h a r e s
a c q u i r e d , t h e n upon t h e i r a c q u i s i t i o n t h e a u t h o r i z e d
number o f s h a r e s o f the c l a s s t o w h i c h s u c h s h a r e s b e н
l o n g s h a l l be r e d u c e d b y the number o f s h a r e s so a c q u i r н
e d . 54
Treasury sh a re s s h a l l not c a r r y v o t in g or d iv id en d
r i g h t s and s h a l l n o t be c o u n t e d as o u t s t a n d i n g s h a r e s
f o r any p u r p o se nor a s a s s e t s f o r t h e p u r p o se o f computн
in g a su rp lu s a v a i l a b l e f o r d iv id e n d s or the purchase
o f s h a r e s i s s u e d by t h e c o r p o r a t i o n o r th e making o f
any o t h e r d i s t r i b u t i o n t o i t s s h a r e h o l d e r s .
U nless
o t h e r w i s e p r o v i d e d i n the a r t i c l e s , su ch s h a r e s may be
r e t i r e d and r e s t o r e d t o the s t a t u s o f a u t h o r i z e d and u n н
i s s u e d sh ares w ith o u t the r e d u c t i o n o f s t a t e d c a p i t a l
o r may be d i s p o s e d o f f o r su ch c o n s i d e r a t i o n as t h e
b o a r d o f d i r e c t o r s may f i x and t h e c o n s i d e r a t i o n s o r e н
c e i v e d s h a l l be ad ded t o the p a i d - i n s u r p l u s e x c e p t as
f a r a s needed to w r i t e o f f a d e f i c i t o f n e t a s s e t s b e н
lo w t h e amount o f s t a t e d c a p i t a l .
I l l i n o i s , b y i n t e r p r e t a t i o n , makes u n a v a i l a b l e f o r
o th e r purposes su r p lu s e q u a l to the t r e a s u r y sh a re s p u rch a sн
ed.
M ichigan,
i n r e g a r d t o th e books and r e c o r d s and r e н
p o r t s , p o r v i d e s t h a t s u c h b ook s and r e p o r t s s h a l l i n d i c a t e
" th e c u m u l a t i v e e f f e c t o f s u c h p u r c h a s e , e i t h e r b y sh o w in g
t h e c o s t o f s u c h r e s p e c t i v e p u r c h a s e s as a d e d u c t i o n from
su r p lu s or by c l a s s i f y i n g
its
s u r p l u s a c c o u n t s In such a
manner a s t o show t h e amount o f s u r p l u s a p p l i e d t o su ch p u r -
54
I b id . . Sec. 342a.
55
I b id . . Sec. 342b.
300
c h a s e s an d w h ich t h e r e f o r e s h a l l n o t be a v a i l a b l e f o r d i v i н
dends o f any k i n d o r f o f a d d i t i o n a l p u r c h a s e s o f i t s own
s t o c k o r any o t h e r p u r p o s e s ....................
Sec.
10
55 S t a t e o f M ic h ig a n ,
(h).
G e n e r a l C o r p o r a t i o n Law. 1 9 3 8 .
CHAPTER V I I I
BOOKS OP ACCOUNT,
FINANCIAL STATEMENTS, AND REPORTS.
Scope o f t h e c h a p t e r .
T h is c h a p t e r h a s as i t s
p u rн
pose the d e t e r m in a tio n o f th e s t a t u t o r y req u irem en ts r e l a н
tiv e
to t h e b u s i n e s s r e c o r d s t h a t m ust be m a i n t a i n e d , t o
t h e g e n e r a l form and c o n t e n t o f t h e a n n u a l r e p o r t r e q u i r e d
by t h e s t a t e ,
stock h old ers.
and t o t h e f i n a n c i a l r e p o r t to be g i v e n th e
No a t t e m p t w i l l b e made to c o n s i d e r the many
m i s c e l l a n e o u s r e p o r t s t h a t a r e r e q u i r e d from time t o time
by the s t a t e ;
in s t e a d , o n ly those requ irem en ts p e r t a in in g
to f i n a n c i a l s t a t e m e n t s ,
lo ss
t h e b a l a n c e s h e e t and p r o f i t and
s t a t e m e n t , w h ich must be s u b m i t t e d t o the p r o p e r s t a t e
o f f i c i a l s a n d / o r s h a r e h o l d e r s , w i l l be e x a m in e d .
A lso, a
b r i e f s t a t e m e n t w i l l b e made c o n c e r n i n g t h e p e n a l t i e s i n н
c u r r e d f o r f a i l u r e t o k e e p the a c c o u n t s r e q u i r e d or t o .
f a l s i f y the s t a t e m e n t s .
ite
Many o f t h e s t a t e s a re v e r y d e f i n н
con cern in g th ese f i n a n c i a l r e q u ir e m en ts, w hile o th e r s
d e a l w i t h th e problem o n l y i n a b r o a d g e n e r a l vrny.
The c h a p t e r w i l l be d i v i d e d i n t o t h e f o l l o w i n g su b н
d iv isio n s :
S e c t i o n A.
Books o f A c c o u n t .
S e c t i o n B.
R e p o r t s t o t h e R e g u l a t i n g Commission.
502
S e c t i o n C.
R e p o r t s to S h a r e h o l d e r s .
S e c t i o n D.
P e n a l t y f o r F a i l u r e t ░ Comply w i t h t h e
Law.
S e c t i o n E.
Summary.
S ection A
Books o f A c c o u n t
Minute h o o k .
I t i s u n ifo r m ily r e q u ir ed th a t the corн
p o r a t io n keep a r e co r d or jo u r n a l o f each m eetin g o f i t s
d i r e c t o r s o r s t o c k h o l d e r s w i t h t h e tim e and p l a c e where e a c h
m e e t i n g was h e l d , and a s t a t e m e n t a s to w h e th e r i t was a
r e g u l a r o r s p e c i a l m e e t i n g , how t h e m e e t i n g was a u t h o r i z e d ,
and t h e method u s e d to g i v e n o t i c e o f t h e m e e t i n g .
It is
m and atory t h a t - a l l a c t s done o r t h a t were o r d e r e d to b e done
m ust be c o n t a i n e d t h e r e i n , as w e l l as a s t a t e m e n t o f t h o s e
p resent.
Under c e r t a i n c o n d i t i o n s ,
the m i n u t e book m ust
c o n t a i n a r e c o r d o f t h e time t h e d i r e c t o r s o r s t o c k h o l d e r s
e n t e r e d t h e m e e t i n g , or o b t a i n e d l e a v e o f a b s e n c e t h e r e f r o m ,
t h e names o f t h o s e v o t i n g f o r o r a g a i n s t any g i v e n m e a s u r e ,
and t h e p r o t e s t s ,
i f any, r e g i s t e r e d a g a in s t the p r o p o s a ls .
Such a r e c o r d i s o f t h e g r e a t e s t im p o r ta n c e b e c a u s e the
m a jo r p o l i c i e s r e g a r d i n g s t o c k i s s u e d , d i v i d e n d d e c l a r a t i o n ,
and s i m i l a r m a t t e r s a r e d e t e r m i n e d a t s u c h m e e t i n g s and
d e f i n i t e r e s p o n s i b i l i t y f o r the a c t s may be e s t a b l i s h e d from
303
t h e r e c o r d so m a i n t a i n e d .
Stock r e g i s t e r .
The m o s t common r e q u i r e m e n t c o n c e r n н
in g the books o f a c o r p o r a t io n i s the p r o v i s i o n r e q u i r i n g
t h e c o r p o r a t i o n t o k e e p a s t o c k r e g i s t e r and t r a n s f e r b o o k .
This i s ,
o f c o u r s e , v e r y e s s e n t i a l b e c a u s e o f t h e problem s
a r i s i n g o u t o f t h e i s s u a n c e o f t h e v a r i o u s t y p e s and c l a s s e s
of shares.
Such a r e c o r d t e n d s t o p r e v e n t the o v e r i s s u a n c e
o f s h a r e s , and a l s o d eterm ines t h e v o t i n g r i g h t s o f t h e
sh areh old ers.
On t h i s s u b j e c t New J e r s e y h a s a p r o v i s i o n
w h ich i s f r e q u e n t l y c o p i e d ;
the p r o v i s i o n i s worded as
fo llo w s:
Every c o r p o r a t io n o f t h i s s t a t e s h a l l keep a t i t s
p r i n c i p a l o f f i c e t h e t r a n s f e r b o o k , i n which t h e t r a n s н
f e r o f s t o c k s h a l l be r e g i s t e r e d , and t h e s t o c k b o o k s ,
w h ic h s h a l l c o n t a i n t h e name and a d d r e s s e s o f t h e s t o c k н
h o l d e r s and t h e number o f s h a r e s h e l d b y them r e s p e c t i v e н
l y , open a t a l l t i m e s d u r i n g t h e u s u a l h o u r s f o r b u s i н
n e s s to t h e e x a m i n a t i o n o f e v e r y s t o c k h o l d e r , and f o r
the t r a n s f e r o f s t o c k .^
T h is s e c t i o n h a s many v a r i a n t s i n r e g a r d to i n s i s t e n c e
that
t h e s t o c k r e g i s t e r be k e p t a t t h e p r i n c i p a l o f f i c e or t h a t
i t may be k e p t o u t s i d e the s t a t e #
requ ire
if
A few o f th e s t a t e s
a d u p l i c a t e r e g i s t e r t o be k e p t w i t h i n t h e s t a t e
the o r i g i n a l r e g i s t e r i s k ep t o u t s i d e the s t a t e .
There
a r e a l s o d i f f e r e n c e s c o n c e r n i n g t h e number o f h o u r s t h a t
The G e n e r a l C o r p o r a t i o n Law o f New J e r s e y , i n c l u d н
i n g a l l s u p p le m e n t s and amendments t h e r e t o to t h e end o f th e
L e g is la t iv e S e s s io n o f 1938.
T i t . 1 4 , Ch. 5 , S e c . 1 4 : 5 - 1 .
304
t h e r e g i s t e r must be k e p t op en f o r i n s p e c t i o n and t h e r i g h t
t o i n s p e c t th e r e g i s t e r . ^
For t h e s e v a r i a t i o n s c o m p a r e : D o m e s t ic C o r p o r a t i o n
Laws o f Alabama, 1 9 2 4 , Ch. 2 7 4 , A r t . 4 , S e c . 6 9 9 7 ; A riz o n a
C o r p o r a t i o n C o m m issio n . Laws o f A r iz o n a R e l a t i n g t o , o r
Under i t s J u r i s d i c t i o n . Ch. 1 4 , A r t. 1 , Sec* 5 8 4 ; P op e1s
D i g e s t o f A r k a n s a s . 1 9 3 7 , Ch. 3 1 , A r t . XV, S e c . 2 2 3 5 ; P e e r н
in g ? s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a . 1 9 3 7 , D i v , 1 ,
P t . IV, T i t . 1 , Ch. X I I , S e c . 3 5 4 ; C o r p o r a t i o n Laws, CColoradoU as r e v i s e d and amended, t o O c to b er 1 , 1 9 3 7 , Ch. 4 1 , Art.
1 , S u b d i v . 2 , S e c . 3 1 ; Corpora t i o n Laws o f t h e S t a t e o f
C o n n e c t i c u t , R e v i s e d 1 9 3 7 , Ch. 1 9 1 , P t . I F i , S e c . 5 2 ; Genн
e r a l P r o v i s i o n s R e s p e c t i n g D o m e s t ic and F o r e i g n C o r p o r a t i o n s
C o n t a i n e d i n t h e G e n e r a l C o r p o r a t i o n Laws o f - t h e S t a t e o f
D e l a w a r e , a s amended t o 1 9 3 7 , Ch. 6 5 , A r t . 1 , S e c . 2 9 ; Code
o f Laws f o r t h e D i s t r i c t o f C o lu m b ia , 1 9 2 8 , T i t . 5,- Ch. 9 ,
S e c . 2 8 2 - 2 8 3 ; C o r p o r a t i o n Law, S t a t e o f F l o r i d a , 1925 as
amended t o J u l y 1 , 1 9 3 4 , Ch. 1 0 0 9 6 , A r t . XVI, S e c . 58;
Idaho Code, 1 9 3 2 , T i t . 2 9 , Ch. l , S e c . 2 9 - 1 4 3 ; The B u s i n e s s
C o r p o r a t i o n A c t , 1937 ^ I l l i n o i s ] S e c . 4 5 ; C e r t a i n Laws Conн
c e r n i n g C o r p o r a t i o n s f o r P r o f i t , 1937 [ In d ia n a ^ Ch. 2 1 5 ,
P t . I I , A r t . 1 , S e c . 11; Code o f I o w a . 1 9 3 5 , T i t . XIX, Ch.
3 8 4 , S e c . 8 3 8 5 ; S t a t e o f K a n s a s , S e s s i o n Laws. 1 9 3 9 , Ch. 152,
S e c . 6 9 ; C a r r o l l ? s K entucky S t a t u t e s , A n n o t a t e d B a l d w i n s ?
1936 E d i t i o n , Ch. 3 2 , A r t . 1 , S e c . 5 4 6 ; G e n e r a l C o r p o r a t i o n
Laws o f the S t a t e o f L o u i s i a n a , 1 9 3 8 , S e c . 3 8 ; S t a t e o f
Maine, P r o v i s i o n s o f Law i n F o r c e R ela t i n g t o B u s i n e s s Corн
pora t i o n s , 1930 a s amended, Ch. 5 6 , S e c . 3 2 ; Laws o f Maryн
l a n d R e l a t i n g t o B u s i n e s s C o r p o r a t i o n s . A n n o t a te d T w e l f t h
E d i t i o n , 1 9 3 7 , A r t . 2 3 , S e c . 8 5 ; G e n e r a l Laws o f t h e Commonн
w ea lth o f M a s s a c h u s e tts . T ercentenary E d it io n , 1932, T i t .
X X II, Ch. 1 5 5 , S e c . 2 2 ; S t a t e o f M i c h i g a n , G e n e r a l C orporaн
t i o n Law, 1 9 3 8 , S e c . 4 5 ; M in n e so ta B u s i n e s s C o r p o r a t i o n Act,
as amended t o 1 9 3 5 , Ch. 3 0 0 , S e c . 33 ( I ) ;
G e n e r a l C o rp oraн
t i o n Laws and M i s c e l l a n e o u s p r o v i s i o n s o f t h e StsrBe o f
M i s s o u r i , R e v i s e d S t a t u t e s o f 1929 and amendments th r o u g h
1 9 3 3 , Ch. 3 2 , A r t . 1 , S e c . 4 5 5 0 and Ch. 3 7 , A r t . 7 , S e c .
4 9 4 5 ; R e v i s e d Code o f M on tana, 1 9 3 5 , Ch. 2 1 , S e c . 6 0 0 8 ; ' Comн
p i l e d S t a t e s o f N e b r a s k a , 1929 w i t h 1937 su p p le m e n t ,. Ch. 2 4 ,
A r t . I l l , S e c . 3 0 2 ; S t a t e o f Nevada, D o m e s t ic an d F o r e i g n
C o r p o r a t i o n Laws as amended t o 1 9 3 7 , S e c . 8 0 ; E x t r a c t s from
t h e S t o c k C o r p o r a t i o n Law, G e n e r a l Corpora t i o n Law, E x e c u -
305
It is
i n t e r e s t i n g t o n o t e t h e a t t e m p t on t h e p a r t o f
t h e l e g i s l a t o r s t o a s s u r e a c c u r a c y i n t h e - s t o c k r e c o r d s by"
t h e u s e o f q u a l i f y i n g w o r d s.
For e x a m p le , Alabama r e q u i r e s
a " t r u e s t a t e m e n t o r book;'* A r iz o n a
t h a t the b ook s be k e p t s o a s t o n .
*z
and Oregon
A
requ ire
. . . show i n t e l l i g e n t l y
( c o n t i n u a t i o n o f f o o t n o t e No. 2 . )
t i v e Law, and P e n a l , E d i t i o n o f 1 9 3 8 , S t o c k Corpora t i o n . haw,
A r t . 3 , S e c . 1 0 ; S t a t e o f North C a r o l i n a , C o r p o r a t i o n Laws,
Ch. 22 o f C o n s o l i d a t e d S t a t u t e s o f 1 9 5 5 , Ch. 2 2 , A r t . 6 ,
S e c . 1 1 7 0 ; C o r p o r a t i o n Laws o f the S t a t e o f N orth D akota:
G e n e r a l and C o o p e r a t i v e , R e v i s e d to J u l y 1 , 1925 and s u p p l e н
m ents to 1 9 3 7 , Ch. 1 2 , S e c . 4 5 6 0 ; G e n e r a l and F o r e i g n Corн
p o r a t i o n A c t s o f t h e S t a t e o f .Ohio, A n n o t a t e d , 1 9 3 9 , T i t . IX,
D i v . I , S e c . 8 6 2 3 - 6 3 ; Oklahoma Compiled S t a t u t e s , 1 9 2 1 , Ch.
3 4 , A r t . IV, S e c . 5 3 5 0 ; Oregon C o r p o r a t i o n Laws, 1 9 3 6 , T i t .
XXV, Ch. I I , S e c . 2 5 - 2 1 6 ; Purdon* s P e n n s y l v a n i a S t a t u t e s ,
A n n o t a t e d Permanent E d i t i o n , 1 9 3 8 , T i t l e s 1 3 - 1 5 , T i t . 1 5 ,
Ch. 49 B , A r t . I l l , S e c . 2 8 5 2 - 5 0 8 ; G e n e r a l C o r p o r a t i o n Law o f
t he S ta t e o f Rhode I s l a n d . . a s amended t o 1 9 3 2 , Ch. 2 4 8 , A r t .
I I , S e c . 3 5 ; Corpora t i o n Laws o f S ou th D a k o t a . 1 9 3 8 , P t . 1 7 ,
Ch.- 2 , S e c . 8 8 3 0 ; D o m e s t ic and F o r e i g n C o r p o r a t i o n Laws o f
T e n n e s s e e , 1 9 3 6 , Ch. 5 , A r t . I , S e c . 3 7 6 2 ; V e r n o n 1s Texas
S t a t u t e s . 1 9 3 6 , C e n t e n n i a l E d i t i o n , T i t . 3 2 , Ch. 3 , S e c .
1528: R ev ised S t a t u t e s o f - U t a h . 1933, T i t . 18, S e c . 1 8 -2 -3 1 ;
P u b l i c Laws o f t h e S t a t e o f Vermont R e l a t i n g to C o r p o r a t i o n s ,
1 9 3 4 , Ch. 2 3 9 , S e c . 5 8 0 5 ; V i r g i n i a C o r p o r a t i o n Law, w i t h a l l
amendments to June 2 1 , 1 9 3 8 , Ch. 1 4 7 , S e c . 3 7 9 7 ; Laws Conн
c e r n i n g P r i v a t e C o r p o r a t i o n s , ^Washington! S e c . 3 8 0 3 - 3 5 ; Cor' p o r a t i o n Laws o f West V i r g i n i a . a d o p t e d b y t h e L e g i s l a t u r e ,
S p e c i a l S e s s i o n , March 1930 w i t h amendments t o d a t e o f I s s u e ,
J u l y 1 , 1 9 3 5 , Ch. 3 1 , A r t . 1 , S e c . 20 and 3 1 ; S t a t u t e s o f
W i s c o n s i n R e l a t i n g t o P r i v a t e C o r p o r a t i o n s . S e c . 1 8 2 . 1 0 and
S e c . 1 8 2 . 1 2 ; Wyoming R e v i s e d S t a t u t e s . 1 9 3 1 , A r t . 1 , S e c .
28-138.
о A r iz o n a C o r p o r a t i o n Commisslon.Laws o f A r iz o n a Reн
l a t i n g t o . or u n d e r I t s J u r i s d i c t i o n . 1 9 2 8 . C h .1 4 , A r t . 1 ,
S e c . 584T
Sec.
4 O regon C o r p o r a t i o n Laws,
25-216.
------ -------------------------
1936.
T it.
XXV. Ch.
II.
306
the o r i g i n a l s t o c k h o l d e r s ,
th eir re sp ectiv e in te r e s ts ,
amount w h ich h a s b e e n p a i d t h e r e o n . ,
.
the
T his i n s i s t н
e n c e upon sh ow ing t h e c o n s i d e r a t i o n r e c e i v e d f o r s h a r e s i s
a l s o e m p h a s i s e d i n the s t a t u t e s . o f C o n n e c t i c u t
as f o l l o w s :
The b o o k s o f e a c h c o r p o r a t i o n o f t h i s s t a t e s h a l l be
s o k e p t a s t o show a t a l l t i m e s t h e m o n e y o r o t h e r c o n - ,
s i d e r a t i o n r e c e i v e d b y s u c h c o r p o r a t i o n f o r th e s t o c k
i s s u e d b y i t and t h e number and par v a l u e , i f a n y , o f
the sh ares o f each c l a s s i s s u e d f o r the s a m e . 6
Some o f t h e o t h e r s t a t e s - - s p e c i f i c a l l y ,
Iow a ,
7
L ou isiana,о
M arylan d ,^ T e n n e s s e e , ^ U t a h , W e s t V i r g i n i a , ^ and Wiscons i n 13- - a l s o r e q u i r e t h e d e t a i l s r e g a r d i n g t h e c o n s i d e r a t i o n
received for shares.
Books o f a c c o u n t .
I t i s o f c o g e n t im p o r ta n ce tha t
5 Loc. c i t .
о C orporation
Laws o f t h e S t a t e o f C o n n e c t i c u t , Reн
v i s e d 1 9 3 7 . Ch. 1 9 1 , P t . IB ,
Sec. 25.
7
Code o f I o w a . 1 9 3 5 , T i t . XIX, Ch. 3 8 4 , S e c . 8 3 8 5 .
о C o n s t i t u t i o n o f L o u i s i a n a . Art. X I I I , S e c . 4 .
^ Laws o f Maryland R e l a t i n g to B u s i n e s s Corpora t i o n s ,
A nnotated T w elfth E d i t i o n , 1937. A rt. 2 3 , S ec. 4 8 .
1 0 D o m e s t ic a nd F o r e i g n Corpora t i o n Laws o f T e n n e s s e e ,
1 9 3 6 . Ch. 5 , A r t . I , S e c . 3 7 6 2 .
11
R evised S ta tu te s
o f U t a h . 1 9 3 3 . T i t . 1 8 , S e c . 18-2-31.
^
Corpora t i o n
Laws o f Wes t V i r g i n i a , a d o p t e d b y L e g i s н
l a t u r e , S p e c i a l S e s s i o n , March, 1930 w i t h amendments t o d a t e
o f I s s u e , J u l y 1 , 1 9 3 5 . Ch. 3 1 , A r t . 1 , S e c . 3 1 .
S t a t u t e s o f W i s c o n s i n R e l a t i n g to P r i v a t e C o rp o ra н
t i o n s , 1 9 3 7 . S e c . 1 8 2 . 1 0 and 1 8 2 . 1 2 .
307
the c o r p o r a tio n keep books o f acco u n t i n which are reco rd ed
the b u s in e s s t r a n s a c t io n s o f the c o r p o r a tio n .
I t is
sig n ifн
i c a n t to n o t i c e t h e d e g r e e t o w h ic h the v a r i o u s s t a t e s have
. p r e s c r i b e d t h e d e t a i l n e c e s s a r y i n su ch b o o k s .
w i l l be made o f su ch s e c t i o n s a t t h i s t i m e .
A survey
This a n a l y s i s
w i l l exclu d e the sto c k r e g i s t e r .
The f i r s t grou p i s composed o f t h o s e s t a t e s w hich r e н
q u i r e m e r e l y .that b ook s o f a c c o u n t be k e p t .
t i o n has been o r g a n iz e d in M o n ta n a ,^
N
I f the corp oraн
e b r a s k a ,
15 N orth Daн
k o t a , 1о Oklahoma,1 ^ S o u t h D a k o t a , 1о an^ T e x a s - ^ i t i s n e c e s н
s a r y f o r a r e c o r d o f a l l b u s i n e s s t r a n s a c t i o n s t o be k e p t ,
but the type o f r e c o r d or d e t a i l n e c e s s a r y i s n o t m en tioned.
Some o f t h e o t h e r s t a t e s
i n t h i s group q u a l i f y the g e n e r a l
r e q u i r e m e n t b y some a d j e c t i v e i n d i c a t i n g t h e e x t e n s i v e n e s s
or a d e q u a c y o f 'the a c c o u n t s i n a g e n e r a l way.
^
Colorado^о and
R e v i s e d Code o f M on tana, 1 9 3 5 . Ch. 2 1 , S e c . 6 0 0 8 .
Compiled S t a t u t e s o f N e b r a s k a . 1929 w i t h 1937
cu m u lative supplem ent.
Ch. 2 4 , A r t . I l l , S e c . 3 0 2 .
C o r p o r a t i o n Laws o f t h e Stg t e o f N orth D a k o t a :
G e n e r a l and C o o p e r a t i v e , R e v i s e d t o 'July 1 , 1925 w i t h s u p p l e н
m ents t o 1 9 3 7 . Ch. 1 2 , S e c . 4 5 6 0 .
1^ Compiled S t a t u t e s o f Oklahoma 1 9 2 1 . Ch. 3 4 , A r t .
IV, S e c . 5 3 4 9 .
1 8 C o r p o r a t i o n Laws o f South D a k o t a , 1 9 3 8 .
Pt. 1 7 , ,
Ch. 2 , S e c . 8 8 3 2 .
Vernon*s Texas S t a t u t e s . 1 9 3 6 . C e n t e n n i a l E d i t i o n ,
T i t . 3 2 , Ch. 3 , S e c . 1 5 2 8 .
20 C o r p o r a t i o n Laws a s r e v i s e d and amended t o O c tob er
1-, 1 9 3 7 . Ch. 4 1 , A r t . 1 , S u b d i v . 2 , S e c . 3 1 .
308
New York?S
r e q u i r e " c o r r e c t books o f a c c o u n t . "
and Indiana*'
Illin o is22
p rovid e t h a t e v e r y c o r p o r a tio n s h a l l keep
" c o r r e c t and c o m p l e t e ? b ooks o f a c c o u n t s ; Maryland 2 4 r e q u i r e s
" f u l l and f a i r a c c o u n t s o f t h e i r t r a n s a c t i o n s . ? West V i r ?
P5
gin ia
p r e s c r ib e s "accurate accoun ts o f the co rp o ra te transa c t i o n s " ; U tah
im poses a d u t y on t h e o f f i c e r s o f t h e c o r н
p o r a t i o n t o k e e p " t r u e and c o r r e c t b o o k s o f t h e p r o c e e d i n g s
and b u s i n e s s ."
The n e x t grou p o f s t a t e s by t h e p h r a s e o l o g y u s e d
t e n d s to i n d i c a t e t h a t t h e l e g i s l a t o r s r e a l i z e d t h a t t h e
b ooks o f a c c o u n t and a c c o u n t i n g s y s t e m s v e r y w i d e l y from
one b u s i n e s s t o a n o t h e r , and i t was s o u g h t t o word the la w
so a s t o em p h a siz e t h e s u i t a b i l i t y o f t h e s y s t e m t o be a d o p t-
P
1
E x t r a c t s from the S t o c k C o r p o r a t i o n Law. G eneral
C o r p o r a t i o n Law. Tax Law. E x e c u t i v e Law, and P e n a l . E d i t i o n
o f 1 9 3 8 . S t o c k C o r p o r a t i o n Law, A r t . .3 , S e c . 1 0 .
^2
The B u s i n e s s C o r p o r a t i o n A c t . 1 9 3 7 .
Sec. 45.
C e r t a i n Laws C o n c e r n in g C o r p o r a t i o n s f o r P r o f i t .
Ch. 2 1 5 , P t . I I , A r t . 1 , S e c . 1 1 .
25
1937.
2 4 Laws o f Maryland R e l a t i n g t o B u s i n e s s C o r p o r a t i o n s .
A nnotated T w elfth E d i t i o n , 1937. A rt. 2 3 , S ec. 8 6 .
P S
C o r p o r a t i o n Laws o f West V i r g i n i a . a d o p t e d b y t h e
L e g i s l a t u r e , S p e c i a l S e s s i o n , March 1930 w i t h amendments t o
d a t e o f I s s u e , J u l y 1 , 1 9 3 5 . Ch. 3 1 , A r t . 1 , S e c . 7 4 .
^
2-30.
R evised S ta tu te s
o f U tah. 1933,
T it.
18,
Sec.
18-
309
ed. ' I d a h o , M i n n e s o t a , 2 8 P en nsylvania,
22
and W ash in gton 5 0
as w e l l a s t h e Uniform B u s i n e s s C o r p o r a t i o n A c t 5 ^- a r e t o b e
fo u n d i n t h i s grou p w h ic h p r o v i d e s t h a t , " e v e r y c o r p o r a t i o n
s h a l l a l s o k e e p a p p r o p r i a t e and c o m p l e t e books o f a c c o u n t s . n
P e n n s y l v a n i a appends t h e word " a c c u r a t e " to the a b o v e .
The n e x t gro u p i n c l u d e s t h o s e s t a t e s t h a t e l a b o r a t e
somewhat on t h e d e t a i l o r t h e i t e m s to be m a i n t a i n e d i n th e
books o f a c c o u n t.
M is s o u r i, 5 2 r e l a t i v e to the g e n e r a l c o r н
p o r a t i o n , p r o v i d e s t h a t th e c o r p o r a t i o n s h a l l h ave b o o k s i n
w h ich s h a l l be r e c o r d e d t h e amount o f c a p i t a l s t o c k s u b н
scrib ed ,
t h e names o f owners o f t h e s t o o k ,
ed by them r e s p e c t i v e l y ,
the amounts ownн
t h e amount o f s t o c k p a i d , and by
whom, t h e t r a n s f e r o f s a i d s t o c k w i t h t h e d a t e o f t r a n s f e r ,
and t h e amount o f i t s a s s e t s an d l i a b i l i t i e s .
27
Idaho C ode. 1 9 3 2 .
A corporation
T i t . 2 9 , Ch. 1 , S e c . 2 9 - 1 4 3 .
28
1935.
M in n e so ta B u s i n e s s Corpora t i o n A c t , as amended t o
Ch. 3 0 0 , S e c . 33 ( ivT*
20
P urdon1s P e n n s y l v a n i a S t a t u t e s . A n n o t a t e d Permanн
e n t E d i t i o n , 1938.- T i t l e 1 3 - 1 5 . T i t . 1 5 , Ch. 49B, A f t . I l l ,
S ec. 2S52-303c.
35 (2) .
░3 0 Laws C oncernin g P r i v a t e C o r p o r a t i o n s , S e c . 3 8 0 3 5 -*- U niform B u s i n e s s
Corpora t i o n A c t . S e c . 35 ( I I ) .
52
C o n s titu tio n o f th e S ta te o f M isso u r i. A rt. 12,
S e c . 15 and G e n e ra l C o r p o r a t i o n Laws and t h e M i s c e l l a n e o u s
P r o v is io n s o f the S ta te o f M i s s o u r i, R ev ised S t a t u t e s o f
1929 w i t h amendments t h r o u g h 1 9 3 3 .
Ch. 3 2 , A r t . 1 , S e c .
4 6 2 7 and Ch. 3 2 , Art. 7 , S e c . 4 9 4 7 .
310
whose c h a r t e r h as b e e n g r a n t e d b y T e n n e s s e e m ust m a i n t a i n
b o o k s sh ow ing t h e amount p a i d i n on th e s t o c k s u b s c r i b e d ,
and ". '.
. . a l l o t h e r f a c t s and t r a n s a c t i o n s i n w h ich i t
is'
presumed a s t o c k h o l d e r o r c r e d i t o r may have an i n t e r e s t .
The l a s t s t a t e m e n t ,
i f a problem a r o s e , would n e c e s s i t a t e
an i n t e r p r e t a t i o n to d e t e r m i n e i n what f i n a n c i a l m a t t e r s
s t o c k h o l d e r s and c r e d i t o r s may have an i n t e r e s t .
i t p r o b a b l y w o u l d .b e i n t e r p r e t e d a s t h e a s s e t s ,
ca p ita l,
su rp lu s,
The s t a t e s
d efin ite
However,
lia b ilitie s,
income and e x p e n s e a c c o u n t s .
i n t h e n e x t group a r e f a r more p r e c i s e and
c o n c e r n i n g the books o f a c c o u n t ; f o r e x a m p le ,
the
C a l i f o r n i a law s e t s f o r t h t h e r e q i i l r e m e n t s a s f o l l o w s :
E v e r y c o r p o r a t i o n s h a l l k e e p and m a i n t a i n a d e q u a t e
and c o r r e c t a c c o u n t s o f i t s p r o p e r t i e s and b u s i n e s s
tr a n s a c t io n s , in clu d in g accounts o f i t s a s s e t s , l i a b i l i н
t i e s . r e c e i p t s , d isb ursem en ts, g a in s , l o s s e s , c a p i t a l ,
s u r p l u s , and s h a r e s .
Any s u r p l u s , i n c l u d i n g e a r n e d s u r н
p l u s , p a i d - i n s u r p l u s and s u r p l u s a r i s i n g from a r e d u c н
t i o n o f s t a t e d c a p i t a l s h a l l be c l a s s i f i e d a c c o r d i n g t o
s o u r c e and shown i n a s e p a r a t e a c c o u n t .
The books o f
a c c o u n t s h a l l a t a l l r e a s o n a b l e t i m e s be open t o i n s p e c н
t i o n by any d i r e c t o r . ^
A c c o r d i n g to t h i s s t a t u t e c o m p le t e i n f o r m a t i o n mijst be p r o н
v i d e d i n the a c c o u n t s ; d e t a i l e d i n f o r m a t i o n c o n c e r n i n g the
v a r io u s ty p es o f su r p lu s as w e l l as the o th e r groups o f
S3 D o m e s t ic and F o r e i g n C o r p o r a t i o n Laws o f T e n n e s s e e .
1 9 3 6 . Ch. 5 , A r t . I , S e c . 3 7 6 2 .
^ P e e r i n g 1s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a ,
1 9 3 7 . D i v . 1 , P t . IV, T i t . 1 , Ch. X I I , S e c . 3 5 3 .
311
assets, lia b ilitie s
and n e t w orth i t e m s is?. n e c e s s a r y .
The
Ohio law i s s i m i l a r to C a l i f o r n i a i n r e q u i r i n g c o r r e c t books
o f a c c o u n t and d e t a i l r e g a r d i n g i t s
itie s,
n.
. . . assets,
r e c e i p t s , disbursem ents, g a in s , l o s s e s ,
t a l and s h a r e s ,
lia b ilн
sta ted cap iн
t o g e t h e r w i t h s u c h p a r t i c u l a r a c c o u n t s as
a r e r e q u i r e d b y t h i s act."'-'1' L o u i s i a n a im p oses t h e l i a b i l i t y
on t h e c o r p o r a t i o n , b o t h d o m e s t i c and f o r e i g n ,
n. .
to m a i n t a i n
. . a d e q u a t e and c o m p le t e r e c o r d s sh ow ing c o r r e c t a c н
c o u n t s o f i t s p r o p e r t i e s and b u s i n e s s t r a n s a c t i o n s
L ou isiana,
in c lu d in g accounts o f i t s
assets,
r e c e i p t s , disb ursem en ts, g a in s , l o s s e s ,
in
lia b ilitie s,
c a p i t a l and s u r p lu s* 36
M i c h i g a n , i n t h e s e c t i o n d e a l i n g w i t h the b o o k s o f
a c c o u n t , m e r e l y p r o v i d e s t h a t the c o r p o r a t i o n s h a l l k e e p
a d e q u a t e and c o r r e c t a c c o u n t o f i t s b u s i n e s s t r a n s a c t i o n s ,
rzrt
b u t t h i s g e n e r a l r e q u i r e m e n t i s e l a b o r a t e d and made more
s p e c i f i c i n a s e c t i o n w h ich r e q u i r e s t h a t :
A c o r p o r a t i o n s h a l l a t a l l t i m e s k e e p i t s books i n
su c h manner a s to i n d i c a t e c l e a r l y t h e . d i v i s i o n o f th e
s u r p l u s a c c o u n t , b e t w e e n s u r p l u s a r i s i n g from e a r n i n g s
and s u r p l u s a r i s i n g from o t h e r s o u r c e s , and i t s h a l l
l i k e w i s e i n d i c a t e c l e a r l y such i t e m s i n i t s a n n u a l r e -
^ G e n e r a l and F o r e i g n C o r p o r a t i o n A c t s o f t h e S t a t e
o f O h i o , A n n o t a t e d 1 9 3 9 . T i t . IX, D i v . I , Ch. I , S e c . 8 6 2 3 - 6 3 .
36 ^ t Wo. 12 o f t h e Third E x t r a o r d i n a r y S e s s i o n o f
the L e g i s l a t u r e o f 1934.
S e c . 1 , c o n t a i n e d i n G e n e r a l Corн
p o r a t i o n Laws o f the S t a t e o f L o u i s i a n a .
3^ S t a t e
Sec. 45.
o f M ich igan ,
G e n e r a l C o r p o r a t i o n Law, 1 9 3 8 .
312
p o r t t o the- s t a t e and. i t s a n n u a l r e p o r t t o s h a r e h o l d e r s .
A lso,
rzo
i t w i l l be remembered t h a t i n the d i s c u s s i o n o f t r e a s н
u r y s h a r e s i t was p o i n t e d o u t t h a t t h i s s t a t e r e q u i r e s th e
r e c o r d s t o be k e p t so as to i n d i c a t e
the c u m u l a t i v e e f f e c t
o f t h e a c q u i s i t i o n o f su c h s t o c k .
The l a s t grou p t o be d i s c u s s e d i n c l u d e s t h o s e j u r i s н
d ictio n s
t h a t m e n t i o n t h e b ook s o f a c c o u n t s , b u t i n su c h a
manner a s t o make i t d i f f i c u l t t o d e t e r m i n e what i s d e s i r e d .
As h a s b e e n m e n t io n e d i n the d i s c u s s i o n o f the s t o c k r e g i s ^ t e r some o f the s t a t e s r e q u i r e t h a t t h e b ooks be k e p t so a s
to show a t a l l t i m e s t h e money or o t h e r c o n s i d e r a t i o n r e н
c e i v e d by such c o r p o r a tio n f o r t h e sto c k i s s u e d .
C o n n e c t i c u t , ^ Iowa?S
states
A riz o n a ,^
and W i s c o n s i n ^ a r e i n c l u d e d among the
t h a t h ave t h i s p r o v i s i o n a s the o n l y s t a t e m e n t g o v e r n -
in g t h e r e c o r d s .
38
New J e r s e y 43 p r o v i d e s t h a t the b ooks may
Ib id . . Sec. 20.
*5<5
A r iz o n a C o r p o r a t i o n C o m m iss io n , haws o f A rizona
R e l a t i n g t o o r u n d er I t s J u r i s d i c t i o n , 1 9 2 8 . C h .1 4 , A r t . 1 ,
S ec. 584.
4 о C o r p o r a t i o n Laws o f t h e S t a t e o f C o n n e c t i c u t , Reн
v i s e d 1 9 3 7 . Ch. 1 9 1 , P t . IB , S e c . 2 5 .
41
Code o f I o w a , 1 9 3 5 .
T i t . XIX, Ch. 3 8 4 , S e c . 8 3 8 5 .
4 ^ S t a t u t e s o f W i s c o n s i n R e l a t i n g t o P r i v a t e C orp oraн
t i o n s , 1 9 3 7 . S e c . 1 8 2 . 1 0 and 1 8 2 . 1 2 .
rphe G e n e r a l C o r p o r a t i o n Law o f New J e r s e y , i n c l u d н
in g a l l s u p p le m e n t s and amendments t h e r e t o t o t h e end o f
the L e g i s l a t i v e S e s s i o n o f 1938.
T i t . 1 4 , Ch. 5 , S e c . 1 4 :
5 -1 .1 .
313
be k e p t o u t s i d e t h e s t a t e w h i l e W i s c o n s i n ^ makes I t mandaн
t o r y t h a t t h e b ook s be k e p t w i t h i n t h e s t a t e .
O regon 4 ^
reн
q u i r e s t h a t t h e s t o c k r e g i s t e r "as w e l l as o t h e r books o f
t h e c o r p o r a t i o n n e c e s s a r y f o r c a r r y i n g on t h e b u s i n e s s ? be
kept.
N orth
C
a r o l i n
a 4
о
h a s no s e c t i o n d e a l i n g w i t h t h e b ooks,
b u t i m p l i e s t h a t s u c h r e c o r d s a r e t o be k e p t by t h e s t a t e н
ment t h a t t h e books may be a u d i t e d .
S t a t e s h a v i n g no p r o v i s i o n c o n c e r n i n g t h e books o f
account.
The s t a t e s o f Alabama, A r i z o n a , A r k a n s a s , D e la w a r e ,
F l o r i d a , G e o r g i a , K an sas, K entucky , M aine, M a s s a c h u s e t t s ,
M i s s i s s i p p i , Nevada, New Ham pshire, New M e x ic o , Rhode I s l a n d ,
S ou th C a r o l i n a , Vermont, V i r g i n i a , Wyoming, and t h e D i s t r i c t
o f Columbia do n o t s p e c i f i c a l l y m e n t i o n t h e b ook s o f a c c o u n t ;
however,
t h e y may m e n t i o n the s t o c k r e g i s t e r and i n d i r e c t l y
im ply t b a t o t h e r r e c o r d s a r e to be k e p t , or r e q u i r e tba t the
r e c o r d s be open f o r i n s p e c t i o n u n d er c e r t a i n c o n d i t i o n s , or
im pose? a p e n a l t y f o r f r a u d ? i n t h e b o o k s .
These r e f e r e n c e s
a r e u s u a l l y made i n p a s s i n g and c a n n o t be u s e d a s a p r e c i s e
^ S t a t u t e s o f W i s c o n s i n R e l a t i n g to P r i v a t e C orp oraн
t i o n s . 1937. Sec. 182.03 ( 1 ) .
45 Oregon C o r p o r a t i o n Laws, 1 9 3 6 . T i t . , XXV, Ch. I I ,
Sec. 25-216.
45 S t a t e o f North C a r o l i n a , C o r p o r a t i o n Laws, Ch. 2 2 ,
o f t h e C o n s o l i d a t e d S t a t u t e s 1 9 3 5 . Ch. 2 2 , A r t . 4 , S e c . 1 1 4 6 .
314
r e q u i r e m e n t o r a s an i n d i c a t i o n o f the c o n t e n t s o f su c h
books.
R e l i a n c e o f t h e b o a rd o f d i r e c t o r s on t h e books o f
account.
E i g h t s t a t e s h av e u n e q u i v o c a l p r o v i s i o n s w h ic h
a l l o w the b oard o f d i r e c t o r s to r e l y on the b ook s and s t a t e н
m ents i n d e t e r m i n i n g p o l i c i e s .
A r k a n s a s , 4 7 D e l a w a r e , 4 8 and
Kansas p r o v i d e t h a t :
A d i r e c t o r s h a l l be f u l l y p r o t e c t e d i n r e l y i n g i n
good f a i t h upon t h e books o f a c c o u n t o f t h e c o r p o r a t i o n
or s t a t e m e n t s p r e p a r e d b y any o f i t s o f f i c i a l s a s t o the
v a l u e and amount o f t h e a s s e t s , l i a b i l i t i e s , a n d / o r n e t
p r o f i t s o f t h e c o r p o r a t i o n , or any o t h e r f a c t s p e r t i n e n t
t o th e e x i s t e n c e and amount o f s u r p l u s o r o t h e r fun ds
from \vhich d i v i d e n d s m i g h t p r o p e r l y be d e c l a r e d and
p a id . 4 9
G e o r g i a 8 8 a l s o h a s a somewhat s i m i l a r p r o v i s i o n .
A statem ent
o f t h i s t y p e i s no more t h a n r e a s o n a b l e inasmuch a s t h e
d i r e c t o r s o f a c o r p o r a t i o n c a n n o t be e x p e c t e d t o make an
a u d i t o f t h e books p r i o r t o t h e d e c l a r a t i o n o f a d i v i d e n d .
The b oard o f d i r e c t o r s , o f c o u r s e , m i g h t v e r y w e l l h a v e an
independ en t a u d it to a ssu r e th em selv es o f the v a l i d i t y o f
47
P o p e 1s D i g e s t o f t h e S t a t u t e o f A r k a n s a s , 1 9 3 7 .
Ch. 3 1 , A r t . IV, S e c . 2 1 3 3 .
4 8 G e n e r a l P r o v i s i o n s R e s p e c t i n g Domes t i c
and F o r e i g n
C o r p o r a t i o n C o n t a in e d i n t h e G e n e r a l C o r p o r a t i o n Laws o f th e
S t a t e o f D e l a w a r e , 1 9 3 7 . Ch. 6 5 , A r t . 1 , S e c . 34'.
86.
49
S t a t e o f K a n s a s , S e s s i o n Laws, 1 9 3 9 . Ch. 1 5 2 , S e c .
50 A c t s and R e s o l u t i o n s o f t h e G e n e r a l Assembly o f the
S t a t e o f G e o r g i a . 1 9 3 7 - 1 9 3 8 . P t . 1 , T i t . 1 , S e c . 1 6 , amendн
i n g S e c . 2 2 - 3 0 8 o f t h e Code o f G e o r g i a . 1 9 3 5 .
315
the a c c o u n ts .
The u s e o f the p h r a s e " s u r p l u s and o t h e r
f u n d s " -in t h e above q u o t a t i o n on ce a g a i n i n d i c a t e s th e g e n н
e r a l c o n f u s i o n i n t h e minds o f t h e lawmakers a s to t h e d i f н
f e r e n c e b e t w e e n s u r p l u s , an a c c o u n t i n the n e t w orth s e c t i o n ,
w h ic h i s c h a r g e d a t t h e tim e o f a d i v i d e n d d e c l a r a t i o n , and
a fun d a c c o u n t o r a s s e t a c c o u n t from w h ich payment i s made.
The C a l i f o r n i a la w i s a l s o somewhat s i m i l a r on t h i s p o i n t ;
i t reads as f o l l o w s :
A d i r e c t o r s h a l l n o t be h e l d to h a v e b e e n n e g l i g e n t
w i t h i n the meaning o f t h i s s e c t i o n i f he r e l i e d and a c t н
ed i n good f a i t h upon a b a l a n c e s h e e t o r p r o f i t and l o s s
s t a t e m e n t o f the c o r p o r a t i o n f u r n i s h e d o r e x h i b i t e d to
him b y the p r e s i d e n t or t h e o f f i c e r o f the c o r p o r a t i o n
h aving charge o f or s u p e r v is io n o f i t s a c c o u n ts , or c e r н
t i f i e d to be c o r r e c t and a c c o r d i n g t o the b o o k s by a
p u b lic accoun tant or a firm o f p u b lic accoun tants s e l e c t н
e d w i t h r e a s o n a b l e c a r e . 51
The Ohio
s t a t u t e a g r e e s r a t h e r c l o s e l y w ith the above, but
t h e r e a r e one o r two p o i n t s o f d i f f e r e n c e s .
statem ents,
In speaking o f
Ohio m e n t i o n s , i n a d d i t i o n to th e b a l a n c e s h e e t
a n d . p r o f i t and l o s s s t a t e m e n t , a s t a t e m e n t o f t h e a s s e t s
a v a ila b le fo r d iv id en d s.
J u s t what t h i s s t a t e m e n t m ig h t be
i s .n o t su sc e p tib le o f p o s itiv e statem ent.
t i v e l y assu m ed , h o w e v e r ,
I t may be t e n t a н
t h a t s u c h a s t a t e m e n t would i n c l u d e
the a v a i l a b l e cash (e x c lu d in g cash s e t a s id e for s p e c i a l pur-
^ P e e r i n g 1s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a ,
1 9 3 7 . D i v . I , P t . IV , T i t . 1 , Ch. XIV, S e c . 3 6 3 .
^ G e n e r a l and F o r e i g n C o r p o r a t i o n A c t s o f the S t a t e
o f O h io . A n n o ta te d 1 9 3 9 .
Sec. 8623-123b.
316
p o s e s , s u c h a s s i n k i n g f u n d s ) from w h ich would be d e d u c t e d
t h e e s t i m a t e d n e e d s f o r w o rk in g c a p i t a l ,
a v a ila b le fo r d ivid en d s.
the b a la n c e b e in g
T h is cod e p r o v i d e s t h a t t h e a ccoun tн
a n t o r f i r m o f a c c o u n t a n t s m ust h ave a good r e p u t a t i o n i f
t h e d i r e c t o r s s e e k to e l i m i n a t e t h e l i a b i l i t y ,
and c o n t i n u н
i n g , a d i r e c t o r " s h a l l n o t be h e l d t o have b e e n n e g l i g e n t I f
In good f a i t h h e c o n s i d e r e d a s s e t s a t t h e i r book v a l u e , n or
i f i n any c a s e he f o l l o w e d wba t he b e l i e v e d t o be sound a c c o u n t i n g an d b u s i n e s s p r a c t i c e .
c 'z
Illinois
tz'A .
and M innesota
d u p l i c a t e i n g e n e r a l m eaning t h e C a l i f o r n i a code w i t h t h e e x н
c e p t i o n t h a t In I l l i n o i s
t h e d i r e c t o r s s h a l l n o t be l i a b l e
i f th ey co n sid er ed the a s s e t s
to be w orth book v a l u e , and i n
M in n eso ta o n l y a p r o f i t and l o s s s t a t e m e n t i s m e n t i o n e d .
S ection B
R e p o r t s t o t h e R e g u l a t i n g Commission
Annual r e p o r t t o the r e g u l a t i n g c o m m i s s i o n .
The comн
p i l e d s t a t u t e s f r e q u e n t l y r e q u i r e t h a t e v e r y c o r p o r a t i o n su b н
m i t to t h e p r o p e r c o m m is s io n a t l e a s t a n n u a l l y a r e p o r t r e н
g a r d i n g c e r t a i n m a t t e r s germane t o t h e r e g u l a t i o n o f s u c h
1935.
53
Loc. c i t .
^
The B u s i n e s s
C orp oration A c t , 1937.
M in nesota B u s in e s s
S e c . 22 ( l b ) .
C orp oration A ct,
S e c . 42
(h ).
a s am en ded t o
corp oration s.
The i t e m s and d e g r e e o f p a r t i c u l a r i t y r e q u i r н
e d i n f i n a n c i a l m a t t e r s i s p e r t i n e n t to t h e p r e s e n t d i s c u s - ,
sio n .
R e p o r t s r e q u i r e d s o l e l y f o r t a x p u r p o s e s w i l l n o t be
con sid ered in th is d is c u s s io n ;
in stea d , con sid eration w ill
be g i v e n t o t h o s e s t a t e m e n t s w hich b y t h e i r c o n t e n t w i l l a id
the s t a t e
i n d e t e r m i n i n g w h eth er t h e c o r p o r a t i o n i s a d h e r i n g
to t h e law s c o n c e r n i n g f i n a n c i a l p o l i c y .
In cid en tal fin a n н
c i a l r e p o r t s w i l l a l s o be e x c l u d e d .
The d i v e r g e n c e i n r e q u i r e m e n t s i s wide and i t
therefore, d if f ic u lt
is,
to a rr a n g e the v a r i o u s s e c t i o n s i n an
ord erly c l a s s i f i c a t i o n .
The g e n e r a l i n f o r m a t i o n u s u a l l y aslг
ed i n c l u d e s :
( 1 ) Name o f t h e c o r p o r a t i o n
(2)
The l o c a t i o n o f i t s p r i n c i p a l b u s i n e s s o f f i c e
(3 ) The name and a d d r e s s e s o f th e o f f i c d r s and
d irectors
(4)
The d a t e and p l a c e o f a n n u a l m e e t i n g s
These q u e s t i o n s i v h ile im p o r t a n t a r e n o t e s s e n t i a l t o the
present d isc u ssio n sin ce i t
is
the f i n a n c i a l d a t a t h a t I s o f
p rim ary im p o r ta n c e i n t h i s s t u d y .
Annual r e p o r t to i n d i c a t e o n l y c a p i t a l s t o o k i s s u a n c e
A l a r g e number o f t h e s t a t e s , among them C o n n e c t i c u t , 5 о Geor
56 C o r p o r a t i o n Laws o f t h e S t a t e o f C o n n e c t i c u t . Reн
v is e d 1937.
Ch. 1 9 1 , P t . IB , S e c . 2 1 .
318
g ia ,
5 "7
Id a h o ,о о Io w a ,5о L o u i s i a n a , 6 6 M a i n e , 6 '*? New J e r s e y ,
New M e x i c o ,
con sin ,
67
66
O r e g o n ,6^ Rhode I s l a n d , 6 6 - V i r g i n i a ,
66
62
an d'W Is-
r e q u ir e o n ly t h a t the annual r e p o r t c o n t a i n , in
a d d i t i o n to th e i n f o r m a t i o n m e n t i o n e d a b o v e , i n f o r m a t i o n r e н
g ard in g the r e l a t i v e s t a t u s o f the c a p i t a l s t o c k .
W it h in
t h i s g r o u p t h e r e i s a wid e d i f f e r e n c e a s t o th e a c t u a l d a ta
t h a t m ust be s u b m i t t e d .
For e x a m p le , Maine r e q u i r e s t h a t
o n l y t h e amount o f t h e c o r p o r a t i o n ' s a u t h o r i z e d c a p i t a l be
57
Code o f G e o r g i a . 1 9 3 5 . T i t . 2 2 ,
-
58
Idaho Code. 1 9 3 2 . T i t . 2 9 , Ch.
59
Code o f I o w a . 1 9 3 5 , Ch. 3 8 8 , S e c . 8 4 3 9 .
703.
P t . V I, S e c . 2 2 6
, Sec. 29-601.
G e n e r a l C o r p o r a t i o n Laws o f t h e S t a t e o f L o u is i a n a .
S e c . 39 ( I ) .
66
1938.
6 -** S t a t e o f M aine, P r o v i s i o n s o f Law . i n Force Re la t in g t o B u s i n e s s C o r p o r a t i o n s . Ch. 5 6 , S e c . 3 2 .
62 ijfoe G e n e r a l C o r p o r a t i o n Law o f New J e r s e y , i n c l u d н
i n g a l l s u p p le m e n t s and amendments t h e r e t o to t h e end o f t h e
L e g i s l a t i v e S e s s i o n o f 1 9 3 8 . T i t . 1 4 , Ch. 6 , S e c . 14: 6 - 2 .
p.'K
Ch. I I ,
C o r p o r a t i o n Laws o f t h e S t a t e o f New Mexico* 1 9 2 8 .
A r t . I , S e c . lT~.
6<^ Oregon C o r p o r a t i o n Laws, 1 9 3 6 . T i t . XXV, Ch. I I ,
Sec. 25-237.
6 5 G e n e r a l Corpora t i o n Laws o f
t h e S t a t e o f Rhode
I s l a n d , 1 9 3 2 . Ch. 2 4 8 , A r t . I I , S e c . 5 4 .
6 9 V i r g i n i a C o r p o r a t i o n Law, w i t h a l l amendments to
June 2 1 , 1 9 3 8 . . Ch. 1 4 7 , S e c . 3 8 2 0 .
^
S t a t u t e s o f W i s c o n s i n R e l a t i n g to P r i v a t e Corporaн
t i o n s . S e c . 1 8 0 . 0 8 as amended Laws o f 1 9 3 9 , Ch. 1 3 4 .
319
named; Oregon makes i t m andatory t h a t t h e r e p o r t show t h e
amount o f a u t h o r i z e d c a p i t a l s t o c k ,
t h e par v a l u e o f e a c h s h a r e ,
t h e number o f s h a r e s ,
the amount o f c a p i t a l s t o c k
i s s u e d , and t h e amount o f c a p i t a l s t o c k p a i d - u p .
d e ta il va ries,
t h e y may be c l a s s i f i e d
While the
t o g e t h e r as a s i n g l e
group b e c a u s e o f t h e d e g r e e to w hich t h e y r e s t r i c t t h e i n н
form ation.
Annual r e p o r t to i n d i c a t e c a p i t a l s t o c k i s s u a n c e and
m inor
supplem entary f i n a n c i a l in f o r m a t io n .
group a r e i n c l u d e d t h o s e s t a t e s
the proper c o r p o r a tio n o f f i c i a l s
In the n ex t
t h a t make i t incumbent upon
to make a r e p o r t s e t t i n g
f o r t h t h e s t o c k i s s u a n c e , as a b o v e , and i n a d d i t i o n , a v a r i e d
type o f a d d i t i o n a l f i n a n c i a l in fo r m a tio n , but the inform ation
so r e q u i r e d would n o t c o n s t i t u t e a c o m p l e t e s t a t e m e n t o f f i n н
a n c ia l co n d itio n .
Delaware^о a s an a d j u n c t t o the d a t a c o n н
c e r n i n g t h e s t o c k r e q u i r e s i n f o r m a t i o n ab o u t t h e c a p i t a l i n н
v e s t e d i n r e a l e s t a t e and m a n u f a c t u r i n g i n . D e l a w a r e .
D i s t r i c t o f Columbiaо^ r e q u i r e s
The
t h a t t h e r e be p u b l i s h e d a r e н
p o r t o f t h e amount o f c a p i t a l s t o c k ,
th e amount p a i d i n on
6 8 F r a n c h i s e Tax Law - Domes t i c
C orporations c o n t a in н
ed i n G e n e ra l P r o v i s i o n s R e s p e c t i n g Domes t i c and For e i g n
C o r p o r a t i o n s C o n t a in e d i n the G e n e ra l C o r p o r a t i o n Laws o f
t h e S t a t e o f D e l a w a r e , a s amended t o 1 9 3 7 . A r t . 8 , Ch. 6 ,
Sec. 63.
^
Code o f Laws o f t h e P i s t r l e t o f C o lu m b ia . 1 9 2 8 .
T i t . 5 , Ch. 9 , S e c . 2 7 3 .
320
t h e s h a r e s , and t h e amount o f e x i s t i n g d e b t .
F lorida
would h a v e t h e c o r p o r a t i o n add s u c h i n f o r m a t i o n a s would e n н
a b l e t h e c o r p o r a t i o n c o m m issio n to d e t e r m i n e i f t h e c o r p o r a н
tion is a c tiv e ,
and t h a t would e n a b l e the s e c r e t a r y o f s t a t e
to c a r r y o u t t h e p r o v i s i o n s o f t h e a c t .
na,
>70
and N orth C a r o l i n a
7 '^
?
Indiana,
71
Monta-
n ot o n ly r e q u ir e the u su a l i n f o r н
m ation about th e c a p i t a l s t o c k , but a l s o a d e t a i l e d a n a l y s i s
o f t h e t y p e s and v a l u a t i o n o f t h e c o n s i d e r a t i o n r e c e i v e d i n
payment o f t h e s h a r e s .
Indiana r e q u ir e s a sta tem en t co n cern н
i n g t h e s u r p l u s t r a n s f e r r e d t o c a p i t a l a t t h e t im e o f the
payment o f a s h a r e d i v i d e n d and w h e th e r s u c h s u r p l u s was
created by r e v a lu a tio n o f a s s e t s .
A sta te m e n t o f the g r o s s
r e c e i p t s a r i s i n g from, b u s i n e s s w i t h i n t h e s t a t e f o r th e p r e н
viou s year i s
t h e s u p p l e m e n t a r y i n f o r m a t i o n r e q u i r e d by t h e
sta tu te of Tennessee. 74
Ch. I ,
1937.
Compiled G e n e ra l haws o f F l o r i d a . 1 9 2 7 . T i t .
S e c . 5977 ( 1 ) .
Ill,
7 -*- C e r t a i n Laws C o n c er n in g C o r p o r a t i o n s f o r P r o f i t t
Ch. 2 1 5 , P t . I I , A r t . 7 , S e c . 4 5 .
^
R e v i s e d Codes o f Montana, 1 9 3 5 . Ch. 1 9 , S e c . 6 0 0 3 .
S t a t e o f North C a r o l i n a , C o r p o r a t i o n Laws, Ch. 22
o f t h e C o n s o l i d a t e d S t a t u t e s 1935. Ch. 2 2 , A r t . 4 , S e c .
1148.
riA
1936.
Domes t i c a n d F o r e i g n C o r p o r a t i o n Laws o f T e n n e s s e e .
Ch. 7 , S e c . 4 1 3 6
321
Annual r e p o r t t o I n d i c a t e c a p i t a l s t o c k I s s u a n c e and
_a f i n a n c i a l s t a t e m e n t whose c o n t e n t s i s n o t p r e s c r i b e d i n
d eta il.
T h is grou p v a r i e s from t h a t o f t h e grou p above b e н
c a u s e o f the i n s i s t e n c e upon a f i n a n c i a l s t a t e m e n t , a b a l ance s h e e t .
assets,
Tic
A r i z o n a ,tJ p r e s c r i b e s t h a t the r e p o r t show the
lia b ilitie s,
and a c c u m u l a t i o n s ,
t h e amount o f c a p i н
t a l s t o c k p a i d up and i s s u e d , and a s t a t e m e n t sh ow ing i n d e н
t a i l a l l p r o p e r t y , b o t h r e a l and p e r s o n a l , owned, l e a s e d , or
co n tro lled .
The term " a c c u m u l a t i o n ? i n the above s t a t e m e n t
may be assumed to mean a s t a t e m e n t a n a l y z i n g t h e s u r p l u s a c н
count.
A c o r p o r a t i o n o r g a n i z e d i n Colorado^о must su b m it a
r e p o r t show ing t h e amount o f i n d e b t e d n e s s o f t h e c o r p o r a t i o n
and n . . . . su ch o t h e r i n f o r m a t i o n as w i l l show w i t h r e a s o n
a b l e f u l l n e s s and c e r t a i n t y t h e f i n a n c i a l c o n d i t i o n o f s a i d
c o r p o r a t i o n ........................ n
K a n s a s , ^ M a s s a c h u s e t t s , ^ о and New
Hampshire 79 r e q u i r e i n f o r m a t i o n r e g a r d i n g t h e c a p i t a l s t o c k
A rizona Corpora t i o n C o m m ission , haws o f A r iz o n a
R e l a t i n g t o , or u n d er I t s J u r i s d i c t i o n , 1 9 2 8 . Ch. 1 4 , A r t . 7,
S e c . 662 .
Corpora t i o n haws o f t h e S t a t e o f C o n n e c t i c u t . Reн
v i s e d 1 9 3 7 . Ch. 4 1 , A r t . 1 , S u b d i v . 7 , S e c . 80 ( 7 ) and ( о) .
^ G e n e r a l S t a t u t e s o f the S t a t e o f K a n s a s , 1 9 3 5 . Ch.
17, A rt. 7, Sec. 17-701.
G e n e r a l haws o f the Commonwealth o f M a s s a c h u s e t t s .
T e r c e n t e n a r y E d i t i o n , 1 9 3 2 . T i t . XXII, Ch. 1 5 6 , S e c . 4 7 .
79
B u s i n e s s C o r p o r a t i o n haw a n d R e g u l a t i o n o f F o r e i g n
C o rp o ra tio n s, 1937.
S e c . 83 and 8 4 .
322
anCj a c o m p l e t e and d e t a i l e d s t a t e m e n t o f a s s e t s and l i a b i l i Of)
tie s.
I f a M assachusetts
c o r p o r a tio n has a c a p i t a l sto ck
o f one h u n d red t h o u s a n d d o l l a r s or more ( f o r t h i s p u r p o se
s h a r e s w i t h o u t par v a l u e a r e c o n s i d e r e d a s o f one h undred
d o l l a r s p er s h a r e ) ,
t h e a n n u a l r e p o r t m ust be accom p an ied
b y a s t a t e m e n t o f an a u d i t o r , u n d er o a t h , s t a t i n g t h a t the
r e p o r t p r e s e n t s a tru e sta te m e n t o f c o n d it i o n s as d i s c l o s e d
b y the b o o k s .
The a u d i t o r i s t o be c h o s e n a t e a c h a n n u a l
m e e t i n g b y a c o m m ittee o f t h r e e s t o c k h o l d e r s who a r e n o t
d irecto rs.
I f t h e r e a re n o t t h r e e s t o c k h o l d e r s a b l e and
w i l l i n g t o s e r v e on s u c h a c o m m i t t e e ,
the board o f d i r e c t o r s
may c h o o s e the a u d i t o r , b u t no em p loyee o r o f f i c e r may be
O-i
ap poin ted a u d ito r .
The s t a t u t e o f Nebraska,
by I n t e r p r e t a н
t i o n , r e q u i r e s a b a l a n c e s h e e t , for' the p ro p er o f f i c i a l s must
p u b l i s h i n a n ew sp a p e r o f g e n e r a l c i r c u l a t i o n a s t a t e m e n t
show ing t h e w. . . . f u l l ,
f a i r , and d e t a i l e d s t a t e m e n t o f
t h e c o n d i t i o n o f t h e company*5., and s i m i l a r i l y , Vermont 8 2 r e н
q u i r e s a r e p o r t sh o w in g the c o n d i t i o n o f t h e b u s i n e s s , w hich
r e p o r t s h o u l d show t h e amount o f i t s
c a p ita l stock,
the t o -
8 8 G e n e ra l Laws o f
the Commonwea1 t h o f M a s s a c h u s e t t s .
? T e rc en te n a r y E d i t i o n , 1 9 3 2 . T i t . XXII, Ch. 1 5 6 , S e c . 4 7 .
^ Compiled S t a t u t e s o f N e b r a s k a . 1929 w i t h c u m u l a t i v e
s u p p l e m e n t s to 1 9 3 7 .
Ch. 2 4 , S e c . 2 4 - 1 0 .
^
P u b l i c Laws o f t h e S t a t e o f Vermont Re la t i n g to
C orporations, 1934.
Ch. 2 3 9 , S e c . 5 8 8 2 .
323
t a l amount' o f i t s
in d eb ted n ess,
t h e amount o f s u c h i n d e b t e d н
n e s s s e c u r e d b y m o r t g a g e , and th e amount n o t so s e c u r e d ,
t o t a l amount o f c a s h on hand and the amount o f a s s e t s
the
in clu d н
ing ca sh .
Annual r e p o r t t o i n d i c a t e c a p i t a l s t o c k i s s u a n c e a n d .
r e q u i r i n g p r e s c r i b e d d e t a i l i n the f i n a n c i a l s t a t e m e n t .
The
g rou p o f s t a t e s now to be c o n s i d e r e d , composed o f I l l i n o i s ,
M i c h i g a n , - a n d M i s s o u r i , a r e m ark ed ly d i f f e r e n t from t h e p r e н
v i o u s group i n t h a t a v e r y l e n g t h y and p r e c i s e s t a t e m e n t i s
p r o v i d e d i n t h e c o d e s r e g u l a t i n g t h e i t e m s t h a t must be i n н
c l u d e d i n the f i n a n c i a l s t a t e m e n t s t h a t a re t o b e s u b m i t t e d .
I l l i n o i s req u ires,
i n a d d i t i o n to t h e g e n e r a l i n f o r m a t i o n ,
t h a t the r e p o r t in c lu d e :
(d) A s t a t e m e n t o f t h e a g g r e g a t e number o f s h a r e s
w h ich the c o r p o r a t i o n h a s t h e a u t h o r i t y to i s s u e , i t e m н
i z e d by c l a s s e s , par v a l u e o f s h a r e s , s h a r e s w i t h o u t par
v a l u e , and s e r i e s , i f a n y , w i t h i n a c l a s s .
( e ) A s t a t e m e n t o f t h e a g g r e g a t e number o f i s s u e d
s h a r e s , i t e m i z e d by c l a s s e s , par v a l u e o f s h a r e s , s h a r e s
w i t h o u t par v a l u e and s e r i e s , i f a n y , w i t h i n a c l a s s .
( f ) A . s t a t e m e n t , e x p r e s s e d i n d o l l a r s , o f the amount
o f s t a t e d c a p i t a l and the amount o f p a i d - i n s u r p l u s o f
the c o r p o r a t i o n a f t e r g i v i n g e f f e c t t o ( 1 ) t h e a l l o c a н
t i o n b e t w e e n s t a t e d c a p i t a l and p a i d - i n s u r p l u s o f t h e
t o t a l c o n s i d e r a t i o n r e c e i v e d f o r , o r on a c c o u n t o f , i s s u н
ed s h a r e s ; ( 2 ) any amount added or t r a n s f e r r e d to s t a t e d
c a p i t a l upon the I s s u a n c e o f s h a r e s a s a s h a r e d i v i d e n d ,
e x c l u s i v e o f any amount t r a n s f e r r e d from p a i d - i n s u r p l u s ;
( 3 ) any amount added o r t r a n s f e r r e d to s t a t e d c a p i t a l or
p a i d - i n su rp lu s w ith o u t the is s u a n c e o f s h a r e s , e x c l u s i v e
o f any amount t r a n s f e r r e d to s t a t e d c a p i t a l from p a i d - i n
s u r p l u s ; ( 4 ) any i n c r e a s e o r d e c r e a s e i n t h e sum o f t h e
s t a t e d c a p i t a l and p a i d - i n s u r p l u s r e s u l t i n g from any
e x c h a n g e o r r e - c l a s s i f i c a t i o n o f s h a r e s ; (5) any d e c r e a s e
i n t h e sum o f t h e s t a t e d c a p i t a l and p a i d - i n 's u r p l u s r e -
324
s u i t i n g from any r e d e m p t i o n and c a n c e l l a t i o n o f s h a r e s
or from any d i s t r i b u t i o n made to s h a r e h o l d e r s as a l i q н
u i d a t i n g d i v i d e n d ; and ( 5 ) any o t h e r change i n the
amount o f the s t a t e d c a p i t a l o r p a i d - i n s u r p l u s made as
p rovid ed in t h i s Act.
(g)
A s ta te m e n t , e x p r e s s e d i n d o l l a r s , o f the v a lu e
o f a l l t h e p r o p e r t y owned by th e c o r p o r a t i o n , w h e re v er
l o c a t e d , and! the v a l u e o f the p r o p e r t y w i t h i n t h i s s t a t e ,
and a s t a t e m e n t , e x p r e s s e d i n d o l l a r s , o f t h e g r o s s
amount o f b u s i n e s s t r a n s a c t e d b y t h e c o r p o r a t i o n f o r t h e
t w e l v e months . . . .8 3
This s t a t u t e i s o b v i o u s l y a t t e m p t i n g .to r e q u i r e a f u l l d i s н
c l o s u r e o f t h e c a u s e s f o r the v a r i a t i o n i n t h e s t a t e d c a p i н
t a l and s u r p l u s a c c o u n t s .
Michiganо^ r e q u i r e s a r e p o r t w hich would i n c l u d e the
u s u a l and c u st o m a r y f a c t s a b o u t the c a p i t a l s t o c k , and i n
a d d i t i o n , a s t a t e m e n t o f t h e book v a l u e and t h e p r i c e f i x e d
f o r t h e s a l e and e x c h a n g e o f i t s
s h a r e s w i t h o u t par v a l u e ,
t h e n a t u r e and v a l u e o f p r o p e r t y owned, t h e number and k i n d
o f s h a r e s i s s u e d f o r p r o p e r t y d u r i n g the p e r i o d and th e v a l u e
o f t h e p r o p e r t y , a c o m p l e t e and d e t a i l e d s t a t e m e n t o f a s s e t s
and o u t s t a n d i n g l i a b i l i t i e s ,
and a s t a t e m e n t o f t h e a g g r e g a t e
amount o f any l o a n s , a d v a n c e s , o v e r d r a f t s ,
and/or w ithdraw ls
and rep aym en ts t h e r e o f made t o o r b y o f f i c e r s ,
d i r e c t o r s , or
s h a r e h o l d e r s o f t h e c o r p o r a t i o n o t h e r w i s e th a n i n the u s u a l
The B u s i n e s s C o r p o r a t i o n A c t , 1 9 3 7 .
04.
░
Sec. 95.
S t a t e o f M i c h ig a n , G e n e r a l C o r p o r a t i o n Laws. 1 9 3 8 .
S e c . 82 a s amended by P u b l i c and L o c a l A c t s o f t h e L e g i s l a t o r e
o f the S t a t e o f M i c h ig a n P a s s e d a t t h e R e g u l a r S e s s i o n . 1 9 3 9 .
Act 58.
325
course of b u sin e ss.
QC
M issouri
g i v e s e v i d e n c e o f some r a t h e r p e c u l i a r
f e a t u r e s r e q u i r e d i n t h e r e p o r t t h a t m ust be s u b m i t t e d .
A fte r m en tion in g the u s u a l c a p i t a l sto c k in fo r m a tio n ,
the
s t a t u t e c o n t i n u e s b y r e q u i r i n g t h a t the a c t u a l v a l u e per
s h a r e be g i v e n ,
t h a t the cash v a lu e o f a l l p ro p erty b o th
w i t h i n and w i t h o u t t h e s t a t e be i n d i c a t e d ;
t h a t the i n d e b t н
e d n e s s , s e c u r e d and u n s e c u r e d , be i n c l u d e d ; t h a t t h e amount
o f s u r p l u s and u n d i v i d e d p r o f i t s be shown; and t h a t t h e
c l e a r m a rk et v a l u e o f i t s c a p i t a l s t o c k and s u r p l u s , i n c l u d н
i n g a l l p r o p e r t y and a s s e t s , be s e t f o r t h .
t h i s law i s
t o be i n t e r p r e t e d i s d o u b t f u l ,
I n what manner
p a r t i c u l a r l y the
l a s t p h r a s e , w. . . . t h e c l e a r m ark et v a l u e o f i t s
cap ita l
s t o c k and s u r p l u s , i n c l u d i n g a l l p r o p e r t y and a s s e t s .................. rt
The m ark et v a l u e o f i t s
c a p i t a l s t o c k and s u r p l u s would seem
to mean t h e a g g r e g a t e m a r k e t p r i c e o f a l l e q u i t y s e c u r i t i e s
o u tstan d in g.
In the I m m e d i a t e ly p r e c e d i n g c l a u s e t h e c o r н
p o r a t i o n was r e q u i r e d t o g i v e t h e a c t u a l v a l u e p e r s h a r e .
Whether t h i s means the book v a l u e or t h e m ark et v a l u e i s n o t
known.
M oreover, t h e r e i s n o t h i n g In t h e s t a t u t e on w hich
t o p r e d i c a t e an i r r e f u t a b l e
judgm ent.
I t s h o u l d a l s o be
G e n e r a l C o r p o r a t i o n Laws and M i s c e l l a n e o u s P r o v i s i o n s o f t h e S t a t e o f M i s s o u r i , R e v i s e d S t a t u t e s o f 1929
amended t h r o u g h 1 9 3 3 .
Ch. 3 2 , A r t . 1 , S e c . 4 6 1 5 and S e c .
4642.
326
n o t e d t h a t t h i s s t a t e a p p a r e n t l y demands an a p p r a i s a l o f t h e
assets.
Annual r e p o r t r e q u i r i n g m i s c e l l a n e o u s p r o v i s i o n s .
Wyoming,о^ m e n t i o n i n g n o t h i n g c o n c e r n i n g t h e c a p i t a l s t o c k ,
r e q u i r e s m e r e l y t h a t a s t a t e m e n t he made r e g a r d i n g t h a t ' p o r н
tion of i t s
ca p ita l,
p r o p e r t y , and a s s e t s l o c a t e d i n t h e
s ta t e ..
S t a t e s h a v i n g no r e q u i r e m e n t c o n c e r n i n g f i n a n e i a l
sta te m e n t f o r o th e r than t a x p u r p o s e s .
N ineteen s t a t e s ,
Alabama-, A r k a n s a s , C a l i f o r n i a , K e n t u c k y , Maryland, M i n n e s o t a ,
M i s s i s s i p p i , Nevada, New Y ork, N orth D a k o ta , O h io, Oklahoma,.
P en nsylvania,
South C a r o l i n a , S ou th D a k o ta , T e x a s , U tah , Washн
i n g t o n , and West V i r g i n i a , have no r e q u i r e m e n t making i t n e c н
e s s a r y f o r co rp o r a tio n s organized in th ese s t a t e s
fin a n c ia l reports.
t o make
L e ss t h i s l a s t s t a t e m e n t b e m i s i n t e r p r e t н
ed i t s h o u l d be remembered t h a t i n t h i s d i s c u s s i o n t a x r e н
p o r t s have b e e n e x c l u d e d from c o n s i d e r a t i o n , and a l s o t h e
mere f a c t t h a t the s t a t u t e d o e s n o t ' s p e c i f i c a l l y make i t manн
d a t o r y f o r t h e c o r p o r a t i o n t o su b m it a s t a t e m e n t d o e s n o t
n e c e s s a r i l y w a rr a n t the d e d u c t i o n t h a t c o r p o r a t i o n s o r g a n i z e d
i n t h e s e s t a t e s n e e d n o t s u b m it r e p o r t s .
Sec.
Wyoming R e v i s e d S t a t u t e s , 1 9 3 1 .
28-1001.
On th e c o n t r a r y ,
Ch. 2 8 , A r t .
10,
327
t h e y may h ave to p r e p a r e and f i l e
very ex ten siv e rep o rts,
f o r a c o r p o r a t i o n must con form t o t h e r e g u l a t i o n s o f t h e
S e c r e t a r y o f S t a t e or C o r p o r a t i o n C o m m iss io n e r, who u s u a l l y
has t h e power -to demand r e p o r t s as he s e e s f i t .
S ection C
Reports to S hareholders
Shareholders r i g h t t o sta tem en t o f a f f a i r s .
The laws
i n many o f /the s t a t e s g r a n t t h e r i g h t to t h e s h a r e h o l d e r s to
r e c e i v e , o r t o have made a v a i l a b l e t o them a t t h e a n n u a l
m e e t i n g or t h r o u g h p u b l i c a t i o n , a
co n d itio n o f the corporation.
statem ent of the f in a n c ia l
I t i s , of course, of great
Im portan ce t h a t the s h a r e h o l d e r s have a c o p y o f t h e f i n a n н
c i a l s t a t e m e n t , f o r th r o u g h su c h p u b l i c n o t i c e
there w i l l
n o r m a l l y be an e v e r p r e s e n t r e s t r a i n upon .the d i r e c t o r s or
o f f i c e r s who m ig h t o t h e r w i s e s e e k t o c a r r y on a c t i v i t i e s
t r a r y to t h e b e s t i n t e r e s t s o f the c o r p o r a t i o n and i t s
co n н
shareн
holders .
S t a t e m e n t s u b m i t t e d on r e q u e s t .
One o f t h e common
methods u s e d to make s t a t e m e n t s a v a i l a b l e t o the s h a r e h o l d e r s
i s t o a l l o w the s h a r e h o l d e r t o r e q u e s t s u c h a s t a t e m e n t .
F r e q u e n t l y , a s h a r e h o l d e r must be th e owner o f a c e r t a i n m i n i н
mum number o f s h a r e s , or t h e group o f s h a r e h o l d e r s r e q u e s t i n g
su ch a s t a t e m e n t must own a minimum number o f s h a r e s .
The
328
New York s t a t u t e
i s a good example o f t h e s t a t e s r e q u i r i n g
t h a t a named minimum p er c e n t o f t h e t o t a l s h a r e s b e c o n t r o l н
l e d b e f o r e the r e q u e s t may be made.
The New York s t a t u t e
r e a d s as f o l l o w s :
S t o c k h o l d e r s owning t h r e e p e r centum of., t h e s h a r e s
o f any c o r p o r a t i o n o t h e r than a moneyed c o r p o r a t i o n may
make a w r i t t e n r e q u e s t t o the t r e a s u r e r or o t h e r f i s c a l
o f f i c e r t h e r e o f f o r a s t a t e m e n t o f i t s a f f a i r s , u n d er
o a t h , em bracing a p a r t i c u l a r a c c o u n t o f a l l i t s a s s e t s ,
and l i a b i l i t i e s , and t h e t r e a s u r e r s h a l l .make such
s t a t e m e n t and d e l i v e r i t to t h e p e r s o n making the r e н
q u e s t w i t h i n t h i r t y days t h e r e a f t e r , and k eep on f i l e
i n t h e o f f i c e o f t h e c o r p o r a t i o n f o r t iv e lv e months
t h e r e a f t e r a c o p y o f su ch s t a t e m e n t , which s h a l l a t a l l
t i m e s d u r i n g b u s i n e s s h o u r s b e e x h i b i t e d t o any s t o c k н
h o l d e r demanding an e x a m i n a t i o n t h e r e o f ; b u t t h e t r e a s u r н
e r s h a l l n o t be r e q u i r e d t o d e l i v e r more t h a n one such
s t a t e m e n t i n any one y e a r . ? '
The s t a t e s o f Colorado,оо C o n n e c t i c u t , о ^
M a r y l a n d ,
9о Monta-
E x t r a c t s from t h e S t o c k Corpora t i o n Law. G e n e r a l
C o r p o r a t i o n Law, Tax Law, E x e c u t i v e Law, and P e n a l . E d i t i o n
o f 1 9 3 8 . S t o c k C o r p o r a t i o n Law.
Art. 7, S ec. 77.
оо C o r p o r a t i o n Laws. a s r e v i s e d and amended t o O ctob er
1 , 1 9 3 7 . Ch. 4 1 , A r t . 1 , S u b d i v . 2 , S e c . 3 9 .
о^ Corpora t i o n Laws o f t h e S t a t e o f C o n n e c t i c u t ,
v i s e d 1 9 3 7 . Ch. 1 9 1 , p t . IE, S e c . 4 3 .
Reн
^ Laws o f Maryland R e l a t i n g t o B u s i n e s s C o r p o r a t i o n s .
Annotated T w elfth E d i t i o n 1937.
A rt. 23, Sec. 84.
329
n a , 9 1 Oklahoma,92 South D a k o t a , 93 and Wyoming^ have s e c t i o n s
th a t are v ery s im ila r w ith c e r t a in e x c e p tio n s .
In the j u r i s н
d i c t i o n o f C o lo r a d o , Montana, Oklahoma, S o u th D a k o ta , and
Wyoming t h e s t a t e m e n t must be d e l i v e r e d i n t w e n t y days and
t h e r e p o r t m ust be f i l e d i n the p r i n c i p a l o f f i c e f o r t h e
n e x t s i x m on th s; su ch a r e p o r t n e e d n o t be d e l i v e r e d more
f r e q u e n t l y th a n on ce e v e r y s i x m o n t h s .
The minimum p e r c e n t
o f s t o c k h o l d e r s t h a t may demand t h e s t a t e m e n t i n Oklahoma
and S o u t h Dakota i s t w e n t y p e r c e n t ;
In C olorad o and Wyoming,
f i f t e e n p e r c e n t ; and i n Maryland and Montana, f i v e p er c e n t .
In C o n n e c t i c u t ,
s h a r e h o l d e r s owning f i v e p er c e n t o f th e
s t o c k may, upon r e q u e s t , o b t a i n a cop y o f t h e m ost r e c e n t r e q5
port.
C a lifo rn ia
a l l o w s h o l d e r s o f t e n p e r c e n t o f the
s h a r e s to r e q u e s t and r e c e i v e a f i n a n c i a l s t a t e m e n t , b a l a n c e
s h e e t and p r o f i t and l o s s s t a t e m e n t ,
i f s u c h a s t a t e m e n t h as
n o t b e e n g i v e n i n the l a s t s i x m o n t h s .
T his s t a t e m e n t i s to
9^- R e v i s e d Codes o f Montana. 1 9 3 5 . Ch. 1 7 , S e c . 5 9 5 7 .
QP
Compiled S t a t u t e s o f Oklahoma. 1 9 2 1 . Ch. 3 4 , A r t .
X I I I , S ec. 5465.
9о C o r p o r a t i o n Laws o f South D a k o t a . 1 9 3 8 . P t . 1 7 ,
Ch. 2 , S e c . 8 8 3 4 . C f. P o s t .
9^ Wyoming R e v i s e d S t a t u t e s . , 1 9 3 1 . Ch. 2 8 , A r t . I ,
Sec. 2 8 -1 4 0 .
95 P e e r i n g *s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a ,
1 9 3 7 . D i v . 1 , P t . IV, T i t . I , Ch. X I I , 359 and s e e a l s o t h e
d i s c u s s i o n o f the annual sta te m e n t to s h a r e h o ld e r s b elo w .
330
toe f i l e d
i n the o f f i c e o f the company f o r t w e l v e m o n t h s .
M ic h ig a n 9 B p e r m i t s t h e h o l d e r s o f two p e r c e n t o f t h e o u t н
s t a n d i n g s t o c k t o r e q u e s t and r e c e i v e a s t a t e m e n t o f o p e r a н
t i o n s and p r o p e r t i e s , w hich s t a t e m e n t s h a l l be k e p t on f i l e
in the p r i n c i p a l o f f i c e .
N eb r a sk a ,^ u sin g a rather in d e c is iv e p r o v isio n , proн
v i d e s t h a t t h e d i r e c t o r s o f m a n u f a c t u r i n g c o m p a n i e s , when
r e q u i r e d , s h a l l p r e s e n t t o the s t o c k h o l d e r s a r e p o r t i n
w r i t i n g o f the s i t u a t i o n and amount o f b u s i n e s s o f the
company.
L ouisiana
q o
makes i t m andatory f o r e v e r y c o r p o r a t i o n
o n c e i n e v e r y c a l e n d a r y e a r , upon t h e r e q u e s t o f any s h a r e н
h o l d e r , t o s e n d by m a i l t o su ch s h a r e h o l d e r a r e p o r t c o n t a i n н
i n g the i n f o r m a t i o n i n c l u d e d i n the l a s t a n n u a l r e p o r t .
The
l e g i s l a t o r s when d r a f t i n g t h e Minnesotaо^ la w made i t compulн
s o r y f o r t h e c o r p o r a t i o n , upon r e q u e s t ,
to f u r n i s h t h e s h a r e н
h o l d e r w i t h a s t a t e m e n t o f p r o f i t and l o s s f o r i t s
la s t acн
c o u n t i n g p e r i o d , s e t t i n g f o r t h s e p a r a t e l y t h e amount o f a l l
S t a t e o f M i c h i g a n , G e n e ra l Corpora t i o n Law. 1 9 3 8 .
Sec. 45.
^
Compiled S t a t u t e s o f N e b r a s k a . 1929 w i t h c u m u l a t i v e
s u p p le m e n t s to 1 9 3 7 .
Ch. 2 4 , A r t . I l l , S e c . 3 0 2 .
G e n e r a l C o r p o r a t i o n Laws o f t h e S t a t e o f L o u i s i a n a ,
1938. Sec. 39.
1935.
^ Minnesota Bu s iness Corporation A c t , as amended to
Ch. 300, Sec . 3 4 .
331
d i v i d e n d s p a i d from p a i d - i n s u r p l u s d u r i n g t h e y e a r , and t o
f u r n i s h a b a l a n c e s h e e t a s o f t h e c l o s i n g d a t e o f the y e a r .
In a d d i t i o n , a c r e d i t o r upon w r i t t e n demand s h a l l he f u r n н
i s h e d , w i t h i n t h i r t y d a y s , a s t a t e m e n t sh ow in g a l l d i v i d e n d s
p a i d and t h e number and p u r c h a s e p r i c e o f t r e a s u r y s h a r e s
purchased w it h in the p a st three y e a r s .
I n th e same manner,
any s h a r e h o l d e r or c r e d i t o r s h a l l have f u r n i s h e d h im , w i t h н
in t h ir t y days, a d e s c r ip tio n o f a 1 1 .p r o p e r ty or s e r v ic e s
r e c e i v e d or t o be r e c e i v e d i n payment o f s h a r e s d u r i n g th e
p a s t t h r e e y e a r s and th e v a l u a t i o n t h e r e o f .
O h io 100 r e q u i r e s the o f f i c e r s a t the a n n u a l m e e t i n g ,
o r any m e e t i n g c a l l e d f o r the p u r p o se o f e l e c t i n g d i r e c t o r s ,
to l a y b e f o r e th e s h a r e h o l d e r s a b a l a n c e s h e e t and a s t a t e н
ment o f p r o f i t and l o s s w i t h d e t a i l c o n c e r n i n g p r o f i t s e a r n н
e d , d i v i d e n d s p a i d , and c h a n g e s i n s u r p l u s .
The s t a t e m e n t
must b e a r a d a t e n o t more th a n f o u r months b e f o r e su c h m e e t н
in g.
M oreover, a c o p y o f su ch s t a t e m e n t i s
t o be m a i l e d t o
a s h a r e h o l d e r upon r e q u e s t .
S outh C a r o l i n a 101 l i k e w i s e r e q u i r e s t h e p rop er o f f i c e r
o f a c o r p o r a t i o n t o p r o v i d e e a c h s h a r e h o l d e r who r e q u e s t s i t .
100
G e n e r a l and F o r e i g n C o r p o r a t i o n A c t s o f t h e S t a t e
o f O h i o , A n n o t a t e d 1 9 3 9 . T i t . IX, D i v . I , Ch. I , S e c . 8 6 2 3 64.
Code o f haws o f S ou th C a r o l i n a . 1 9 3 2 .
Ch. 1 5 3 , A r t . 1 , S e c . 7 7 2 3 .
T it. 37,
*
352
w i t h an i t e m i z e d s t a t e m e n t o f t h e a s s e t s and l i a b i l i t i e s
of
th e company.
Upon r e q u e s t o f t w e n t y - f i v e per c e n t o f t h e s t o c k н
h o l d e r s , or o f any s t o c k h o l d e r ow ning t w e n t y - f i v e p e r c e n t
o f t h e c a p i t a l s t o c k o f a c o r p o r a t i o n o r g a n i z e d i n North
C a r o l i n a , -^2 the o f f i c e r s must have t h e books o f t h e c o r p o r н
a t i o n a u d i t e d and a r e p o r t s u b m i t t e d t o t h e c o r p o r a t i o n and
th e s h a r e h o l d e r s r e q u e s t i n g t h e same.
I f the a u d i t i s not
s t a r t e d w i t h i n t h i r t y days a f t e r t h e r e q u e s t ,
the s t o c k н
h o l d e r s , a f t e r g i v i n g n o t i c e , may a p p l y to t h e c o u r t s f o r
a u t h o r i t y to have s u c h an a u d i t made.
Statem ents to be p u b lis h e d .
tion s
I n some o f the j u r i s d i c н
in s t e a d o f r e q u i r i n g th a t the sta te m e n t o f f i n a n c i a l
c o n d i t i o n be g i v e n to t h e s h a r e h o l d e r i n d i v i d u a l l y on r e q u e s t ,
t h e law makes i t o b l i g a t o r y f o r the o f f i c e r s t o g i v e such
n o tice
th r ou gh some form o f p u b l i c a t i o n .
the c o r p o r a tio n o f f i c i a l s
Iowa 1
req u ires
to p o s t i n th e p r i n c i p a l p l a c e o f
b u s i n e s s a s t a t e m e n t o f the c a p i t a l s t o c k s u b s c r i b e d , , the
amount a c t u a l l y p a i d i n , and the t o t a l i n d e b t e d n e s s . . T h e
p r e s i d e n t o f e v e r y Maryland c o r p o r a t i o n , o r i f so p r o v i d e d
1OP
S t a t e o f North C a r o l i n a , C o r p o r a t i o n Laws, Ch. 22
o f t h e C o n s o l i d a t e d S t a t u t e s . 1 9 3 5 . Ch. 2 2 , A r t . 4 , S e c .
1146.
1
Code o f Iowa, 1935.
Ch. 384,
Sec. 8383.
333
some o t h e r e x e c u t i v e o f f i c e r t h e r e o f , must p r e p a r e a n n u a l l y
a f u l l and t r u e s t a t e m e n t o f t h e a f f a i r s o f t h e c o r p o r a t i o n
w h ich s h a l l be s u b m i t t e d a t t h e a n n u a l m e e t i n g o f t h e s t o c k н
h o l d e r s and f i l e
cip a l o ffic e
the r e p o r t w i t h i n tw e n t y d ays a t t h e p r i n н
i n the s t a t e where i t
i n s p e c t i o n . - * - ^ West V i r g i n ia - * - ^ i s
s h a l l be a v a i l a b l e f o r
s i m i l a r t o M aryland.
*
1A A
S ou th Dakota-1-
stip u la tes
t h a t a s t a t e m e n t o f a c c o u n t s be
made and l a i d b e f o r e the s t o c k h o l d e r s a t l e a s t once e a c h
year.
W isconsin 1 0 7 r e q u ir e s
t h a t t h e r e be f i l e d i n t h e p r i n н
c i p a l o f f i c e o f t h e c o r p o r a t i o n a s t a t e m e n t o f a s s e t s and
l i a b i l i t i e s and i t s f i n a n c i a l t r a n s a c t i o n s f o r t h e p r e v i o u s
y e a r , and a l s o a b r i e f s t a t e m e n t o f t h e s o u r c e s o f i t s r e н
ceip ts,
s t a t e d i n c l a s s e s , and a s i m i l a r s t a t e m e n t o f i t s
exp en d itu res,
of ob jects.
sh ow ing t h e amounts d i s b u r s e d f o r e a c h c l a s s
The s t a t e m e n t o f r e c e i p t s and d i s b u r s e m e n t s
m ig h t be i n t e r p r e t e d as a s t a t e m e n t o f p r o f i t and l o s s o r as
a statem ent o f a p p lic a t io n o f funds.
Laws ░ f Maryland Rela t i n g t o B u s i n e s s Corpora t i o n s ,
A n n o t a te d T w e l f t h E d i t i o n , 1 9 3 7 . A r t . 2 3 , S e c . 8 6 .
Corpora t i o n Laws o f West V i r g i n i a . a d o p t e d by
L e g i s l a t u r e , S p e c i a l S e s s i o n , March 1930 w i t h amendments to
d a t e o f i s s u e , J u l y 1 , 1935.' Ch. 3 1 , A r t . I , S e c . 7 4 .
Corpora t i o n Laws o f S ou th D a k o t a . 1 9 3 8 . P t . 1 7 ,
Ch. 2 , S e c . 8 8 3 2 .
tion s,
S t a t u t e s o f Wiscons in d e l a t i n g to Priva te Corpora 1937.
Se c . 182 .03 ( 3 ) .
334
The D i s t r i c t o f C olu mbia,-1-0 о N eb ra sk a ,-1-00 and Oklaн
homa-1--1-0 r e q u i r e t h a t c e r t a i n f i n a n c i a l i n f o r m a t i o n c o n c e r n н
in g d o m e s t i c c o r p o r a t i o n s be p u b l i s h e d ? i n a nev/spa p e r .
homa l i m i t s
p an ies.
Oklaн
the r e q u i r e m e n t to m in i n g and m a n u f a c t u r i n g comн
The i n f o r m a t i o n so r e q u i r e d to b e p u b l i s h e d i s c o n н
c e r n e d p r i m a r i l y w i t h the c a p i t a l s t o c k and the i n d e b t e d n e s s
o f the c o r p o r a t i o n .
Hampshire
Having t h e same p u r p o se i n v i e w , New
req u ires that a report o f f in a n c i a l con d ition
be s u b m i t t e d to t h e S e c r e t a r y o f S t a t e and t h a t i t be p r i n t н
ed and l a i d b e f o r e t h e g e n e r a l c o u r t , which would n o r m a l l y
make i t a m a t t e r o f p u b l i c r e c o r d .
S t a t e m e n t t o be d i s t r i b u t e d to the s h a r e h o l d e r s a n n u a l н
ly .
C a l i f o r n i a u n d o u b t e d l y h as e s t a b l i s h e d t h e m ost s p e c i f i c
and f a r r e a c h i n g r e q u i r e m e n t s c o n c e r n i n g the s t a t e m e n t o f
f i n a n c i a l c o n d i t i o n o f any o f the s t a t e s .
The s t a t u t e
in
t h i s s t a t e i s as f o l l o w s :
The b oard o f d i r e c t o r s o f e v e r y s t o c k c o r p o r a t i o n s h a l l
c a u s e to be s e n t to the s h a r e h o l d e r s n o t l a t e r than one
T it.
-1-0 о Code o f Laws o f t h e D i s t r i c t o f C o lu m b ia . 1 9 2 8 .
5 , Ch. 9 , S e c . 2 7 3 .
Compiled S t a t u t e s o f N e b r a s k a . 1 9 2 9 . Ch. 2 4 ,
Sec.
24-101.
-1--1-0 Compiled Sta t u t e s o f Oklahoma. 1 9 2 1 .
A rt. X I I I, Sec. 5464.
Ch. 4 6 ,
Bus ine ss Corpora t i o n Law and R egu lation o f Forн
e i g n C or po r a t io ns . 1937.
Sec. 8 3 -8 5 .
335
hundred and t w e n t y days' a f t e r the c l o s e o f t h e f i s c a l
o r c a l e n d a r y e a r an a n n u a l r e p o r t u n l e s s s u c h r e p o r t be
e x p r e s s l y d is p e n s e d w it h in the b y - la w s .
Such a n n u a l r e p o r t s h a l l i n c l u d e a b a l a n c e s h e e t a s
o f s u c h c l o s i n g d a t e and a s t a t e m e n t o f income o r p r o н
f i t and l o s s f o r th e y e a r e n d e d -o n s u c h c l o s i n g d a t e .
Such f i n a n c i a l s t a t e m e n t s h a l l be p r e p a r e d from t h e books
and s h a l l be i n a c c o r d a n c e t h e r e w i t h and s h a l l be c e r t i н
f i e d by the p r e s i d e n t , s e c r e t a r y , t r e a s u r e r , or a p u b lic
a c c o u n t a n t , and s h a l l be p r e p a r e d i n a form s a n c t i o n e d
b y sound a c c o u n t i n g p r a c t i c e f o r the p a r t i c u l a r k i n d o f
b u s i n e s s c a r r i e d on b y the c o r p o r a t i o n .
Such b a l a n c e s h e e t i t s e l f o r comments accom panying i t
s h a l l s e t f o r t h ( 1 ) the b a s e s em ployed i n s t a t i n g th e
v a l u a t i o n o f t h e a s s e t s and any change i n s u c h b a s e s
d u r i n g the p r o c e e d i n g y e a r ; (2 ) t h e amount o f t h e s u r p l u s ,
t h e s o u r c e s t h e r e o f and c h a n g e s t h e r e i n d u r i n g t h e p a s t
y e a r ; (3) t h e number o f s h a r e s o f e a c h c l a s s o f s t o c k
a u t h o r i z e d and o u t s t a n d i n g and t h e number o f s h a r e s , i f
a n y , c a r r i e d a s t r e a s u r y s h a r e s , t h e c o s t t h e r e o f and
t h e s o u r c e from w h ic h su ch c o s t was p a i d ; ( 4 ) t h e amount,
i f a n y , o f l o a n s o r a d v a n c e s to o r from o f f i c e r s , s h a r e н
h o l d e r s , and e m p l o y e e s .
Such s t a t e m e n t o f income or p r o f i t and l o s s s h a l l be
o f such form as t o d i s c l o s e t h e amount o f income or l o s s ,
i n s u c h c l a s s i f i c a t i o n a s may be a p p r o p r i a t e to t h e b u s i н
n e s s o f the c o r p o r a t i o n , and the a d d i t i o n s t h e r e t o and
d e d u c t i o n s t h e r e f r o m , s e t t i n g f o r t h i n p a r t i c u l a r the
amounts o f d e p r e c i a t i o n , d e p l e t i o n , a m o r t i z a t i o n , i n t e r н
e s t and e x t r a o r d i n a r y income or c h a r g e s , w h e t h e r o r n o t
i n c l u d e d i n o p e r a t i n g in co m e, and t h e amount and n a t u r e
o f income from s u b s i d i a r y c o r p o r a t i o n s .
The b a l a n c e s h e e t o f a h o l d i n g c o r p o r a t i o n may be
-e it h e r i t s sep a r a te b alance s h e e t or a c o n s o lid a t e d b a l н
a n c e s h e e t o f t h e h o l d i n g c o r p o r a t i o n and i t s s u b s i d i a r y
corporations.
I f n o t c o n s o l i d a t e d , i t s h a l l show as
s e p a r a t e i t e m s th e a g g r e g a t e amount o f t h e i n v e s t m e n t i n
sh a re s o f s u b s i d i a r y c o r p o r a t i o n s , the a g g r e g a te i n d e b t н
e d n e s s o f th e h o l d i n g c o r p o r a t i o n t o the s u b s i d i a r y c o r н
p o r a t i o n s , the a g g r e g a t e i n d e b t e d n e s s o f t h e s u b s i d i a r y
to th e h o l d i n g c o r p o r a t i o n , and how and i n - w h a t amounts
t h e p r o f i t s or l o s s e s o f s u b s i d i a r y c o r p o r a t i o n s have
b e e n t a k e n i n t o the a c c o u n t s o f t h e h o l d i n g c o r p o r a t i o n s .
I f c o n s o l i d a t e d , th e b a l a n c e s h e e t s h a l l s t a t e o r be a c н
companied b y a s t a t e m e n t o f t h e name o f e a c h s u b s i d i a r y
? 336
c o r p o r a t i o n and s h a l l be accom panied b y a s e p a r a t e b a l н
ance s h e e t o f t h e h o l d i n g c o r p o r a t i o n , w hich s e p a r a t e
b alance s h e e t o f the h o ld in g c o r p o r a tio n s h a l l c o n ta in
th e same i n f o r m a t i o n as though i t were n o t accom p an ied
by a c o n s o l i d a t e d b a l a n c e s h e e t . ^ 2
In t h e r e q u i r e m e n t r e l a t i n g to i n f o r m a t i o n a b o u t t h e t r e a s u r y
s t o c k i t i s n e c e s s a r y f o r the c o r p o r a t i o n t o s t a t e t h e so u r c e
from which s u c h c o s t s were p a i d .
Whether t h i s means the
s o u r c e o f the c a s h from w h ic h s u c h s t o c k was p a i d , or t h e
ty p e o f s u r p l u s to be r e d u c e d as a r e s u l t o f t h e a c q u i s i t i o n
o f su c h s t o c k i s n o t known.
In a l l p r o b a b i l i t y the l a t t e r
a s s u m p t i o n i s more l i k e l y to be the t r u e o n e .
1^
M i c h ig a n ,-11-1
-0 i n a somewhat s i m i l a r manner, r e q u i r e s
a s t a t e m e n t o f o p e r a t i o n s and p r o p e r t i e s
to b e communicated
o r d i s t r i b u t e d to t h e s h a r e h o l d e r s w i t h i n f o u r months a f t e r
t h e end o f t h e f i s c a l y e a r ; h o w e v e r , su c h a w e a l t h o f d e t a i l
i s n o t demanded as i t i s
in the C a lif o r n ia s t a t u t e .
A manuн
f a c t u r i n g and m i n i n g company i n Missouri"*-^ must se n d a s t a t e н
ment o f t h e c o n d i t i o n o f a f f a i r s o f t h e company t o the s h a r e н
h old ers .
P e e r i n g *s C i v i l Code o f t h e Sta t e o f C a l i f o r n i a .
1 9 3 7 . D iv . I , P t . IV, T i t . I , Ch.. X I I , S e c . 3 5 8 .
S t a t e o f M i c h i g a n , G e n e r a l Corpora t i o n Law, 1 9 3 8 .
Sec. 45.
G e n e r a l Corpora t i o n Laws and M i s c e l l a n e o u s P r o v i н
s i o n s o f t h e Sta t e o f Mis s o u r i , R e v i s e d S t a t u t e s o f 1929 and
amendments th r o u gh 1 9 3 3 .
Ch. 3 2 , A r t . 7 , S e c . 4 9 4 3 .
337
In the j u r i s d i c t i o n o f the s t a t e o f P e n n s y l v a n i a ,
u n l e s s o th e r w ise e x p r e s s l y provided i n the b y - la w s ,
the
d i r e c t o r s m ust send t o t h e ?s h a r e h o l d e r s w i t h i n n i n e t y days
a f t e r the c l o s e o f th e f i s c a l year a f i n a n c i a l r e p o r t .
The
r e p o r t s h a l l g i v e a summary o f a s s e t s and l i a b i l i t i e s ,
the
amount o f d i v i d e n d s d e c l a r e d and p a i d d u r i n g the y e a r ,
the
c o n d i t i o n o f the s u r p l u s or d e f i c i t and how a c q u i r e d or
c r e a t e d , and a s t a t e m e n t o f Income and l o s s p r e p a r e d i n t h e
form o r d i n a r i l y u s e d b y a c c o u n t a n t s f o r t h a t p a r t i c u l a r b u s i н
ness.
w ise,
M oreover, u n l e s s t h e b y - l a w s e x p r e s s l y p r o v i d e o t h e r н
the r e p o r t i s
to be c e r t i f i e d by a c e r t i f i e d p u b l i c
a c c o u n t a n t , o r a f i r m one member o f w h ich i s a c e r t i f i e d
p u b l i c a c c o u n t a n t , which' a c c o u n t a n t o r f i r m was c h o s e n by
t h e s h a r e h o l d e r s o f the c o r p o r a t i o n .
c o u l d be d e t e r m i n e d ,
is
This s t a t e ,
so f a r as
the o n l y s t a t e r e q u i r i n g t h a t the
s t a t e m e n t be c e r t i f i e d by a c e r t i f i e d p u b l i c a c c o u n t a n t , who
was e l e c t e d b y t h e s h a r e h o l d e r s .
The a p p o in t m e n t o f the
a c c o u n t a n t by the s h a r e h o l d e r s would a f f o r d a d e g r e e o f i n - ,
d ep en d e n c e from the' d i r e c t o r s and management whose t r u s t e e н
s h i p i s b e i n g r e v i e w e d , and In t h a t way s h o u l d b r i n g to l i g h t
c o n d i t i o n s or p o l i c i e s i n j u r i o u s to t h e s h a r e h o l d e r s .
Purdon*s P e n n s y l v a n i a S t a t u t e s . A nn ota ted Permanн
e n t E d i t i o n , 1 9 3 8 . T i t l e 1 3 - 1 5 . T i t . 1 5 , Ch. 49B, A r t . I l l ,
S e c . 2 8 5 2 - 3 1 8 . - Compare. r e q u i r e m e n t s f o r an a u d i t e d sta te m e n t
t o be s u b m i t t e d to t h e C o r p o r a t i o n Commissioner i n t h e law
o f M assachusetts.
338
S ection D
P e n a l t y f o r F a i l u r e , t o Comply w i t h t h e Law
F a i l u r e t o coranlv w i t h the s t a t u t o r y r e q u i r e m e n t s r e н
g a r d i n g b o o k s , r e p o r t s , and s t a t e m e n t s .
The codes, make the
d i r e c t o r s and/or o f f i c e r s l i a b l e f o r f a i l u r e
to comply w i t h
t h e v a r i o u s r e q u i r e m e n t s g o v e r n i n g the r e c o r d s and j o u r n a l s
t h a t must be k e p t .
The p e n a l t i e s
imposed a r e e i t h e r c r i m i n н
a l o r c i v i l , and i n some i n s t a n c e s b o t h c r i m i n a l and c i v i l
p en a lties.
A d e t a i l e d c o n s i d e r a t i o n w i l l n o t be g i v e n s i n c e
the consequence o f f a i l i n g
to comply w i t h the p r o v i s i o n s o f
la w v a r y w i d e l y from s t a t e t o s t a t e ; m o r e o v e r ,
th is study is
c o n c e r n e d p r i m a r i l y w i t h the p o s i t i v e r e q u i r e m e n t s o f t h e
law r a t h e r t h a n w i t h the n e g a t i v e f e a t u r e s .
make a law e f f e c t i v e
it
O b viously,
to
i s n e c e s s a r y to p r o v i d e p un ish m ent
f o r n o n c o n f o r m i t y , b u t i f t h e o f f i c e r s , d i r e c t o r s , and s h a r e н
h o l d e r s w i s h to a d h e re, t o the p r o v i s i o n s o f the lav/ s u c h p en н
a l t i e s have no a p p l i c a t i o n .
N everth eless,
i n o r d e r to i n d i н
c a t e t h e g e n e r a l f e a t u r e s o f su ch p r o v i s i o n th e v a r i o u s r e н
quirem ents o f th e C a l i f o r n i a
Code on t h i s p o i n t w i l l be c i t e d :
Any o f f i c e r , d i r e c t o r , e m p lo y e e , or a g e n t s o f a c o r н
p o r a t i o n , who: ( 1 ) make, i s s u e , d e l i v e r o r p u b l i s h any
p rospectus, rep o rt, c ir c u la r , c e r t i f i c a t e , f in a n c ia l
s t a t e m e n t , b a l a n c e , s h e e t , p u b l i c n o t i c e or document r e н
s p e c t i n g th e c o r p o r a t i o n or i t s s h a r e s , a s s e t s , l i a b i l i н
t i e s , c a p i t a l , d i v i d e n d s , b u s i n e s s , e a r n i n g s , or a c c o u n t s
w h ich i s f a l s e i n any m a t e r i a l r e s p e c t , knowing i t to be
f a l s e , or who k n o w i n g l y p a r t i c i p a t e s t h e r e i n ; o r (2)
make or c a u s e t o be made i n t h e b o o k s , m i n u t e s , r e c o r d s
339
o r a c c o u n t s o f a c o r p o r a t i o n any e n t r y w h ich i s f a l s e
i n any m a t e r i a l p a r t i c u l a r , knowing su ch e n t r y i s f a l s e ;
o r rem ove, e r a s e , a l t e r or c a n c e l ' a n y e n t r y t h e r e i n w i t h
i n t e n t to d e c e i v e , s h a l l be l i a b l e j o i n t l y and s e v e r a l l y
f o r a l l t h e damage r e s u l t i n g t h e r e f r o m to t h e c o r p o r a н
t i o n ' a n d / o r any p e r s o n i n j u r e d t h e r e b y who r e l i e d t h e r e н
o n . 116
'
C ontinuing,
t h e law p r o v i d e s t h a t :
Every c o r p o r a t i o n which n e g l e c t s , f a i l s , or r e f u s e s :
(a) to k e e p or c a u s e to be k e p t o r m a i n t a i n e d t h e s h a r e
r e g i s t e r o r the books o f a c c o u n t r e q u i r e d b y t h i s t i t l e
- t o be k e p t or m a i n t a i n e d ; o r (b) t o p r e p a r e or c a u s e to
? be p r e p a r e d or s u b m i t t e d t h e f i n a n c i a l s t a t e m e n t s r e н
q u ired by t h i s t i t l e to be prepared or su b m itted , s h a l l
be s u b j e c t to a p e n a l t y o f t e n d o l l a r s f o r e a c h d a y up
t o a maximum o f one th o u sa n d d o l l a r s , b e g i n n i n g t h i r t y
d ays a f t e r r e c e i p t o f w r i t t e n r e q u e s t t h a t su ch d u t y be
p erfo rm ed from one e n t i t l e d t o make the same, t h a t such
f a i l u r e o r r e f u s a l c o n t i n u e s , to be p a i d to the s h a r e н
h o l d e r o r s h a r e h o l d e r s j o i n t l y making such r e q u e s t t h e r e н
f o r and damaged t h e r e b y , i f s u i t t h e r e f o r be commenced
w i t h i n n i n e t y d ays a f t e r making su ch w r i t t e n r e q u e s t ;
p r o v i d e d , h o w e v e r , t h a t the maximum d a i l y p e n a l t y h e r e н
u nd er b e c a u s e o f f a i l u r e to comply w i t h any number o f
s e p a r a t e r e q u e s t s made on any one d ay o r f o r the same
a c t s h a l l be one h u n d fed d o l l a r s .
Any p e n a l t y p r e s c r i b e d b y t h i s s e c t i o n s h a l l be i n
a d d i t i o n to any remedy b y i n j u n c t i o n o r a c t i o n f o r damн
a g e s , or by w r i t o f mandate f o r t h e n onp erform a n ce o f
a c t s or d u t i e s e n j o i n e d by law upon t h e c o r p o r a t i o n or
i t s d i r e c t o r s or o f f i c e r s .
The c p u r t i n w hich an a c t i o n f o r any s u c h p e n a l t y i s
b r o u g h t may r e d u c e , r e m i t o r s u s p e n d such' p e n a l t y on
s u c h terms and c o n d i t i o n s as i t may deem r e a s o n a b l e when
i t i s made to appear t h a t the n e g l e c t , f a i l u r e o r r e f u s н
a l was i n a d v e r t e n t or e x c u s a b l e . 1 1 ^
1937.
116 P e e r i n g 1s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a ,
P i v . I , P t . IV, T i t . I , Ch. XIV, S e c . 3 6 7 .
1937.
117 P e e r i n g 1s C i v i l Code o f t h e S t a t e o f C a l i f o r n i a .
P i v . I , P t . IV, T i t . I , Ch. XIV, S e a . 3 6 8 .
340
In a d d i t i o n t o n t h e a b o v e , t h e p e n a l code im poses upon a
d i r e c t o r or o f f i c e r who makes a f a l s e e n t r y w i t h i n t e n t to
d e f r a u d , a p e n a l t y o f n o t l e s s t h a n t h r e e y e a r s o r more th a n
t e n y e a r s im p r ison m e n t i n t h e s t a t e p r i s o n , or one y e a r i n
the c o u n t y j a i l ,
and a f i n e n o t i n e x c e s s o f f i v e hundred
1 -I Q
d o l l a r s , or b o t h . xo
A d i r e c t o r who k n o w i n g l y c o n c u r s i n
the is s u a n c e o f a f a l s e r e p o r t i s g u i l t y o f a f e l o n y .
Moreн
o v e r , d i r e c t o r s a r e presumed to have su ch know ledge o f t h e
c o r p o r a t i o n ' s a f f a i r s so a s t o d e t e r m i n e w h e th e r an a c t i s
i n v i o l a t i o n o f t h e p r o v i s i o n s . 11о
S ection E
Summary
Summary.
An a b r i d g e d s t a t e m e n t o f t h e s t a t u t o r y p r o н
v i s i o n s r e l a t i n g t o th e books o f a c c o u n t and f i n a n c i a l r e н
p o r t s may now be made.
Of the
three ty p e s o f re co r d s th a t
ar e m e n t i o n e d i n the c o m p i l e d l a w s - - t h e m in u te b o o k s ,
the
stock- r e g i s t e r and t r a n s f e r b o o k , and t h e books o f a c c o u n t - th e f i r s t
i s u n i f o r m i l y r e q u i r e d by a l l t h e s t a t e s ;
the
s e c o n d i s m e n t i o n e d b y a l l e x c e p t f i v e s t a t e s : n a m e ly , Georн
g i a , M i s s i s s i p p i , New Hampshire, New M e x ic o , and' South Caro-
1937.
118 P e e r i n g 1s P e n a l Code o f t h e S t a t e o f C a l i f o r n i a .
P t . 1 , T i t . 1 3 , Ch. 1 3 , S e c . 5 6 3 .
119 I b i d . . S e c . 564 and 5 6 8 .
341
lin a ;
the th ir d re co r d ,
the books o f a c c o u n t ,
a l l except n in eteen s t a te s
ion
i s r e q u ir e d by
and t h e D i s t r i c t o f Columbia,
Of t h e s t a t e s r e q u i r i n g t h a t books o f a c c o u n t be k e p t , s i x teen s ta te s
TO 1
m e r e l y r e q u i r e t h a t the c o r p o r a t i o n k e e p su ch
books w i t h o u t e l a b o r a t i o n as t o the d e t a i l n e c e s s a r y o t h e r
th an t h a t the books must be a c c u r a t e .
Two s t a t e s , M i s s o u r i
and T e n n e s s e e , o c c u p y a r a t h e r i n t e r m e d i a t e p o s i t i o n w i t h
some d e t a i l s b u t n o t t h e m in u te d e t a i l u s u a l l y demanded; f o r
e x a m p le , T e n n e s s e e r e q u i r e s t h a t the books s h o w - t h e amount
o f s t o c k p a id i n and o t h e r f a c t s i n w h ich i t i s assumed t h a t
t h e s t o c k h o l d e r s o r c r e d i t o r s may h ave an i n t e r e s t .
F in a lly ,
t h e r e a r e f o u r s t a t e s , C a l i f o r n i a , L o u i s i a n a , M i c h i g a n , and
Ohio, whose s t a t u t e s g i v e r a t h e r p r e c i s e r e g u l a t i o n s d e a l i n g
w ith th e a cco u n ts.
C a l i f o r n i a , f o r e x a m p le , demands t h a t the
a c c o u n t s be so k e p t a s t o i n d i c a t e
ty, a s s e ts ,
lo sses,
the amount o f t h e p r o p e r н
l i a b i l i t i e s , r e c e i p t s , disbursem ents, g a in s,
ca p ita l,
The o t h e r s t a t e s
s u r p l u s and t h e v a r i o u s t y p e s o f s u r p l u s .
i n t h i s c l a s s have p r o v i s i o n s whose p u r p o se
1on
Alabama, A r i z o n a , A r k a n s a s , D e la w a r e , F l o r i d a ,
G e o r g i a , K a n sas, K e n tu c k y, Maine, M a s s a c h u s e t t s , M i s s i s s i p p i ,
Nevada, New Hampshire, New M exico, Rhode I s l a n d , South Caroн
l i n a , Vermont, V i r g i n i a , and Wyoming.
C o lo r a d o , I d a h o , I l l i n o i s , I n d i a n a , Maryland,
M i n n e s o t a , Montana, N e b r a sk a , N orth D a k o ta , New Y ork, O k la н
homa, P e n n s y l v a n i a , S ou th D ak o ta, T e xas, U t a h , and West V i r н
g in ia .
342
i s a n a l o g o u s to t h a t o f C a l i f o r n i a .
cut,
S ix s t a t e s ,
C onnectiн
Iowa, New J e r s e y , W i s c o n s i n , O r egon ,a n d North C a r o l i n a ,
-have s e c t i o n s d e a l i n g w i t h the books o f a c c o u n t , b u t th e r e н
q u ir e m e n ts a r e n o t s u s c e p t i b l e o f e x a c t i n t e r p r e t a t i o n or
t h e r e q u i r e m e n t s a re so v a r i e d as t o make e x t e n s i v e c o n s i d н
e r a tio n im p ossib le.
E i g h t s t a t e s , -Arkansas, C a l i f o r n i a , D e l a w a r e , Georн
g i a , K an sas, I l l i n o i s , M i n n e s o t a , and O h io, have a p r o v i s i o n
w hich p e r m i t s t h e b oard o f d i r e c t o r s
to r e l y on the books o f
a c c o u n t and t h e s t a t e m e n t s s u b m i t t e d to them-, and w h e n t h e y
do r e l y on su ch s t a t e m e n t s , no c h a r g e o f n e g l i g e n c e may be
b r o u g h t a g a i n s t them f o r any a c t i o n t a k e n a s a r e s u l t o f a
judgment b a s e d on t h e s t a t e m e n t .
C o n c e r n in g t h i s group the
m o st s i g n i f i c a n t f e a t u r e i s f o u n d i n t h e laws o f C a l i f o r n i a ,
I l l i n o i s , M i n n e s o t a , and Ohio, f o r i n t h e s e s t a t e s t h e f i n н
a n c i a l s t a t e m e n t may be s u b m i t t e d by t h e p r o p e r o f f i c e r o f
th e c o r p o r a t i o n , o r i t may be c e r t i f i e d
accountant.
dends,
to be c o r r e c t b y an
When d e t e r m i n i n g t h e f u n d s a v a i l a b l e f o r d i v i н
th e la w s o f I l l i n o i s
and Ohio s p e c i f i c a l l y p r o v i d e
t h a t the d i r e c t o r s are n o t l i a b l e
if
they c o n s id e r the a s s e t s
t o be worth t h e book v a l u e .
Secondly,
th e r e g u l a t o r y co m m issio n o f t w e n t y - n i n e
s t a t e s and t h e D i s t r i c t o f Columbia make i t o b l i g a t o r y f o r
t h e o f f i c e r s o f a c o r p o r a t i o n t o su b m it a r e p o r t o f c e r t a i n
f i n a n c i a l a f f a i r s an nu ally.
Among t h e s t a t e s so r e q u i r i n g ,
343
t h e r e i s a wid e d i v e r g e n c e a s t o th e d e t a i l s
in c lu d e d in such a r e p o r t .
t h a t must be
Twelve o f t h e s t a t e s , C on n ec ticu t,
G e o r g i a , I d a h o , Iow a, L o u i s i a n a , M aine, New J e r s e y , New
M e x ic o , Oregon, Rhode I s l a n d , V i r g i n i a ,
and W i s c o n s i n , r e н
q u i r e the an n u al r e p o r t to I n c l u d e d a t a r e g a r d i n g t h e r e l a н
t i v e s t a t u s o f t h e c a p i t a l s t o c k and i t s
F lo rid a ,
issu an ce.
D e la w a r e ,
I n d i a n a , Montana, N orth C a r o l i n a , T e n n es sd e and the
D i s t r i c t o f Columbia f o l l o w t h e p r e v i o u s c l a s s , b u t a l s o
r e q u ir e c e r t a i n oth er f i n a n c i a l Inform ation; e . g . ,
demands d a ta r e l a t i v e
w ith in the s t a te ;
Delaware
to t h e c a p i t a l i n v e s t e d i n r e a l e s t a t e
I n d i a n a , Montana, and N orth C a r o l i n a c a l l
f o r an a n a l y s i s o f t h e ty p e and v a l u e o f a s s e t s r e c e i v e d In
payment o f s t o c k ; T e n n e s s e e r e q u i r e s t h a t t h e g r o s s r e c e i p t s
from the b u s i n e s s be r e p o r t e d .
The n e x t grou p o f s t a t e s ,
s e v e n i n number, a r e t h o s e t h a t r e q u i r e d a t a c o n c e r n i n g c a p i н
t a l s t o c k i s s u a n c e and a l s o a f i n a n c i a l s t a t e m e n t .
These
s t a t e s , A r i z o n a , C o l o r a d o , K an sas, M a s s a c h u s e t t s , New Hampн
sh ire
Nebraska , and Vermont, do n o t i n d i c a t e t h e e x a c t form
or c o n t e n t o f the r e p o r t .
next c la ss o f s t a t e s ,
T h is i s i n s h a r p c o n t r a s t to the
I l l i n o i s , M i c h ig a n , and M i s s o u r i , which
p r e s c r i b e i n m in u te d e t a i l t h e i t e m s to be i n c l u d e d i n t h e
statem ent.
sp ec ified ,
As an i n d i c a t i o n o f t h e ty p e o f i n f o r m a t i o n
the I l l i n o i s
s t a t u t e s may be c i t e d .
I l l i n o i s deн
mands d a ta r e g a r d i n g t h e a g g r e g a t e number o f s h a r e s a u t h o r н
i z e d and i s s u e d , a s t a t e m e n t o f t h e s t a t e d c a p i t a l and p a i d -
344
in su rp lu s,
the amount t r a n s f e r r e d t o s t a t e d c a p i t a l a s t h e
r e s u l t o f a share d iv id e n d ,
the d e c r e a s e i n the sum o f s t a t н
ed c a p i t a l as a r e s u l t o f r e d e m p t io n o f s h a r e s , o t h e r changes
in the s t a t e d c a p i t a l ,
a statem ent o f the value o f a l l proн
p e r t y owned, and a s t a t e m e n t o f t h e -gross amount o f b u s i n e s s
tr a n sa c te d in the s t a t e .
The o t h e r two s t a t e s a r e n o t i d e n н
t i c a l b y .any m ean s, b u t t h e y a r e q u i t e com p reh en sive,. ' F i n a l н
l y , l/iy-oming d o e s n o t demand a s t a t e m e n t r e g a r d i n g c a p i t a l
s t o c k , but i t does r e q u ir e a sta te m e n t co n ce rn in g the porн
t i o n o f c a p i t a l , p r o p e r t y , and a s s e t s l o c a t e d i n t h e s t a t e .
N i n e t e e n s t a t e s ^ - 22 have no s t a t u t o r y p r o v i s i o n making
i t n e c e s s a r y f o r a co r p o r a tio n org an ized in th e se s t a t e s to
su b m it a n n u a l r e p o r t s ; h o w e v e r , t h i s d o e s n o t mean t h a t t h e
c o m m is s io n c o u l d n o t demand su ch r e p o r t s under a d m i n i s t r a t i v e
la w .
T h irdly,
t h e r e re m a in s t o be c o n s i d e r e d t h e r i g h t s o f
t h e s h a r e h o l d e r s to r e c e i v e n o t i c e o f t h e f i n a n c i a l a f f a i r s
o f t h e company;
The d i s c u s s i o n on t h i s p o i n t c e n t e r e d
around t h r e e f u n d a m e n t a l s u b d i v i s i o n s :
(1 ) s t a t e s r e q u i r i n g
th e s u b m i s s i o n o f a r e p o r t on r e q u e s t o f a s h a r e h o l d e r ,
sharehold ers,
shares;
(2)
or
owning a c e r t a i n p er b e n t o f t h e o u t s t a n d i n g
s t a t e s r e q u i r i n g t h a t a f i n a n c i a l s t a t e m e n t be
122 Alabama, A r k a n s a s , C a l i f o r n i a , K e n tu c k y, Maryland,
North D a k o t a , M i n n e s o t a , M i s s i s s i p p i , Nevada, New York, Ohio,
Oklahoma, P e n n s y l v a n i a , South C a r o l i n a , S o u th D a k o ta , T e x a s,
U ta h , W ash in g to n , and West V i r g i n i a .
345
p u b l i s h e d i n some form; and (3) s t a t e s r e q u i r i n g t h a t the
s t a t e m e n t be d i s t r i b u t e d t o each s h a r e h o l d e r a n n u a l l y .
I n the f i r s t group may be i n c l u d e d C a l i f o r n i a , C o l o н
rado,
C o n n e c t i c u t , L o u i s i a n a , Maryland, M i n n e s o t a , Montana,
New Y ork , O h io, Oklahoma, S o u t h C a r o l i n a , South D a k ota, and Wyoming.
A l l o f t h e s e s t a t e s u nd er c e r t a i n c o n d i t i o n s , which
a r e en u m erated i n the g e n e r a l d i s c u s s i o n , must su bm it to t h e
s h a r e h o l d e r , upon r e q u e s t , a s t a t e m e n t o f f i n a n c i a l c o n d i н
t io n o f the c o r p o r a tio n .
Nebraska r e q u i r e s a f i n a n c i a l s t a t e н
ment t o be g i v e n on demand t o the s h a r e h o l d e r s o f m a n u f a c t u r н
i n g c o m p a n ie s .
North C a r o l i n a p r o v i d e s that, upon r e q u e s t o f
th e owners o f t w e n t y - f i v e per c e n t o f the o u t s t a n d i n g s t o c k ,
t h e o f f i c e r s must have an a u d i t o f the company? s books and
the s t a t e m e n t p r e p a r e d as a r e s u l t o f s u c h an a u d i t s h a l l be
s u b m i t t e d to the s h a r e h o l d e r s making such r e q u e s t .
In t h e s e c o n d group may be i n c l u d e d Iowa, Maryland,
N eb ra sk a , New Hampshire, Oklahoma, South D ak ota , West V i r g i n н
ia ,
W i s c o n s i n , and the D i s t r i c t o f Columbia.
q u i r e s t h a t t h e s t a t e m e n t be p u b l i s h e d .
This grou p r e н
The word p u b l i s h e d
i n d i c a t e s t h a t the s t a t e m e n t must be made p u b l i c r a t h e r than
i n t h e narrow s e n s e o f m e r e l y b e i n g p r i n t e d ; f o r e x a m p le ,
Maryland r e q u i r e s the p r e s i d e n t o f a company t o s u b m it th e
r e p o r t t o t h e s h a r e h o l d e r s a t t h e an n u a l m e e t i n g and t h e n to
file
the r e p o r t i n t h e p r i n c i p a l o f f i c e o f t h e f i r m .
V i r g i n i a and S outh Dakota are s i m i l a r .
West
On t h e o t h e r hand ,
346
Oklahoma, N e b r a sk a , and t h e D i s t r i c t o f Columbia r e q t i i r e
c e r t a i n f i n a n c i a l i n f o r m a t i o n to be p u b l i s h e d i n a newspaper.
The o t h e r - s t a t e s i n t h i s group r e q u i r e t h e f i n a n c i a l r e p o r t
'to be f i l e d
In the p r i n c i p a l o f f i c e o f the f ir m .
The. t h i r d grou p r e f e r s
the o f f i c e r s
to t h o s e s t a t e s t h a t r e q u i r e
to g iv e th e sh a reh o ld ers a copy o f th e f in a n c ia l
r e p o r t a n n u a l l y ; the s t a t e s
i n t h i s grou p a r e , C a l i f o r n i a ,
M i c h ig a n , M i s s o u r i ( f o r m a n u f a c t u r i n g and m in in g c o m p a n i e s ) ,
and P e n n s y l v a n i a .
The C a l i f o r n i a law r e q u i r e s the s t a t e m e n t
s u b m i t t e d t o be c e r t i f i e d b y the p r e s i d e n t ,
s e c r e t a r y or
t r e a s u r e r , or p u b l i c a c c o u n t a n t and i t must be p r e p a r e d i n a
form s a n c t i o n e d by sound a c c o u n t i n g p r a c t i c e .
The b a l a n c e
s h e e t s h o u l d s e t f o r t h the b a s e s o f v a l u a t i o n ,
the amount of
su rp lu s,
the s o u r c e s and changes t h e r e i n d u r in g the p a s t y ear,'
t h e number o f s h a r e s o f t r e a s u r y s t o c k and t h e i r c o s t , and
t h e amount o f any l o a n s t o o f f i c e r s ,
ees.
s h a r e h o l d e r s , and employн
The s t a t e m e n t o f p r o f i t and l o s s must show th e v a r i o u s
c l a s s i f i c a t i o n o f income and e x p e n s e i n d e t a i l w i t h the d e н
p r e c i a t i o n , d e p l e t i o n , a m o r t i z a t i o n , . i n t e r e s t , and e x t r a н
o r d i n a r y Income and c h an ges c l e a r l y shown.
The o t h e r s t a t e s
i n t h e group do n o t p r e s c r i b e s u c h a g r e a t amount o f d e t a i l .
I t i s i n t e r e s t i n g to n o te t h a t i n P e n n sy lv a n ia , u n l e s s the
b y - l a w s p r o v i d e o t h e r w i s e , t h e s t a t e m e n t must be c e r t i f i e d
b y a c e r t i f i e d p u b l i c a c c o u n t a n t c h o s e n by the s h a r e h o l d e r s .
F in a lly ,
t h e r e re m a in s t o be c o n s i d e r e d t h e p r o v i s i o n
c o n c e r n i n g the f a i l u r e t o comply w i t h s t a t u t o r y r e q u i r e m e n t s .
Only t h e law i n C a l i f o r n i a was c o n s i d e r e d s i n c e t h e purpose
o f t h i s s t u d y i s t o d e t e r m i n e th e p o s i t i v e f e a t u r e s o f t h e
law r a t h e r than n e g a t i v e .
I n g e n e r a l i t may be s a i d t h a t
c i v i l and c r i m i n a l l i a b i l i t i e s
i t y w i t h the l a w s .
a r e imposed f o r n onconform н
CHAPTER IX
SUMMARY AND CONCLUSION
Scope o f t h e c h a p t e r .
Having c o n s i d e r e d a t l e n g t h
t h e s t a t u t o r y p r o v i s i o n s c o n c e r n i n g c e r t a i n f i n a n c i a l p ro b н
lems r e l a t i n g t o t h e c o r p o r a t i o n , a r e c a p i t u l a t i o n o f t h e
o u t s t a n d i n g f e a t u r e s o f t h e laws may now be p r e p a r e d .
There
a r e few l e g a l s u b j e c t s i n w h ich s o many d i f f i c u l t i e s and so
g r e a t a c o n f l i c t In t h e co d es a r e t o be met a s i n t h e law o f
p rivate corporations.
The law i n many j u r i s d i c t i o n s
is
u n s e t t l e d on v a r i o u s p o i n t s and i n a d d i t i o n t h e s t a t u t e s o f
some o f t h e s t a t e s have b e e n u n d e r g o i n g c o n s i d e r a b l e m o d i f i н
c a tio n in rece n t y e a r s .
The d i f f i c u l t i e s e n c o u n t e r e d i n
a t t e m p t i n g t o summarize t i e
la w s a r e a l m o s t I n s u r m o u n ta b le ,
f o r t h e law s are so f a r a t v a r i a n c e t h a t t h e r e I s no common
ground on w hich t h e i r d i f f e r e n c e s can be f u s e d .
M oreover,
an a t t e m p t t o g e n e r a l i z e o r c o n f i n e w i t h i n t o o narrow a l i m i t
t h e v a r i o u s law s may seem t o i n d i c a t e a g r e a t e r d e g r e e o f
u n if o r m it y than a c t u a l l y e x i s t s .
In a d d i t i o n , apparent d i f н
f e r e n c e s among the s e v e r a l s t a t e s a r e o f t e n g r e a t l y m a g n i f i e d
b y t h e d i v e r s i t y i n t h e p h r a s e o l o g y e m p lo y ed .
s p i t e the apparent d i f f i c u l t i e s
However, d e н
i n h e r e n t In s u c h a s u b j e c t ,
a s y n t h e s i s o f a g e n e r a l c h a r a c t e r may be j u s t i f i e d .
s h o u l d be r e c o g n i z e d , n e v e r t h e l e s s ,
It
that fin e d is tin c tio n s
c a n n o t be i n c l u d e d i n s u c h a broad o v e r v i e w .
In a d d itio n
349
t o the summary some c o n c l u s i o n s , w hich seem w a r r a n t e d on t h e
b a s i s o f t h e data* w i l l be drawn.
S ection A
Summary
In trod u ction .
In t h e ? i n t r o d u c t i o n t o the s t u d y twenty-
q u e s t i o n s were s e t f o r t h as t h e b a s i s upon w h ich the s u b s e н
q uent d i s c u s s i o n was t o be d e v e l o p e d .
The p rim ary theme o f
t h e s e q u e s t i o n s c e n t e r s a b o u t t h e f i n a n c i a l p rob lem a r i s i n g
o u t o f t h e n e t w orth s e c t i o n o f t h e c o r p o r a t e b a l a n c e s h e e t ,
p a r t i c u l a r l y th e s o u r c e o f t h e v a r i o u s t y p e s o f d i v i d e n d s .
I t i s e s s e n t i a l t h a t th e l e g a l meaning o f t h e term " s t a t u t o r y
c a p i t a l " be d e t e r m i n e d .
The s t a t u t o r y c a p i t a l i s the p o r н
t i o n o f t h e a s s e t s s u b s c r i b e d or p a i d - i n
of a corporation,
by the s h a r e h o ld e r s
and the p o r t i o n o f t h e a s s e t s which h as
b e e n t r e a t e d a s payment f o r s h a r e s a l l o t t e d as s h a r e d i v i н
dends t h a t i s c o n s i d e r e d by the law t o be a f i x e d q u a n t i t y
and n o t s u b j e c t to r e d u c t i o n .
The f u n d s o f a . c o r p o r a t i o n
a r e c o n t r i b u t e d b y two p r i n c i p a l g r o u p s ,
the s h a r e h o l d e r s .
th e c r e d i t o r s and
I n o t h e r w ord s, t h e r e a r e two prim ary
c l a i m s a g a i n s t the a g g r e g a t e a s s e t s o f a c o r p o r a t i o n :
the
c l a i m s o f t h e i n d i v i d u a l s o t h e r th an s h a r e h o l d e r s and the
c l a i m s o f the s h a r e h o l d e r s .
The c l a i m s o f t h e c r e d i t o r s a r e
a p r io r claim a g a i n s t the a s s e t s .
The s h a r e h o l d e r s h ave a
550
r e s i d u a l c l a i m t o t h a t p o r t i o n o f t h e a s s e t s t h a t re m a in a f t e r the c l a i m s o f t h e c r e d i t o r s a r e s a t i s f i e d .
o f t h e c r e d i t o r s a re known as t h e l i a b i l i t i e s ?
The r i g h t s
the c l a i m s
of, the s h a r e h o l d e r s a r e an e q u i t a b l e r i g h t , commonly known
as t h e n e t w o r t h .
At any g i v e n t i m e ,
therefore,
the a g g r e н
g a t e o f t h e c l a i m s o f t h e c r e d i t o r s a n d . t h e c l a i m s o f the
s h a r e h o l d e r s w i l l e q u a l the a g g r e g a t e v a l u e o f t h e a s s e t s .
T h is f u n d a m e n t a l f a c t may be e x p r e s s e d a l g e b r a i c a l l y as
fo llo w s:
A ssets=
L i a b i l i t i e s - ^ N et Worth
The a g g r e g a t e o f t h e n e t w orth o f a c o r p o r a t i o n may be d i v i d н
ed i n t o two b a s i c s u b d i v i s i o n s ,
su rp lu s.
t h e c a p i t a l s t o c k and the
In t h e e a r l y l a w s , when a c o r p o r a t i o n i s s u e d shares
h a v i n g a par v a l u e f o r a c o n s i d e r s t i o n e q u a l t o p a r , assumн
in g no l i a b i l i t i e s had y e t b e e n i n c u r r e d ,
the t o t a l v a l u e o f
t h e a s s e t s would be e x a c t l y e q u a l t o t h e a g g r e g a t e par v a l u e
o f the shares o u tsta n d in g .
a s s e t s equal in value
M oreover, t h e laws p r o v i d e d t h a t
to the a g g r e g a t e par v a l u e o f t h e c a p i н
t a l s t o c k i s s u e d and o u t s t a n d i n g s h o u l d be r e t a i n e d b y t h e
c o r p o r a t i o n . - 1-
T h is a g g r e g a t e so r e q u i r e d t o be m a i n t a i n e d
was t h e c a p i t a l .
w i t h o u t par v a l u e ,
by law .
Under the c u r r e n t la w s which a l l o w s h a r e s
the sum o f t h i s c a p i t a l must be determ in ed
This s t u d y has c o n c e r n e d i t s e l f w i t h t h o s e p h a s e s
The l a w , o f c o u r s e , p r o v i d e d tha t the c a p i t a l c o u l d
be ch an ged b y a d e f i n i t e l e g a l p r o c e d u r e .
351
o f law which s e e k to p r o v i d e f o r t h e m a in t e n a n c e o f t h e
f u n d s and p r o p e r t y o f t h e c o r p o r a t i o n i n t a c t f d r the p r o t e c н
t i o n o f t h e two gro u p s o f c o n t r i b u t o r s ,
the s h a r e h o ld e r s .
To a c r e d i t o r the
the c r e d i t o r s and
cap ital ( i f
the c a p i t a l '
has b e e n m a i n t a i n e d a s r e q u i r e d b y law i n m ost j u r i s d i c t i o n s )
r e p r e s e n t s t h e amount t h e a s s e t s may s h r i n k i n v a l u e w i t h o u t
i m p a i r i n g t h e p o s s i b i l i t y o f h a v in g h i s c l a i m p a i d .
The s t a t u t o r y c a p i t a l i s
i n t h e n a t u r e o f a permanent
or h i s t o r i c a l s t a n d a r d w h ich may n o t be r e d u c e d by d i v i d e n d s .
As a c o r o l l a r y o f t h i s t h e r e has d e v e l o p e d the r u l e common
i n many s t a t e s t h a t a c o r p o r a t i o n c o u l d n o t p ay d i v i d e n d s
o u t o f c a p i t a l , o r c o u l d n o t pay a d i v i d e n d tba t would im p a ir
c a p ita l.
As a r e s u l t o f t h e above
s t u d y has
b een t o d e t e r m i n e ( 1 )
s t a t e m e n t t h e problem o f
th is
what t h e law s h o l d t o be
the
sta tu to r y c a p it a l o f a corporation;
(2) what t h e law s have
e s t a b l i s h e d a s t h e method o f d e t e r m i n i n g what t y p e o f a s s e t s ,
and how and by whom the a s s e t s are t o be v a l u e d t o e s t a b l i s h
t h e e q u a l i t y o f the a s s e t s r e c e i v e d f o r s h a r e s i s s u e d ;
(3)
what g e n e r a l s o u r c e s .are a v a i l a b l e f o r the payment o f d i v i н
d e n d s , b o t h c a s h and s h a r e ;
(4) what s p e c i a l p r o v i s i o n s
g o v e r n the payment o f d i v i d e n d s ;
(5) what a r e the r e q u i r e m e n t s
r e g a r d i n g t h e p u r c h a se o f a c o r p o r a t i o n ' s own s h a r e s and (6)
what a c c o u n t s must be k e p t and what r e p o r t s must be g i v e n t o
t h e s t a t e and s h a r e h o l d e r s so t h a t t h e y may be aware o f t h e
352
c i r c u m s t a n c e s and c o n d i t i o n s o f t h e company.
S t a t u t o r y c a p i t a l ; par v a l u e s h a r e s .
S in c e the s t a t u н
t o r y c a p i t a l i s so im p o r ta n t from the v i e w p o i n t - o f p r o t e c t н
i n g t h e c r e d i t o r s and s h a r e h o l d e r s as b e t w e e n t h e m s e l v e s ,
i t i s e s s e n t i a l t h a t t h e v a r i o u s l e g a l r u l e s d e f i n i n g the
terms be c a r e f u l l y s c r u t i n i z e d .
I n s e a r c h i n g t h e law s i t
was foun d t h a t t h e c o n c e p t ' o f s t a t u t o r y c a p i t a l was f r e q u e n t н
l y h o t d e f i n e d , and t h a t many o f t h e s t a t e s
th a t attem pted
a d e f i n i t i o n u s e d a vagu e and u n s a t i s f a c t o r y t e r m i n o l o g y .
T h i r t y s t a t e s d i s c u s s th e c o n c e p t o f s t a t u t o r y c a p i t a l and
i n so d o i n g t h e term ?c a p i t a l s t o c k ? i s u s e d b y f i v e s t a t e s ,
t h e term ?c a p i t a l ? by s e v e n t e e n s t a t e s , and t h e term ? s t a t e d
c a p i t a l ? by e i g h t s t a t e s .
Inasmuch as the two terms " c a p i н
t a l ? and ?c a p i t a l s t o c k ? have b e e n u s e d i n l e g a l p r a c t i c e
f o r many y e a r s w i t h a wide v a r i e t y o f m e a n i n g s , i t h a s n o t
a i d e d i n p r e c i s i o n o f meaning t o u s e t h e s e two terms w h ich
have had a s s o c i a t e d w i t h t h e m s e l v e s a l a r g e number o f c o n n a tio n s.
The e s s e n t i a l problem i s
t o d e t e r m i n e j u s t what t h e
law h a s e s t a b l i s h e d a s the l e g a l m easure o f t h e s t a t u t o r y
ca p ita l;
i n o t h e r w o rd s, what p o r t i o n o f t h e amount r e c e i v e d
o r t o be r e c e i v e d f o r s h a r e s must be c r e d i t e d t o . t h e v a r i o u s
c a p i t a l s t o c k a c c o u n t s and what p o r t i o n may l e g a l l y be p l a c н
ed i n the p a i d - i n s u r p l u s a c c o u n t .
S i n c e t h e r e a r e two
p r i n c i p a l t y p e s o f s h a r e s , par v a l u e s h a r e s and s h a r e s w i t h н
o u t par v a l u e ,
the l e g a l r e q u i r e m e n t s d e a l i n g w i t h e a c h o f
t h e s e two t y p e s m ust be c o n s i d e r e d .
I n m ost j u r i s d i c t i o n s
when par v a l u e , s h a r e s a r e i s s u e d the s t a t u t o r y c a p i t a l r e н
p r e s e n t i n g such', s h a r e s I s to. be e q u a l t o the a g g r e g a t e par
v alu e o f the shares is s u e d .
I f the sh ares are i s s u e d f o r a
c o n s i d e r a t i o n i n e x c e s s o f p a r , t h e e x c e s s may be c a r r i e d t o
a p a i d - i n surplus a ccoun t.
On the o t h e r hand, s h a r e s h a v н
in g a par v a l u e may be i s s u e d f o r l e s s
th is
t h a n t h e par v a l u e ;
i s a llo w e d w ith c e r t a in r e s t r i c t i o n s
C a lifo rn ia ,
in the s t a t e s o f
I n d i a n a , Rhode I s l a n d , K a n s a s , O h io, Maryland,
Yfest V i r g i n i a , and New M e x ic o .
C a l i f o r n i a , I n d i a n a , and
Rhode I s l a n d p r o v i d e t h a t o n l y th e a g g r e g a t e o f t h e c o n s i d e r н
a t i o n r e c e i v e d f o r su ch s h a r e s naed be c o n s i d e r e d s t a t u t o r y
ca p ita l.
Kansas and Ohio r e q u i r e t h a t t h e s t a t u t o r y c a p i t a l
n e e d be e q u a l to the par v a l u e o f t h e s t o c k i s s u e d d e s p i t e
th e f a c t t h a t the s h a r e s were s o l d f o r l e s s th a n p a r .
Maryн
l a n d and West V i r g i n i a have no s p e c i f i c p r o v i s i o n c o n c e r n i n g
the amount t o b e c a p i t a l i z e d but im ply t h a t the a g g r e g a t e o f
th e par v a l u e i s t h e I amount t o b e c o n s i d e r e d s t a t u t o r y c a p i н
t a l , and New M e xico, b y I n t e r p r e t a t i o n , a l s o r e q u i r e s par
v a l u e to be c a p i t a l i z e d .
S t a t u t o r y c a p i t a l : s h a r e s w i t h o u t par v a l u e .
W ith in
th e p a s t two d e c a d e s t h e a u t h o r i z a t i o n o f the i s s u a n c e o f
s h a r e s w i t h o u t par v a l u e by m ost s t a t e s has c r e a t e d many
354
new p roblem s c o n n e c t e d w i t h the d e t e r m i n a t i o n o f t h e s t a t u н
tory c a p it a l of a corporation.
The u s e o f s h a r e s w i t h o u t
par v a l u e h a s d e v e l o p e d so r a p i d l y t h a t i t may n o t be l o n g
b e f o r e such ty p e o f s h a r e s w i l l - s u p e r s e d e to a c o n s i d e r a b l e
e x t e n t par v a l u e s h a r e s .
The r e m o v a l o f t h e par v a l u e t a k e s
away the n e c e s s i t y f o r an e q u a l i t y b e t w e e n t h e a s s e t s on the
one hand and t h e a r t i f i c i a l f a c e v a l u e o f s h a r e s on the
o t h e r h and, b u t i t c r e a t e s th e v e r y s e r i o u s p rob lem o f d e t e r н
m in in g what p a r t o f t h e amount r e c e i v e d s h a l l be c o n s i d e r e d
s t a t u t o r y c a p i t a l s i n c e the l e g i s l a t o r s
i n many o f the s t a t e s
p e r m it the d i r e c t o r s or s t o c k h o l d e r s ?t o d e t e r m i n e t h a t a
p o r t i o n o f t h e c o n s i d e r a t i o n r e c e i v e d f o r su ch s t o c k need
n o t be t r e a t e d as s t a t u t o r y c a p i t a l .
Of t h o s e s t a t e s t h a t
concern them selves w ith a d e f i n i t i o n o f s t a t u t o r y c a p i t a l
n i n e t e e n s t a t e s : n a m e ly , A r k a n s a s , C a l i f o r n i a , C o n n e c t i c u t ,
D e la w a r e , G e o r g i a , K an sas, I d a h o , I l l i n o i s ,
L o u i s i a n a , Maine,
Maryland, M i n n e s o t a , Nevada, New J e r s e y , O h io , P e n n s y l v a n i a ,
Rhode I s l a n d , T e n n e s s e e , and W ashington, p e r m i t the d i r e c t o r s
o r s h a r e h o l d e r s t o d e t e r m in e a t t h e t i m e o f I s s u a n c e t h a t a
p o r t i o n o f the c o n s i d e r a t i o n r e c e i v e d from t h e s a l e o f such
s h a r e s s h a l l be a l l o c a t e d t o t h e p a i d - i n s u r p l u s a c c o u n t .
G eorgia r e q u i r e s an a u t h o r i z a t i o n b y c h a r t e r p r o v i s i o n or
v o t e o f t h e s t o c k h o l d e r s ; and Maine p l a c e s the power i n the
hands o f the s t o c k h o l d e r s who may d e l e g a t e i t t o the board
o f d i r e c t o r s u nd er a g e n e r a l nr s p e c i a l a c t .
I f b oth shares
355
w i t h par v a l u e and s h a r e s w i t h o u t par v a l u e a r e i s s u e d f o r
a g i v e n common c o n s i d e r a t i o n ,
the s t a t e s o f Arkansas, D ela -
-ware, K an sas, and Nevada make i t m and atory t h a t some amount,
be i n c l u d e d i n t h e s t a t e d c a p i t a l f o r s h a r e s w i t h o u t par
v alu e.
S t r a n g e l y enough m ost o f t h e s t a t e s make no d i s t i n c н
t i o n b e t w e e n s h a r e s w i t h o u t par v a l u e h a v i n g a l i q u i d a t i o n
p r e f e r e n c e and t h o s e n o t h a v i n g a l i q u i d a t i o n . p r e f e r e n c e .
An e x c e p t i o n t o t h i s g e n e r a l i z a t i o n i s found i n C a l i f o r n i a ' ,
C o l o r a d o , I l l i n o i s , and M i n n e s o t a .
I l l i n o i s and M in n eso ta
(ex c e p t i f the s u b s c r ip t io n c o n tr a c t provides oth erw ise in
the l a t t e r s t a t e )
s t i p u l a t e s t h a t an amount e q u a l t o t h e
l i q u i d a t i o n p r e f e r e n c e be c a r r i e d t o s t a t u t o r y c a p i t a l .
C aliforn ia,
C o lo r a d o , and P e n n s y l v a n i a , when su ch s t o c k i s
i s s u e d , r e q u i r e t h a t the e n t i r e c o n s i d e r a t i o n r e c e i v e d be
t r e a t e d as s t a t e d c a p i t a l .
The c a p i t a l i z a t i o n o f t h e e n t i r e
c o n s i d e r a t i o n m ig h t a t f i r s t t h o u g h t seem to o f f e r a d e q u a t e
p r o t e c t i o n , but i f the sh ares are s o ld f o r l e s s than the
liq u id a tio n preference,
t h e s t a t e d c a p i t a l , - under t h i s r u l e ,
w i l l n o t be e q u a l to the a g g r e g a t e l i q u i d a t i o n p r e f e r e n c e o f
su c h s h a r e s ?. i s s u e d .
F i v e s t a t e s p r o v i d e f o r a more e f f e c t i v e c o n t r o l o v e r
th e amount o f the
c o n s id e r a tio n r e c e iv e d fo r shares w ithout
p ar v a l u e t h a t may be c r e d i t e d to p a i d - i n s u r p l u s .
F lorid a,
I n d i a n a , and Iowa s t i p u l a t e t h a t t h e t o t a l o f t h e c o n s i d e r н
a t i o n r e c e i v e d f o r s u c h s h a r e s s h a l l be c o n s i d e r e d s t a t u t o r y
356
ca p ita l.
V i r g i n i a r e q u i r e s t h a t a l l o f the c o n s i d e r a t i o n
r e c e i v e d f o r s h a r e s w i t h o u t par s h a l l be c o n s i d e r e d s t a t u t o r y
c a p i t a l , b u t b y s u b s c r i p t i o n ag r e e m e n t an a d d i t i o n a l sum may
be p a i d which sum may be C a r r i e d to p a i d - i n s u r p l u s . '
While
t h i s s t a t e m e n t seems t o o f f e r ad.quate p r o t e c t i o n o v e r the
amount t h a t m ig h t be a p p o r t i o n e d to p a i d - i n s u r p l u s ,
r e a l i t y the r e s t r i c t i o n i s
in
a v e r y s l i g h t o n e , f o r t h e amount
to be p a i d f o r the s h a r e s may be made v e r y s m a l l and t h e
su p p le m e n t a r y amount t o be p a i d may be made r e l a t i v e l y l a r g e .
Thus, t h e amount c a r r i e d t o t h e p a i d - i n s u r p l u s a c c o u n t may
be a l a r g e p r o p o r t i o n o f the t o t a l amount p a i d by the su b н
scrib er.
M ich ig a n s t i p u l a t e s
t h a t a t l e a s t f i f t y p er c e n t
o f thd c o n s i d e r a t i o n p a i d f o r s h a r e s w i t h o u t par v a l u e must
be t r e a t e d a s c a p i t a l .
I f th e f i r m h a s a p r e v i o u s l y a c c u m u la t e d s u r p l u s ,
W i s c o n s i n p e r m i t s a c o r p o r a t i o n s e l l i n g s h a r e s w i t h o u t par
v a l u e to r e c o r d i n the p a i d - i n s u r p l u s a c c o u n t a p o r t i o n o f
the c o n s i d e r a t i o n e q u a l to the same p er c e n t as the s u r p l u s
- p r e v i o u s l y a c c u m u la t e d b e a r s t o the t o t a l o f c a p i t a l and
s u r p l u s : . M ic h ig a n , V i r g i n i a , and W i s c o n s i n , w h i l e t h e y do
a t t e m p t to curb t h e r i g h t s o f th e d i r e c t o r s
in r e s p e c t to
th e a l l o c a t i o n o f a p a r t o f t h e c o n s i d e r a t i o n r e c e i v e d from
s h a r e s w i t h o u t par v a l u e , a re l e s s s t r i c t th an F l o r i d a , '
I n d i a n a , and Iowa; n e v e r t h e l e s s ,
,
t h e y do p r o v i d e f o r a g r e a t н
e r l i m i t a t i o n th an m o st o f t h e s t a t e s .
357
The n e x t grou p o f s t a t e s permits a p a r t o f the c o n s i d н
e r a t i o n from s h a r e s w i t h o u t par v a l u e t o be t r e a t e d as p a i d i n s u r p l u s , b u t t h e amount p er s h a r e so d e t e r m i n e d must be
s t a t e d i n the c h a r t e r .
New Y o r k , . f o r e x a m p l e , p r o v i d e s t h a t
by c h a r t e r p r o v i s i o n a c o r p o r a t i o n may d e t e r m i n e t h a t a l l o f
t h e c o n s i d e r a t i o n r e c e i v e d f o r such s h a r e s s h a l l be c o n s i d e r н
ed s t a t u t o r y c a p i t a l ,
or t h a t a named number o f d o l l a r s per
s h a r e s h a l l be c o n s i d e r e d s t a t u t o r y c a p i t a l and t h e e x c e s s
p a i d p e r sh are s h a l l be p a i d - i n s u r p l u s .
S o u t h ? Dakota l i k e н
w i s e has an a l t e r n a t i v e t y p e o f p r o v i s i o n i n t h e c o r p o r a t e
law.
The f i r s t a l t e r n a t i v e
i s r a t h e r c o n f u s i n g and s u b j e c t
to a c o n f l i c t i n i n t e r p r e t a t i o n ;
the second a l t e r n a t i v e i s
s i m i l a r to the s e c o n d a l t e r n a t i v e o f th e New York s t a t u t e .
C olorad o makes i t m andatory f o r t h e c h a r t e r t o name th e
amount to b e c a r r i e d to p a i d - i n s u r p l u s , and i f
have a l i q u i d a t i o n p r e f e r e n c e ,
the s h a r e s
the' e n t i r e c o n s i d e r a t i o n r e н
c e i v e d must be c o n s i d e r e d s t a t u t o r y c a p i t a l .
E q u a l l y im p o r t a n t w i t h the power t o a p p o r t i o n c e r t a i n
amounts o f t h e c o n s i d e r a t i o n to p a i d - i n s u r p l u s i s t h e q u e s н
t i o n o f t h e tim e w i t h i n which su c h an a s s i g n m e n t may be made.
The im p o r ta n ce o f t h e
tim e f a c t o r c a n n o t and s h o u l d not- be
m in i m iz e d i n t h i s c o n n e c t i o n .
At th e time o f p u r c h a s e , or
soon t h e r e a f t e r in c e r t a i n c a s e s ,
the s u b s c r i b e r s t o the
s h a r e s s h o u l d have knowledge o f the u l t i m a t e d i s p o s i t i o n o f
t h e i r c o n t r i b u t i o n to t h e j o i n t e n t e r p r i s e , p a r t i c u l a r l y i f
558
t h e r e are no r e s t r i c t i o n s on the u s e o f p a i d - i n s u r p l u s .
The c r e d i t o r s l i k e w i s e s h o u l d be c e r t a i n o f t h e c a p i t a l i z a н
t i o n o f 'th e c o n c e r n to which t h e y have o f f e r e d and a r e o f f e r н
i n g c r e d i t . " A few o f t h e s t a t e s : v i z . ,
C a lifo r n ia , Idaho,
L o u i s i a n a , M i n n e s o t a , Rhode I s l a n d , and W ash in gton , r e q u i r e
t h a t t h e amount- to be s e t a s i d e i n the c o n t r i b u t e d s u r p l u s
a c c o u n t be d e t e r m in e d a t t h e tim e o f t h e i s s u a n c e o f the
shares.
O h io , l i k e w i s e ,
p r o v i d e s t h a t the amount to be
t r e a t e d as p a i d - i n s u r p l u s s h a l l be d e t e r m i n e d a t t h e tim e
o f i s s u a n c e , b u t i f t h e s h a r e s a r e i s s u e d f o r p r o p e r t y whose
v a l u e h as n o t b e e n e s t a b l i s h e d a t t h e tim e o f the i s s u a n c e
o f th e s h a r e s , the amount or p r o p o r t i o n to be t r e a t e d as
p a i d - i n s u r p l u s must be d e t e r m in e d a t the tim e o f i s s u a n c e .
Under the V i r g i n i a s t a t u t e
the s u b s c r i b e r i s put on n o t i c e
by the terms o f the s u b s c r i p t i o n a g r e e m e n t a s to the u l t i m н
a t e d i s p o s i t i o n o f t h e amount w hich he c o n t r i b u t e s .
Arkanн
s a s , D e la w a r e , I l l i n o i s , K an sas, M i c h ig a n , P e n n s y l v a n i a , and
Nevada r e q u i r e t h a t the method o f d i v i s i o n t o be d e t e r m in e d
a t t h e tim e o f i s s u a n c e i f t h e s h a r e s a re s o l d f o r c a s h and
w i t h i n s i x t y days i f p r o p e r t y i s r e c e i v e d i n payment.
New
J e r s e y , b e i n g t h e m o st l e n i e n t s t a t e i n t h i s r e g a r d , p e r m i t s
t h e d i r e c t o r s t o d e t e r m in e what p o r t i o n o f t h e c o n s i d e r a t i o n
s h a l l be p a i d i n s u r p l u s w i t h i n t h i r t y days a f t e r
h as b e e n i s s u e d .
the s t o c k
Under t h e s e c i r c u m s t a n c e s t h e s u b s c r i b e r
h as no know le dge o f t h e d i s p o s i t i o n o f h i s c o n t r i b u t i o n u n н
359
t i l a f t e r he h as made the p u r c h a se e v e n though the s a l e may
have b e e n f o r c a s h .
A l l o f the rem aining s t a t e s , ^ w h ile
some may u s e the terms " c a p i t a l s t o c k ? " c a p i t a l , ? or " s t a t e d
c a p i t a l ? e i t h e r do n o t d e f i n e s t a t u t o r y c a p i t a l o r the d e н
f i n i t i o n given is
so in a d e q u a t e as t o make a p r e c i s e i n t e r н
p re ta tio n im p ossib le.
th e f a i l u r e
to d e f i n e
E x t e n u a t i n g c i r c u m s t a n c e s may w arrant
the l e g a l c a p i t a l In t h e s t a t e s o f
Oklahoma, N eb ra sk a, North D a k o ta , Montana, and t h e D i s t r i c t
o f Columbia, f o r t h e s e s t a t e s do n o t p e r m it s h a r e s w i t h o u t
par v a l u e .
S i x s t a t e s have v a r i o u s p r o v i s i o n s c o n c e r n i n g u n d e r н
w ritin g c o s t.
Two s t a t e s ,
I l l i n o i s , and P e n n s y l v a n i a , a l l o w
the c o s t to be d e d u c t e d w i t h o u t making the s t o c k a s s e s s a b l e .
L o u i s i a n a and Ohio p e r m it su ch c h a r g e s , b u t make no comment
concerning a s se ssm e n ts.
Ohio makes i t co m p u ls o r y t o show
on the b a l a n c e s h e e t the amount o f u n d e r w r i t i n g c o s t n o t
p reviously w ritten o f f .
if
Kansas p e r m it s underwrI t i n g c h a r g e s
t h e s e c h a r g e s have a r i s e n o u t o f t h e s a l e
to o u t s i d e r s
as a r e s u l t o f the n o n - p u r c h a s e o f .s h a r e s by s h a r e h o l d e r s
h a v i n g p r e e m p t iv e r i g h t s .
C a l i f o r n i a , b e i n g t h e m o st s t r i c t ,
p r o v i d e s t h a t no su ch d e d u c t i o n s h a l l be c o n s i d e r e d In c a l н
cu la tin g sta te d c a p ita l.
^ Alabama, A r i z o n a , K e n t u c k y , M a s s a c h u s e t t s , M i s s i s н
s i p p i , Montana, N e b r a sk a , New Hampshire, N orth C a r o l i n a ,
North D a k o ta , Oklahoma, Oregon, South C a r o l i n a , T e xas, U tah ,
West V i r g i n i a , Wyoming, and t h e D i s t r i c t o f Colu mbia.
C o n s id e r a t i o n f o r s h a r e s .
The l e g a l c a p i t a l h a v i n g
b e e n d e t e r m i n e d , i t now re m a in s t o d e t e r m i n e the t y p e and
amount o f a s s e t s
t h a t may be a c c e p t e d i n exc h an g e f o r t h e
issu an ce o f shares of sto c k .
The a s s e t s p a i d f o r t h e c a p i н
t a l stock of a corporation c o n stitu te ,
the b a s i s o f i t s
c r e d i t and t h e p e r s o n s d e a l i n g w i t h t h e c o r p o r a t i o n have a
r i g h t t o assume t h a t t h e s t o c k h a s b e e n a c t u a l l y p a i d i n ,
o r t h a t i t may be r e a c h e d .
P r o v i s i o n s r e g a r d i n g t h e s e it e m s
a r e f r e q u e n t l y found i n t h e s t a t e c o n s t i t u t i o n a s w e l l as
i n the s t a t u t e s .
N i n e t e e n s t a t e s have a c o n s t i t u t i o n a l p r o н
v i s i o n ; f o r t y - t h r e e s t a t e s have s t a t u t o r y e n a c t m e n t s ; and
t h i r t e e n s t a t e s have b o t h a c o n s t i t u t i o n a l p r o v i s i o n and a
s t a t u t o r y enactm ent.
The p redom inant p r o v i s i o n p e r m i t s a
c o r p o r a tio n to is s u e shares for ca sh , oth er property (ta n g н
i b l e o r i n t a n g i b l e ) , or f o r n e c e s s a r y s e r v i c e s a c t u a l l y
r e n d e r e d to t h e c o r p o r a t i o n .
Some o f t h e s t a t e s add to t h i s
g e n e r a l p r o v i s i o n by naming c e r t a i n s p e c i f i c
v iz .,
types o f a s s e t s
le a s e s , fr a n c h ise s, good w ill, p a ten ts, e t c .
F lorida
p r o v i d e s t h a t c a s h o n l y may be a c c e p t e d i n payment f o r
s h a r e s , u n l e s s p r o v i d e d o t h e r w i s e i n the c h a r t e r .
Fourteen
s t a t e s p r o v i d e t h a t s h a r e s s h a l l n o t be c o n s i d e r e d f u l l y
p a i d when n o t e s h ave b e e n r e c e i v e d i n payment f o r s h a r e s .
Of e q u a l im p or tan ce i s t h e d e t e r m i n a t i o n o f the v a l u e
o f t h e c o n s i d e r a t i o n t h a t may be r e c e i v e d i n payment o f
shares.
In g e n e r a l,
In the a b s e n c e o f f r a u d or n e g l i g e n c e ,
361
th e v a l u e d e t e r m i n e d by t h e board o f d i r e c t o r s w i l l be upн
h e l d i n the c o u r t s , b u t f r e q u e n t l y th e law s e t s f o r t h i n a
d e s c r i p t i v e p h r a s e the method o f v a l u a t i o n ; e . g . ,
t y s h o u l d be t a k e n a t i t s
the p roperн
" f a i r c a s h - v a l u e , " a c t u a l worth
i n money," " j u s t v a l u a t i o n , " and one s t a t e p r o v i d e s f o f
"market v a l u e . "
Montana s a n c t i o n s t h e u s e o f an a r b i t r a r y
v a l u e to be u s e d when v a l u i n g m in e s ; more s i g n i f i c a n t i s
the
law o f M in n e so t a w h ich d oes n o t p e r m it s h a r e s t o be i s s u e d
f o r a c o n s i d e r a t i o n which i s u n f a i r t o t h e t h e n e x i s t i n g
sh areh old ers.
T h is l a t t e r p r o v i s i o n would make i t mandatory
f o r the d i r e c t o r s t o c o n s i d e r the book v a l u e o f t h e s h a r e s
a t the time o f t h e s a l e and i n t h i s way p r e v e n t t h e d i l u t i o n
o f the t h e n e x i s t i n g s h a r e h o l d e r s ? i n t e r e s t i n the e q u i t y .
D e s p i t e the f a c t t h a t o n l y t w e n t y - o n e s t a t e s , by c o n н
s t i t u t i o n a l or s t a t u t o r y e n a c t m e n t , r e q u i r e par v a l u e s h a r e s
to be i s s u e d f o r p a r , such a. p r o v i s i o n i s p r o b a b l y assumed
in a l l o f th e s t a t e s excep t C a lif o r n ia ,
I n d i a n a , Kansas,
Maryland, New M e x ico , O h io, Rhode I s l a n d , and West V i r g i n i a .
These e i g h t s t a t e s , when c e r t a i n c i r c u m s t a n c e s e x i s t ,
t h e i s s u a n c e o f par v a l u e s h a r e s f o r l e s s
than p a r .
p e r m it
I t is
p o s s i b l e f o r a c o r p o r a t i o n , by i s s u i n g par v a l u e s h a r e s p r i o r
to f u l l payment and w i t h the u n d e r s t a n d i n g t h a t su ch u n p a id
s u b s c r i p t i o n s w i l l n o t be c a l l e d ,
t o a c h i e v e the same e s s e n н
t i a l p urpose as t o i s s u e par v a l u e s h a r e s f o r l e s s
Therefore,
th an p a r .
i t I s n o t e w o r t h y t h a t e i g h t j u r i s d i c t i o n s do n o t
362
p e r m it t h e c e r t i f i c a t e
t o be i s s u e d u n t i l the s h a r e s a re
f u l l y p a i d ; s i x s t a t e s p e r m it a c o r p o r a t i o n to i s s u e t h e
- c e r t i f i c a t e p r i o r t o f u l l payment, i f su ch i s p r o v i d e d by
th e c e r t i f i c a t e o f i n c o r p o r a t i o n or b y - l a w s ; and s i x s t a t e s
a l l o w s h a r e s to be i s s u e d p r i o r to f u l l payment.
F in ally,
t h e r e rem ains to be c o n s i d e r e d the p rob lem o f the d e t e r m i n a н
t i o n o f t h e v a l u e t o be r e c e i v e d f o r s h a r e s w i t h o u t par
valu e.
I n t h i s a n a l y s i s t h r e e main c l a s s e s were c o n s i d e r e d ;
(1) s e v e n t e e n s t a t e s
that,
i n the f i r s t i n s t a n c e ,
s u b j e c t to
c h a r t e r , g r a n t t h e power to .d e t e r m in e t h e c o n s i d e r a t i o n f o r
s h a r e s w i t h o u t par v a l u e t o the board o f d i r e c t o r s u n l e s s
o t h e r w i s e p r o v i d e d and t h e n i n d i c a t e
if
th e power i s r e s e r v e d ;
the method to b e u s e d
(2) s e v e n s t a t e s
that,
in the f i r s t
i n s t a n c e , g r a n t t h e power t o d e t e r m i n e t h e c o n s i d e r a t i o n f o r
s h a r e s w i t h o u t par v a l u e to t h e i n c o r p o r a t o r s or s h a r e h o l d e r s
and t h e n p e r m it t h e board o f d i r e c t o r s
under c e r t a i n c o n d i t i o n s ;
to e x e r c i s e t h e power
(3) s e v e n t e e n s t a t e s
t h a t , i n the
f i r s t i n s t a n c e , p rovid e t h a t the c o n s i d e r a t i o n f o r shares
w i t h o u t par v a l u e s h a l l b e d e t e r m i n e d b y t h e a r t i c l e s o f I n н
c o r p o r a t i o n and name t h e v a r i o u s methods o f d e t e r m i n i n g th e
c o n s i d e r a t i o n i f t h e a r t i c l e s do n o t i n d i c a t e
th e amount.
I t i s e v i d e n t , n o t w i t h s t a n d i n g t h e above c l a s s i f i c a t i o n ,
t h a t i n m ost o f t h e s t a t e s
t h e b oard o f d i r e c t o r s may be
g i v e n t h e a u t h o r i t y t o d e t e r m i n e t h e p r i c e or c o n s i d e r a t i o n
o t h e r th a n money t o be r e c e i v e d f o r s h a r e s w i t h o u t par v a l u e .
363
In p r a c t i c a l l y a l l o f the s t a t e s t h e a u t h o r i t y m i g h t , by
c h a r t e r l i m i t a t i o n , be w i t h h e l d from t h e board o f d i r e c t o r s .
In some i n s t a n c e s .the f a i l u r e
to g r a n t p o s i t i v e a u t h o r i t y
i s assumed t o be a d e n i a l o f the power and an i n d i c a t i o n o f
t h e r e t e n t i o n o f t h e r i g h t by the s h a r e h o l d e r s .
I t would
seem d e s i r a b l e t h a t some c o n t r o l o v e r t h e s u b s e q u e n t a l l o t н
ment o f s h a r e s be r e s e r v e d to t h e s h a r e h o l d e r s i n o rd er t h a t
t h e y w o u l d . b e a s s u r e d t h a t a new member c o u l d n o t a c q u i r e
shares w ithou t c o n t r ib u t in g a f a i r c o n s id e r a t i o n .
I f the
s h a r e h o l d e r s do e x e r c i s e the r i g h t o f d e t e r m i n i n g t h e con н
s i d e r a t i o n f o r w h i c h s h a r e s w i t h o u t par v a l u e a r e i s s u e d ,
t h e m o s t common v o t i n g r e q u i r e m e n t i s t h e a f f i r m a t i v e c o n н
s e n t o f t w o - t h ir d s o f the sh a re h o ld er s o f each c l a s s .
it
While
i s t r u e t h a t i n c e r t a i n i n s t a n c e s t h e s h a r e h o l d e r s may
have t h e power t o d e t e r m in e the v a l u e to b e r e c e i v e d f o r
such s t o c k ,
t h i s power u s u a l l y r e s t s w i t h the b oard o f d i r e c t н
ors .
P ro v isio n s regarding cash d iv id e n d s .
I n an a t t e m p t
to p r o t e c t the i n t e r e s t s o f t h e c r e d i t o r s and s h a r e h o l d e r s
t h e c o r p o r a t i o n la w s o f t h e v a r i o u s s t a t e s h a v e ,
i n some
c a s e s v e r y p r e c i s e l y and d e f i n i t e l y and i n o t h e r c a s e s v e r y
l o o s e l y , p l a c e d l i m i t a t i o n s and r e s t r i c t i o n s on t h e payment
of d ivid en d s.
The lawmakers have c o n c e i v e d i t
to be t h e i r
f i r s t t a s k t o p r e v e n t the payment o f d i v i d e n d s from t h e
s ta tu to r y c a p it a l o f the corporation.
In t h e p r e v i o u s d i s -
c u s s io n c o n s id e r a tio n has been g iv e n to
of s ta tu to ry
receiv ed
c a p i t a l and a ls o
in payment f o r
background,
the
shares.
fin d in g s
payment o f d iv id e n d s
to
the
im pairm ent t e s t
teen s ta te s
if
is
the d iv id en d s
the
thou gh the
c ertain
the
to
th is
ex cep tio n s to
net assets
G eo rg ia,
common r u l e ,
im paired or
F ive s t a t e s ,
f o r th ese
are
There a r e ,
the g e n e r a l i t y o f t h is
less
th at
sta te s
is
posed d iv id e n d s .
less
D elaw are,
payment o f d iv id e n d s
th en
the
the. e x i s t i n g
G eo rg ia,
on any s h a r e s
p o ra tio n has been d e p le te d to
sta tem e n t.
the l i q u i d a t i o n
If
If
th e a g g re н
preference
C a lifo rn ia
of
and M inneн
sh a res h av in g such
the a d d i t i o n a l l i m i t н
s h a l l n o t be p a id
than
of course,
the d e g re e t h a t
M innesota adds
such d iv id en d s
o f th e a s s e t s
is
lia b le
and M in n eso ta, a re
law w i l l a llo w d i v i d e n d s 'o n l y on th e
tha t
o f the
f a c t th a t n in eн
im paired.
c a p i t a l may b e i m p a i r e d .
liq u id a tio n preference.
a tio n
cash d iv iн
payment o f d iv id e n d s from n e t p r o f i t even
sh a re s h av in g such p r e f e r e n c e ,
so ta
im portance
on th e
o r make t h e d i r e c t o r s
c a p i t a l has b een Im paired to
g ate
The
cap ita l
D elaw are, K an sas,
s ig n i f ic a n t ex ce p tio n s
san ctio n
o f d iv id e n d s,
a r e p a i d when t h e c a p i t a l
t h e p a y m en t w ould r e n d e r t h e
C a lifo rn ia ,
in fo rm atio n a s .a
a t t e s t e d b y the
p r o h ib it d iv id en d s
t h a t m ig h t be
the l i m i t a t i o n s
sources
d e n d s a t f i r s t , may b e c o n s i d e r e d .
c a p ita l
assets
W ith t h i s
co n cern in g
and th e
the l e g a l d e f i n i t i o n
if
the f a i r
lia b ilitie s
and p ro н
and Kansas e n j o i n
the
value
the
c a p i t a l o f th e
an amount l e s s
th a n the
corн
aggreн
365
g ate
preference
of sh a re s h av in g a l i q u i d a t i o n p r e f e r e n c e .
The i n s o l v e n c y t e s t ,
im p o sitio n of d ir e c to r s '
d e n d s when t h e
th at is ,
lia b ility
th e
p r o h i b i t i o n o r the
on th e paym ent o f d i v i н
c o r p o r a t i o n ?i s . i n s o l v e n t o r i f
th e d i v i d e n d w ould r e n d e r
tain ed
in th e
sta tu tes
se tts,
O regon,
Texas,
th e
the c o r p o r a t i o n .i n s o l v e n t ,
of C o n n ectic u t,
a n d W y o m in g .
Illin o is,
C a lifo rn ia ,
New H a m p s h i r e h a v e w h a t h a s b e e n d e s i g n a t e d a s
tyjbe o f
in so lv en cy
board of d ir e c to r s
b ilitie s
test;
to
w ould e x c e e d i t s
d eb ts
as
n o t only
im possible
c ap ita l
certain
ju risd ic tio n s
sta te s,
C olorado,
New H a m p s h i r e ,
tal
is
M ississip p i,
o f Colum bia
im pairm ent t e s t b u t a ls o
d iv id en d s.
i n d ic a t e d by the f a c t
D elaw are,
F lo rid a,
M isso u ri,
the
in so lн
The s i g n i f i н
tests
in
th a t eig h t
K entucky, M a s s a c h u s e tts , M i s s i s s i p p i ,
New Y o r k , a n d W y o m in g , h a v e e i t h e r
on d iv id e n d , p a y m e n ts;
the
due.
im pairm ent and in s o lv e n c y
Iow a,
im pairm ent a n d /o r
A labam a,
a m o d ified
i n c l u d i n g am on g t h e m C o l o r a d o ,
c a p ita l
and
f o r th e c o r p o r a tio n to
v e n c y t e s t a s a means o f r e s t r i c t i n g
cance of the
O hio,
i t u n law fu l fo r a
and W isc o n sin , and th e D i s t r i c t
the
conн
M assachuн
o r when t h e p ay m en t o f
Iow a, K e n tu c k y , M aryland,
W est V i r g i n i a ,
use
t e s t makes
assets
th ey f a l l
Ten s t a t e s ,
In d ian a,
th is
is
p a y a d i v i d e n d when t h e d e b t s and l i a н
d i v i d e n d w o u ld make i t
m eet i t s
payment o f
the
cap iн
in so lv en cy t e s t as th e
o n ly l i m i t a t i o n
and on th e
th e
G eo rg ia,
o th er hand,
K ansas,
L o u isian a,
law s o f
M ich ig an ,
366
M in n eso ta,
sta te s
P e n n sy lv an ia,
in a l l ,
do n o t
South. C a r o l i n a ,
co n ta in a c a p ita l
and W ash in g to n ,
im p airm ent o r
ten
in so lн
vency t e s t .
The l i m i t a t i o n s
th e c a p i t a l
im pairm ent a n d /o r
n e g a tiv e approach to
p o sitiv e
the
on d iv id e n d s as
approach,
In so lv en cy t e s ts
in
term s
of
o ffer a rath er
the problem o f d iv id e n d s .
The m o r e
w h ic h w i l l n o & 'b e c o n s i d e r e d ,
d eals
w ith ?
p r o b le m o f d i v i d e n d , p aym ent from , th e v i e w p o i n t o f t h e
source
o f the
"p ro fit,"
c re d its
a v aila b le fo r
"net p ro fit,"
f o r d iv id en d s
of A rizona,
f o r th o se
M isso u ri,
o n ly ),
U tah,
and W est V i r g i n i a .
co rp o ratio n s
N orth D akota,
th e p r o f i t and l o s s
source,
f o r the
req u ire
the
O klahom a,
to
M aryland,
If
the
the
the
sta te s
(m an u factu rin g conн
South D ak o ta,
Texas,
said to use
problem o f d iv id e n d
p ro fit
w ould seem to
show n b y the
Nev>r M e x i c o ,
and S outh C a r o li n a ,
i n nam ing th e
in clu d н
N o r th C aro-use
source
the
of d iv iн
te rm " s u r p l u s " means o n ly th e a c c u m u l a t i o n o f
u n d istrib u te d p rio r p ro fits ,
c o n c e i v a b l y be
the
a v a ila b le
o rg anized in
circu m stan ces
M ich ig an ,
"net p r o f it or su rp lu s"
dends.
are
The
A nother g ro u p o f s t a t e s ,
O regon, Rhode I s l a n d ,
phrase
the
lo o k to
statem en t.
ing C o n n e c tic u t,
p ro fits"
T h e s e s t a t e s m ay b e
a p p ro a ch to
d ire c to rs
cash d iv id en d s.
N ebraska
law u n d e r t h e s e
p r o f i t and lo s s
lin a ,
or "su rp lu s
M ontana,
cerns
sig e
expressed
in clu d ed
p r o f i t and lo s s
th en
th is
g ro up o f s t a t e s m ig ht
in th e group of s ta te s t h a t
empha-
sta te m en t f o r d iv id e n d p u rp o ses;
367
how ever,
i f th e su rp lu s,
as used
in
th e above a l t e r n a t i v e
s t a t e m e n t o f s o u r c e , m eans a n y ty p e
p aid -in
sta te s
lin a
su rp lu s,
of su rp lu s,
u n rea liz ed a p p reciatio n ,
c o u l d n o t b e so
does n o t le a v e
in clu d ed .
the
The s t a t e
term " s u rp lu s "
is,
then
th ese
o f South C aro н
su b ject
to c o n j e c t u r e ,
f o r the
sta tu te
su rp lu s
" a d e q u a te ly earn ed o r p aid o u t of su rp lu s h e re to fo re
earned,
and n o t s e t a s i d e
c u t names t h e
fies
provides
e tc .,
th at
source
t h a t d i v i d e n d s m ay b e p a i d f r o m
fo r a sp ecific
as th e
"actu al
su rp lu s."
C o n n ectiн
M ichigan m odiн
the g e n e r a l i t y o f th e sta te m e n t by a llo w in g p r e f e r r e d
d iv id e n d s from "any s u r p l u s ."
p lu s.
is
p u rp o se ."
The p r o b l e m o f
j u s t w hat i s m eant b y the
d e f i n i t e l y m et by t h e
J e r s e y w hich s t a t e s
su rp lu s
law o f I n d i a n a ,
d eterm in ed by tak in g
and c a p i t a l
over
the a g g r e g a te
s t o c k , may b e u s e d a s
c h a r t e r from th e s t a t e s
s id e r e d as em phasizing
the
source
T h is
the
o f the
lia н
c red it fo r
th a t has re c e iv e d
Idaho,
L o u isian a,
type o f s t a t u t e ,
w ould a l l o w s u r p l u s
fo r.d iv id e n d purposes.
m ining
o f C olorado,
and W ashington.
out m o d ifica tio n ,
or
th e d i f f e r e n c e betw een
payment o f d iv id e n d s by a c o r p o r a t io n
P en n sy lv an ia,
M a i n e , a n d New
su rp lu s.
t h e a g g r e g a t e .of t h e a s s e t s
b ilitie s
term s u r p lu s
a llo w cash d iv id e n d s from n e t p r o f i t s
in clu d in g p a id -in
S u rp lu s,
New Y o r k m e n t i o n s o n l y s u r н
o f any ty p e
the
its
O hio,
if w ith н
to be u se d
T h is g ro u p o f s t a t e s m ig h t be co nн
the b ala n ce
of d iv id en d s,
for
sh e e t v iew p o in t in d e t e r н
the
test
is
b a s e d on the
368
r e s i d u a l v alu e rem ain in g a f t e r
taking
th e d i f f e r e n c e betw een
the
of th e
lia b ilitie s
t o t a l a s s e t s a n d the
to ta l
and s t a t н
u to ry c a p ita l.
The n e x t g r o u p o f s t a t e s ,
Tennessde,
and V ir g in ia ,
and th e b a la n c e
sta te s
of asse ts
Somewhat s i m i l a r
some q u i t e
G eo rg ia,
assets
T h is
n am ely,
of c a p ita l.
th e
latter
the
are
the
sta te s
w ith in , c e r t a i n
of a cap ita l
the n e t p r o f i t s
the
sta tu to ry
th e
cap iн
im pairm ent
C a lif o r n ia and M innesota,
lim its,
th e payment o f a cash
im p airm en t,
and a ls o
these
a v a ila b le f o r d iv id en d s under
W isco nsin u n d o u b te d ly o f f e r s
sta te
c ash d iv id e n d s from e i t h e r n e t p r o f i t s ,
a risin g
for
what has been
in te rp re ta tio n of th e ,d iv id e n d
or su rp lu s
the
out of net
m ost l i b e r a l
su rp lu s,
or
o f D elaw are,
payment o f d iv id e n d s d e s p i t e
m ake p a i d - i n s u r p l u s
allo w s
These
and s t a t u t o r y c a p i t a l .
in c o n n ectio n w ith
circu m stan ces.
and l o s s
problem .
p h rase m erely r e in f o r c e s
Two o t h e r s t a t e s ,
a llo w ,
Nevada,
l a s t g ro u p named a b o v e , b u t a d d in g
of c a p ita l or out of
d iv id en d in s p ite
certain
lia b ilitie s
im p o rtan t f e a tu r e s
m entioned p re v io u s ly
sta te s
the
p ro fit
e i t h e r from th e n e t e a r n in g s
o v er the
to
in excess
lik ew ise
the
F lo rid a,
and K ansas w hich p e rm it c a s h d i v id e n d s
the y e a r.
tal;
com bine b o t h
s h e e t approach in so lv in g
allo w d iv id e n d s
su rp lu s
A rkansas,
the
sectio n for
th is
p a id -in
from u n r e a l iz e d a p p r e c i a ti o n of
a sse ts.
Of t h e
s t a t e s m entioned above
in
th e m ajor s u b d iv i-
369
sio n ,
th ere
O klahom a,
are e le v en s t a t e s ,
S outh D ak o ta,
New M e x i c o ,
U tah,
A r iz o n a , M ontana,
N ebraska,
and N orth C a ro lin a ,
th a t use
" f r o m t h e b u s i n e s s '* when r e f e r r i n g
p o ratio n .
T hree o f th e
N orth C a r o lin a , u se
and then c o n tin u e
to
the
New J e r s e y ,
the m o d ify in g -p h rase
the
p ro fits
New J e r s e y ,
t h e w o r d s "?n e t p r o f i t s
The l e g a l m e a n i n g o f
circu m stan ces
sta te s,
Texas,
N o rth D akota,
of th e
New M e x i c o a n d .
from th e b u sin e ss'*
s t a t e m e n t w i th th e words " o r
the
estab lish
corн
su rp lu s."
te rm " s u rp lu s '* w ould u n d e r t h o s e
the s i g n i f i c a n c e
of th e p h rase
"from
th e b u s in e s s ."
A group o f s t a t e s ,
p ro v isio n reg ard in g
l y on a c a p i t a l
d iv id en d s;
K entucky,
the
the
eig h t
in num ber, have e i t h e r
source of d iv id en d s
in
M a ssac h u se tts,
to r e s t r i c t
t h i s g ro u p i n c l u d e A labam a,
Iow a,
M ississip p i,
V erm ont,
New H a m p s h i r e ,
W y o m in g ,
and th e D i s t r i c t
o f C olum bia.
m ig h t be
in clu d ed in
group? I l l i n o i s
dends
o r depend s o le н
im pairm ent o r in s o lv e n c y t e s t
sta te s
th is
Illin o is
and Nebraska
because a l l
e x c e p t p r e f e r r e d d iv id e n d s from p a i d - i n s u r p lu s
g o v e r n e d b y an i n s o l v e n c y t e s t . ,
no p r o v i s i o n g o v e r n i n g d i v i d e n d s
P ro v isio n s fo r
d itio n
to
Issuance
so t h a t
tio n fo r
share
cash d iv id en d s
of
the
its
no
and N ebraska b e c a u se
are
i t has
o f the g e n e ra l c o rp o r a tio n .
d iv id e n d s.
A c o rp o ra tio n
a l s o may p a y d i v i d e n d s
own s h a r e s
d iv iн
of sto ck .
c o r p o r a t i o n m ay r e t a i n
T h is
is
the a s s e ts
the ex p an sio n o f th e b u s in e s s
or
to
in adн
through th e
commonly d o n e
of the
im prove
corporaн
its
570
p ro p erty .
the
W hile
it
is
tru e
t h a t s u c h a d i v i d e n d m e r e ly gives
s h a r e h o l d e r m ore c e r t i f i c a t e s
book v a lu e
dend,
as he h ad p r i o r
n ev erth eless,
im p o rtan t because
dend to v a rio u s
th e
Tw enty-one
o f the
have
have
to
is
such a d i v i н
the d e trim e n t of
some p r o v i s i o n r e g a r d i n g t h e
in shares
on the
as c a sh d iv id e n d s .
F lo rid a,
of g ran tin g
of sh areh o ld ers
t h e y h a v e no s p e c i f i c
leg islatio n
w are,
p o ssib ility
sta te s
allo w share d iv id en d s
source
the d e c l a r a t i o n o f such a d i v i н
of shares.
payment o f d iv id e n d s
alth o u g h
sa m e
th e law g o v e rn in g su c h a d e c l a r a t i o n
c la sses
o th er classes
to
as ev id en ce o f th e
on th e
p ro v isio n s,
sa m e b a s i s
Of t h e
p o in t,
G eo rg ia,
and t h e r e m a in in g s t a t e s ,
and from th e
tw en ty -o n e
nine
In d ian a,
p r o b a b l y w ould
sta te s,
Illin o is,
sta te s
sa m e
th at
A rkansas,
M ichigan,
D elaн
Nevada,
and T en n essee, m e re ly have a su p p le m e n ta ry p r o v i s i o n added
to
th e g e n e ra l d iv id e n d s e c tio n d e a lin g w ith sh are d iv id e n d s;
the rem a in in g s t a t e s ,
M aryland, M in n e so ta,
'in g to n ,
A labam a,
New H a m p s h i r e ,
W est V i r g i n i a ,
out of n et p ro fits
n a tiv e
O hio,
and W isco n sin ,
g o v erning sh a re d iv id e n d s.
dends
C a lifo rn ia ,
Idaho,
P en n sy lv an ia,
have a s p e c ia l
E ig h t s ta te s
allo w
or earned su rp lu s
asset te st;
four s ta te s
d iv id en d s th e
a lte rn a tiv e
type o f s ta te m e n t;
c ap ita l
surp lu s
sto ck .
of assets
Alabam a h a s
have
as
Wash-
sectio n
share d i v i н
w ith o u t the
excess
ings o r the
L o u isian a,
th eir
a lte rн
source of
i.e .,
n et earnн
ov er the l i a b i l i t i e s
in clu d in g
two s e c t i o n s
w hich c o n f l i c t :
one
371
s e c tio n m entions accum ulated e a rn in g s ;
su rp lu s
o f money o r n e t a s s e t s .
out o f th e n e t a s s e ts
Idaho,
base
L o u isian a,
clu d in g
over
p reced in g y e ar.
P e n n s y l v a n i a , 'an d W a s h in g to n m e r e l y
the a g g r e g a t e
on th e
o f th e
surp lu s
of the
lia b ilitie s
in н
c ap ita l.
In a d d itio n
th e problem o f
t h a t m ust be
to
the
source
F lo rid a,
o f such d iv id e n d s
the d e te r m i n a ti o n o f th e
tran sferred
to s t a t e d
tio n o f a d iv id e n d p ayable
shares
th ere
c a p i t a l upon th e
in sh ares.
is
amount o f s u r p lu s
d eclaraн
A labam a, A rk a n s a s ,
an d Nevada make no m e n t i o n o f t h e
t a l i z e d when e i t h e r
ed.
o f the
the d e c l a r a t i o n o f such d iv id e n d s
ag g reg ate a s s e ts
o th e r m entions
D elaw are a llo w s d i v id e n d
or net p ro fits
O hio,
the
amount to be
w ith o r w ith o u t p ar v alu e
cap iн
a re .issu н
W is c o n s in makes no m e n t i o n o f t h e v a l u a t i o n o f p a r v a lu e
s h a r e s a n d New H a m p s h i r e m a k e s no m e n t i o n o f t h e v a l u a t i o n
of sh ares w ith o u t par v a lu e .
fo rn ia,
D elaw are,
gan, M i n n e s o t a ,
in g to n ,
shares
th e
sta te s
the
In clu d in g
L o u isian a,
Illin o is,
t h a t such sh a re s
M ichiн
Issued a t p ar.
to be
issu an ce
issu ed a t
o f shares
In d ian a,
and O hio.
s h a l l be v a lu e d a t
in
Tenн
th eir
w ith н
v a r y w i d e l y among t h e m s e l v e s .
d e te rm in e d b y the b o a rd o f d i r e c t o r s
o f D elaw are,
C a liн
P e n n s y l v a n i a , a n d Washн
s h a re s be
When d e a l i n g w i t h
out par v alu e,
is
the p a r v a lu e
Indiana,
O hio,
th a t p a r v alu e
nessee req u ires
p rice
Illin o is,
New H a m p s h i r e ,
provide
f a i r v a lu e .
Idaho,
T w elve s t a t e s ,
The
the s t a t e s
M ichigan p ro v id e s
the a v erag e
o f t h e amount
572
o f o r i g i n a l c o n s i d e r a t i o n c a r r i e d t o c a p i t a l In r e s p e c t t o
s h a r e s w i t h o u t par v a l u e o u t s t a n d i n g .
T his p r o v i s i o n would
n o t t a k e c o g n i z a n c e o f t h e c u r r e n t hook v a l u e o f s h a r e s ,
A
e sp ecially
ed s u r p lu s .
to
the
risin g
v alu e
C a lifo rn ia
the o th e r s t a t e s ,
due
to
the accu m u latio n o f e a r n н
and M innesota,
d ifferen tiate
i n m arked c o n t r a s t
b etw een s h a re s w ith o u t
p ar v a lu e h av in g a l i q u i d a t i o n p re fe re n c e
in g such a p r e f e r e n c e .
ference
are
issued,
If
sh a re s h av in g
an amount e q u a l to
f e r e n c e m ust be c a p i t a l i z e d .
liq u id a tio n
preference,
If
th e
in stead ,
the
th e number o f s h a r e s
par v a lu e ,
ferred
but th is
v a lu a tio n .
e stim atн
and W ashington r e q u i r e
no v a l u e
make c l a s s i f i c a t i o n
In o rd er
cla sses
sian a,
payable
share
th at
M innesota,
йommon a n d p r e н
d iv id en d s
so i n d e f i n i t e . o n
at
a fair
G e o rg ia , M aryland,
th is
p o in t as to
im p o ssib le.
to p r o t e c t th e
of sto ck ,
share
in sh a re s w ith or w ithout
in d icate
issu e d as
are
issu ed as
T e n n e s s e e m akes no m enн
The t h r e e r e m a i n i n g - s t a t e s ,
a n d W est V i r g i n i a ,
to
th e f a i r
issu ed .
law does
s h a r e s m ay b e
Is
board of d i r e c t o r s m ust determ in e
to be
tio n o f sh are d iv id en d s
are w ith o u t
c a p ita liz e d
at
t o be p l a c e d on s h a r e s w i t h o u t p a r v a l u e
d iv id e n d s;
liq u id a tio n preн
shares
the am ount to b e
Idaho, L o u isian a,
a liq u id a tio n preн
the
be d e te rm in e d by the b o a rd o f d i r e c t o r s
ed v a lu e .
and th o s e n o t h a v н
the
law s o f
sh areh o ld ers
G e o rg ia,
P en n sy lv an ia,
of th e
v ario u s
Idaho, In d ia n a ,
and W ashington p ro v id e
Louirth at
375
u n less
the
c h a r te r so p ro v id es
o f a n y c l a s s may b e p a i d
c la ss u n less
shares
o f the
sta te s,
source
no d i v i d e n d s
t o the
sh areh o ld ers
a u th o r iz e d b y the v o te
cla ss
i n w hich paym ent i s
to be made.
s p e c ia l p ro v isio n s
Of s p e c i a l s i g n i f i c a n c e
th a t n o tice
are
of u n realized
the need f o r p ro v id in g
c e r ta in broad ex cep tio n s
for a d e p le tio n
p reciatio n .
B ecause o f-th e
tim e
th ere
charge,
change
is a v a ria tio n
in
the
in the
the p r ic e
lev e l
of a ssets
are
risin g
to c r e a t e
plus
a su rp lu s
created
acco u n t,
b alan ce
as
th is
as
and as long
and d e н
l e v e l from
of a corporaн
in v alu e and
th e c o n tra e n tr y .
en te red
no p a r t i c u l a r
long a s
su rp lu s,
At a tim e when
in crease
th is
in ju stic es
such a su rp lu s
If
the
surн
in a s p e c ia l su rp lu s
a n d i f n o a t t e m p t i s m ad e t o u s e
Of c o u r s e ,
reserves,
the d i r e c t o r s
record
in t h i s m anner i s
d iv id e n d p u rp o ses,
dends,
to
the
and as a c o n c o m ita n t the m ark et
in cre asin g ,
tio n freq u e n tly d e sire
or re н
rep ro d u ctio n co st
o v er an ex te n d ed p e rio d o f tim e .
v alu e
o f the
and m i s c e l l a n н
p rice
of a ssets
is
such a s
a p p re c ia tio n and p a id - in
eous p r o v is io n s r e g a r d in g w orking c a p i t a l ,
to tim e
F ive
concerning: d i v i d e n d s .
on th e d e c l a r a t i o n o f d i v i d e n d s ,
a v a ila b ility
o f the
sh are d iv id e n d s be g iv en s h a r e h o ld e rs .
M iscellan eo u s
strictio n s
in shares
o f any o th e r
o f the h o ld e rs
u n d e r v a r i o u s r u l e s , m ay r e q u i r e
o f th e
p ayable
are
su rp lu s
for
co m m itted .
is u n a v ailab le fo r
d iv iн
as th e books a re b e in g k e p t on th e b a s i s
of a going co n ce rn ,
re c o r d in g the
th is
th e
e n try
it
in crease
in
co n d itio n s,
s h o u l d l o g i c a l l y b e m ade w h e n t h e
over a p e rio d of -tim e.
c r e a te d by re c o rd in g
dends,
grave
such an e n tr y
p o rtan ce of th e
D espite
su b ject,
dends
of th is
the
number t h i r t e e n
sta te s
ille g a l,
such d iv id e n d s .
w ith c e r t a i n e x c e p tio n s .
is
if
a v aila b le
the
the e x c e ss r e c o r d e d a t
a sse ts,
such a s s e ts
the
rea liz ab le
and i n M innesota
in d eterm in in g
sur-^
for d iv iн
c e rta in c la sses
sta te s,
im н
th irty -
a v a ila b ility of unн
n ev erth eless,
i t may b e
w ould d e c l a r e
sta te s
in ferн
d iv iн
probably
hav in g a p ro v isio n
C alifo rn ia
The e x c e p t i o n s
are
as
a n d M innesota
d iv id e n d s from su ch a s o u rc e ,
C alifo rn ia
m arket v alu e
H ow ever,
and nine s t a t e s
Of t h e
p r o h i b i t b o th c a sh and sh a re
fo r d iv id en d s,
lev el f a lls ,
of d iv id en d s;
d e a lin g w ith u n re a liz e d a p p re c ia tio n ,
if
p rice
o f the d iv id e n d p r o v i s i o n ,
from such a sou rce
w ould a l l o w
fo r a .re v a lu a tio n
the m a jo rity o f th e
a p p r e c ia tio n as a source
by i n t e r p r e t a t i o n
is
t h e . t h e o r e t i c a l and p r a c t i c a l
s e v e n i n n u m b e r , m ake no m e n t i o n o f
red th a t
E sp ecially
i n j u s t i c e s may b e c o m m i t t e d t o
of sh areh o ld ers.
rea liz ed
is
th e a s s e t v a lu e .
case under c e r ta in
p ro bably w i l l
p lus
no p a r t i c u l a r a d v a n t a g e
374
o btained by
the
are
as fo llo w s:
In
tim e o f an exchange o f
in cash,
is
av ailab le
s e c u r i t i e s m ay b e v a l u e d a t
su rp lu s
a v aila b le
for d iv iн
dends .
Cash d i v id e n d s
a re fo rb id d e n b u t share d iv id en d s
a llo w ed from u n r e a l i z e d a p p r e c i a ti o n b y
L o u isian a,
M ich ig an ,
and O hio.
the
sta te s
are
o f Illin o is,
M ic h ig a n makes a n y ty p e o f
su rp lu s
a v aila b le
d iv id en d s
for
p re fe rre d d iv id e n d s,
from u n r e a l i z e d a p p r e c i a t i o n .
and a llo w s
In a d d itio n
share
th is
..sta te does, n o t c o n s i d e r t h e r e a d ju s tm e n t o f a p r e v io u s w r ite
down a s u n r e a l i z e d a p p r e c i a t i o n ;
th u s,
s u c h a m anner w ould be a v a i l a b l e
for
th o se m en tio n ed ,
v an ia
four o th er s ta te s ,
and W ash in g to n ,
u n realized
a llo w a
a su rp lu s
created
cash d iv id en d s.
Idaho,
c o rp o ra tio n
In d ian a,
to
th ese
sta te s
incom e
exclude
F in a lly ,
t h a t m ig h t p o s s ib ly a r i s e
cash d iv id en d s
P ennsylн
an
of share d i v i н
den d s, b u t by a v e ry d e t a i l e d en u m eratio n o f ty p es
and th e u n e arn ed
B esides
c ap ita liz e
increm ent th ro u g h th e d e c l a r a ti o n
in
of assets
th erefro m ,
from such a s o u r c e .
th e re rem ain s to be c o n s id e re d
the
law o f
W is c o n s in w hich p e r m its
e ith e r
cash o r sh are d iv id e n d s from
u n rea liz ed
if
p r o p e r ty o f the
has
a p p re cia tio n
in creased
v ested
or if
i n perm anent a d d i t i o n s ,
d iv id e n d
assets
in v a lu e ,
the
is
not in excess
ov er the
named i n
the
amount o f su c h
a c tu a l cash v a lu e o f the
and c a p i t a l .
t h e a c t u a l ?c a s h v a l u e
sta tu te s;
co rp o ratio n
n e t earn in g s have been in н
so l o n g a s t h e
of th e
lia b ilitie s
m ining a c c u r a t e l y
its
?
The m e t h o d o f d e t e r
of the a s s e ts
is not
p re s u m a b ly an a p p r a i s a l w ould be n e c н
essary.
The e x t e n t t o w h i c h t h e p o r t i o n o f t h e a s s e t s
u t e d by the
sh areh o ld ers
plu s has been c o n sid e re d ,
c an be a l l o c a t e d
to
a sp ecial su rн
b u t no w t h e r e r e m a i n s
im p o rta n t problem o f d e te rm in in g th e
degree
c o n trib н
the e q u a l ly
to w hich su c h a
576
su rp lu s
fin ite
Is
a v ailab le
re stric tio n s,
fo r d iv id en d s.
L o u isian a,
W i s c o n s i n make a v a i l a b l e f o r
p a id -in su rp lu s.
S u b ject to
New J e r s e y ,
certain deн
V irg in ia ,
cash or sh are d iv id en d s
C a lifo rn ia ,
and
the
I l l i n o i s , M ic h ig a n , M innesota*
and P en n sy lv an ia a llo w b o th cash and sh are d iv id e n d s
t o be
p aid
Two
to p r e f e r r e d
s h a re h o ld e rs from such a s u r p lu s .
sta te s,
Ohio a n d C o l o r a d o , a l t h o u g h n o t m e n t i o n i n g p a i d - i n
su rp lu s
d ir e c tly d iscu ss
th e
problem o f th e d e c l a r a t i o n o f
d iv id en d s
i n s u c h a w ay a s t o
a v ailab le
fo r d iv id en d s.
m ake s u c h a s u r p l u s
in g t h a t
the
no p o s i t i v e
th at
such a source
fo r d iv id en d s,
so p e r m i t .
Indiana r e q u i r н
The o t h e r s t a t e s ,
alth o u g h
s t a t e m e n t i s m a d e , m ay b y I n t e r p r e t a t i o n
of th e
g e n e r a l d iv id e n d p r o v i s i o n be assum ed to a llo w th e u se
p a id -in
ico ,
s u rp lu s f o r d iv id en d s
M isso u ri,
M ontana,
South C a r o lin a ,
Is
I n d i a n a an d M aine v e r y p o s i t i v e l y
av aila b le
ch arter
in d ic ate
as f o llo w s :
N ebraska,
A rizo n a,
N orth D akota,
South D a k o ta, T ex as, U ta h ,
w ould n o t a ll o w d i v i d e n d s fro m p a i d - i n
of
New Mexн
Oklahom a,
a n d W est V i r g i n i a
su rp lu s;
the n e x t
g ro u p w hich w ould p re s u m a b ly a l l o w d i v i d e n d s fro m p a i d - i n
su rp lu s,
K ansas,
sta te s
in clu d es A rkansas,
Nevada,
Tennessee,
D elaw are,
F lo rid a,
and W ashington;
have d iv id e n d p ro v is io n s
the
so w orded as
G eo rg ia,
Idaho,
l a s t group of
t o make i t
Imн
p o ssib le
to draw any c o n c l u s i o n r e g a r d i n g
t h e .use o f p a i d - i n
su rp lu s,
th is
sta te s
C o n n e ctic u t,
g ro u p b e in g composed o f t h e
Iow a,
K entucky,
M aryland,
o f A labam a,
M a ssac h u se tts,
M issis-
377
sip p i,
m ont,
New Y o r k ,
N orth C a r o lin a ,
V erн
and th e D i s t r i c t o f C olum bia.
C a lifo rn ia ,
in
O re g o n , Rhode I s l a n d ,
su rp lu s
for
the
Illin o is
a n d Ohio p e r m i t - t h e u s e
of p aid -
purpose of w r itin g o ff a d e f i c i t .
When a c o m p a n y h a s b e e n o r g a n i z e d t o e x p l o i t a w a s t н
ing a s s e t
or an a s s e t h a v in g a l i m i t e d
i n many s t a t e s
in g a
charge
allo w th e
p letio n
is
a sse ts.
th e p r o f i t and lo s s
annual d ep letio n .
not re q u ire d under th e
w ill cease
to o p e ra te
I f d iv id en d s
th at
a f t e r the
theory
situ atio n
seem t h a t
the
cu m stan ces.
is
the
sh areh o ld ers
is
v a rie d ..
i t w ould
s h o u l d be made aw are o f t h e c i r н
sh o u ld be a llo w e d
to e x p l o i t one
to
ignore
the
deн
The e x a c t p r o v i s i o n o n t h e d e p l e t i o n c h a r g e
A rkansas,
D elaw are, K ansas,
and W est V i r g i n i a
ject
in
any r e s t r i c t i o n
In d ian a,
in
o r ig in a l co n trib u tio n .
th e d e p le tio n
G eo rg ia,
charge,
sh areh o ld er w ill be re c e iv in g
p erm it a c o rp o ra tio n to d is re g a rd
to
co rp o ratio n
ex ten t a l iq u id a tн
Only t h o s e c o m p a n ie s o r g a n i z e d
charge.
the
in h e r e n tl y unsound; how ever,
p a r t i c u l a r w asting a s s e t
p letio n
th at
a r e p a i d w i t h o u t m aking t h i s
is,
not
statem en t fo r
c o m p le te d e p l e t i o n of the
e v e ry d iv id e n d payment a p o r t i o n o f h i s
T his
sta tu tes
T h is d e d u c tio n f o r d e н
e v e r y d i v i d e n d p a i d w i l l be t o a c e r t a i n
ing d iv id e n d ,
the
payment o f d iv id e n d s w ith o u t r e q u i r н
t o b e made i n
th e amount o f t h e
life ,
c o n tain ed
L o u isian a,
the c h a r t e r ;
a n d O hio,
a c t m u st be a p p ro v e d by s p e c i f i c
charge,
provide
ch arter
subн
four s ta te s ,
t h a t such an
p ro v isio n ;
in C a liн
fo rn ia,
Idaho,
M ich ig an , M in n e so ta ,
i n g t o n no c h a r t e r p r o v i s i o n i s
s ig n ific a n t are
n o tic e
C a lifo rn ia ,
be g i v e n t o
d iv id en d s.
the
M innesota,
of
in
and a ls o
P e r h a p s e v e n more
su b ject to
the
o f the
ju risd ic tio n
I n d i a n a makes
of th e
the
p la c e d on th e
an d Ohio r e q u i r e
of
o f v a rio u s classes
of L o u isian a,
of v ario u s
the c r e d i t o r s ;
a n d M i n n e s o t a make s u c h a d i v i d e n d l e g a l o n l y
p r o v i s i o n i s m ad e f o r t h e
Pennн
such a d iv id e n d
sh areh o ld ers
rig h ts
th at
source o f such
the s h a re h o ld e rs
s y lv a n ia , and W ashington.
th e r i g h t s
a n d W ash н
i f th e d e p le tio n charge has n o t
sh areh o ld ers
The r i g h t s
m ust be p ro v id e d f o r
su b je c t to
necessary.
the a d d i t i o n a l r e s t r i c t i o n s
d e c la r a tio n of d iv id en d s
b e e n made.
P en n sy lv an ia,
if
payment o f l i a b i l i t i e s
c la sses
C alifo rn ia
adeqfuate
and -the
liq u id a tio n preferences
o f sto c k h aving such a p re fe re n c e .
These l a t t e r
are
p r o te c t th e
p ro v isio n s
in te rests
of
of v ita l
the
im portance,
sh areh o ld ers
fo r they
o f th e v a rio u s
c la s s e s .
There a r e ,
p ro v isio n s
th a t have
p r o v id e f o r the
th ere
m eaning o f th e
New J e r s e y ,
d irec to rs,
th eir
se ttin g
f o r any c o rp o ra te
ed t h a t
in a d d itio n
is
in the
Three
surplus
was i n d i c a t н
law s c o n c e rn in g
and N orth C a r o l i n a ,
sh areh o ld ers
Seven s t a t e s
o u t o f the
In the d is c u s s io n i t
" r e s e r v e ? a n d !,f u n d . n
New M e x i c o ,
or th e
of a reserv e
some c o n f u s i o n
term s
the above, m is c e lla n e o u s
e f f e c t on d i v id e n d s .
asid e
purpose.
to
the
sta te s,
p e rm it the
I n so m e i n s t a n c e s ,
to d e t e r н
379
m ine
the
before
lin a ,
amount o f w o rk in g c a p i t a l
p ay in g d iv id e n d s .
the d i r e c t o r s
m a in d e r o f the
w orking . c a p i t a l .
I n one o f
are re q u ire d
su rp lu s
th at
in excess
the
o f th e
Idaho,
N orth C aroн
of th e r e н
amount r e s e r v e d f o r
but
is
sp e c ific a lly
th ey a re
uto ry c a p ita l
is
purchase
D elaw are,
the
its
In d ian a,
and W est V i r g i n i a ,
shares
as long a s
c h a s e w ould r e n d e r
san ctio n
assets
the
ex ten t
over th e
and T e n n e sse e .
to
a l l unanim ous
concernн
M ich ig an ,
E ig h t
M isso u ri,
it
cap ita l
C olorado,
N evada, Rhode I s l a n d ,
to
purchase
its
and s ta 'te d c a p i t a l ,
A rkansas,
New Y o r k p e r m i t s
of sta te s
f o r the
own
A nother group o f s t a t e s
o f such s h a r e s from th e s u r p l u s
group in c lu d e ,
The a b o v e tw o g r o u p s
sta te s,
p erm itн
is n o t im p aired or such a p u rн
im paired.
lia b ilitie s
o f any s u rp lu s
th e g e n e r a l problem o f s t a t н
allo w a c o rp o ra tio n
th e
A d iffiн
to w hich a c o r p o r a t i o n i s
own s h a r e s .
purchase
com posing t h i s
use
O hio,
need fo r a d e p re c ia tio n ad ju stm en t.
q u e stio n c lo s e ly r e la te d
ted to
proн
These s t a t e s have
The p u r c h a s e o f a. c o r p o r a t i o n * s own s h a r e s .
c u lt
lo sse s,
L o u isia n a , M innesota,
V erm ont, an d W ash in g to n .
w id ely v a ry in g d e t a i l s ,
ing th e
sta te s,
The a d j u s t m e n t f o r d e p r e c i a t i o n ,
in C a lifo rn ia ,
P e n n sy lv an ia,
he re s e rv e d
to pay d iv id e n d s
d e f e r r e d a n d a c c r u e d incom e a n d e x p e n s e
v id ed f o r
is.to
F lo rid a,
such purchases
the
sta te s
P en n sy lv an ia,
from s u r p l u s .
w ould p re s u m a b ly p e r m i t
purpose
of acq u irin g
o f the
the
such sto c k .
T his
the
s t a t e m e n t a s made i s
sto ck
r a t h e r an o m alo u s, f o r o b v io u s ly
is n o t a c q u ire d from s u r p lu s ,
w ith cash.
In f a c t,
in
th e m a j o r it y o f the
n o c h a n g e n e e d b e m ad e i n t h e s u r p l u s
the a c q u i s i t i o n
so word th e
of treasu ry
statem en t,
a c r e d it b alan ce
cate
sto ck .
O hio,
dends,
for
the
is
and t h a t
the
p ro v isio n s
assum ed to
sta tu te s,
o r make no m e n t i o n o f t h e
before
is
not
the- c o r p o r a t i o n
h o l d e r s may a p p r o v e
tw o -th ird s
own
c o r r e la tio n w ith
acco u n t.
To r e t u r n
C o n n ecticu t,
surp lu s
L ouisiana,
for d iv iн
s o u rc e , b u t have c e r t a i n
the
its
the
own
corн
p u r c h a s e v/ould n o t
th ree-fo u rth s
th e pu rch ase o f the
of each c la s s ,
of any c la s s .
or i f
in so lv en t,
L o u isian a p e rm its
c a s h m ay
a c o r p o r a t i o n m ay a c q u i r e
in so lv en t,
in d iн
in the b a la n c e
C o n n e c t i c u t d o e s n o t name a s o u r c e , b u t i f
p o ratio n
th at
c o rp o r a tio n 's
or decrease
of the su rp lu s
o f the
is
s u c h a n i n f e r e n c e may b e e i t h e r
in crease
or b alan ce
tim e o f
sta tu tes
the e x c e ss
a n d M a r y l a n d e i t h e r m ake a v a i l a b l e
sto ck .
sto ck .
account
the
the
of course,
c a s h a c c o u n t h a s no d i r e c t . p o s i t i v e
v o tin g r e s tr ic tio n s
render
the
How ever,
of p u rch asin g
As a m a t t e r o f f a c t ,
the f l u c t u a t i o n
now t o
surp lu s
of cash,
the purpose
or fa ls e ,
of th e
sto ck .
ju risd ic tio n s
account a t
b u t what is m ea n t,
the
the a v a i l a b i l i t y
be u sed f o r
tru e
in
b u t m ust be p u rc h a se d
of th e
shareн
c o r p o r a t i o n ' s * own
su c h a p u r c h a s e when a p p r o v e d b y
su b je c t to
Ohio p e r m i t s
when a u t h o r i z e d b y th e v o t e
the c o n tr a c t u a l r i g h t s
the a c q u i s i t i o n
of tw o -th ird s
o f such sh ares
of each c la s s ,
or
381
g re a te r or less
v ote
than a m a jo rity ),
i t y under the
as d e te rm in e d b y th e
o r when t h e b o a r d o f d i r e c t o r s
ch arter.
M aryland p e r m its
treasu ry
sh ares o u t of su rp lu s
not less
th a n the d e b ts
and i f
plus
if
th e a s s e t s
or vote
treasu ry
shares by co rp o ratio n s
D akota, M in n e so ta ,
su rp lu s
the
p ro fits
to be u s e d ,
sh areh o ld ers
ju risd ic tio n
and G e o rg ia.
is
su rp lu s
share
of tw o -th ird s
ty p es
of su rp lu s,
i n O klahom a,
The f i r s t
tw o s t a t e s
p re fe rre d shares
are
purchases
lia b ilitie s
i n G e o rg ia, b u t i f
th ere
is
is
source r e s t r i c t i o n
own s t o c k . i f
ru le,
only
sh areh o ld ers.
allo w
f o r th e
sta te
preferred
ways,
is
shares
purpose.
th e m ajor
of its
K ansas, I l l i n o i s ,
req u ires
The
a v a ila b le fo r
p la c e d on a c o r p o r a t i o n ?s p u rch a se
The l a t t e r
m an y s t a t e s
any su rp lu s
in v a rio u s
o rg an ized in C a lifo rn ia ,
South D akota.
s e n t o f the
d efin ed
In the
su rp lu s.
o u t s t a n d i n g o n l y e a r n e d s u r p l u s m ay b e u s e d f o r t h e
Earned s u r p lu s ,
allo w
su rp lu s
o u tstan d in g
s h a r e s m a y be p u r c h a s e d f r o m p a i d - i n
o v e r the
N orth
th e u n anim ous c o n s e n t o f
o b t a i n e d an y s u r p l u s may b e u s e d .
of th e a s s e ts
of
the p u rc h a se o f
org an ized
if
of
rem ain in g are
o f M innesota b o th e a rn e d and p a i d - i n
may be u s e d , b u t i f
preferred
but
have a u th o r н
of issu e d sto ck ,
B oth e a r n e d s u r p l u s and o t h e r
w i t h c e r t a i n e x c e p t i o n s , m ay b e u s e d f o r
(not le s s
the p u rch ase
the. a g g r e g a t e
a u th o r iz e d by the c h a r t e r
each c la s s .
ch arter
and
th e unanim ous c o n н
As a n e x c e p t i o n t o t h e g e n e r a l
the p u rch ase o f sh a re s
fo llo w in g re a so n s:
to
o f s t o c k from
c o llec t
a d e b t,
to
382
e lim in ate
fra c tio n a l
em ployees,
A rizona,
e tc .
san ctio n
In th is
C o n n ecticu t
M assach u setts,
shares,
to rep u rch ase
co n n ec tio n i t
sh a re s from
s h o u l d be n o t e d
(note e x c e p tio n a b o v e),
M ontana,
Idaho,
T exas,' U ta h , V erm ont,
K entucky,
and V i r g i n ia
t h e a c q u i s i t i o n o f a c o r p o r a t i o n ? s own s h a r e s
to p re v e n t a
lo ss
to
the
co rp o ratio n ,
of the
su b scrip tio n p rice
of the
sta te s
even lim i t
or fo r
to h o ld
on ly
th e non-paym ent
or an assessm ent l i a b i l i t y .
the r i g h t
th at
Two
the s to c k beyond
a named p e r i o d .
S u p p le m e n tin g th e f o r e g o i n g , many o f t h e
v ario u s
sectio n s
in ev itab ly a rise
is
attem p tin g
th ro u g h the
commonly p r o v i d e d t h a t
sid ered
Issued,
cases
p rice
b u t not o u tstan d in g
sta tu te s
sto ck ,
are
so h e l d
shares,
M oreover,
th e
treasu ry
shares
It
s h a l l be conн
and t h a t
the
s t o c k may be s o l d
or
I n some
sh areh o ld ers.
L o u isian a
c a n n o t be s o ld f o r l e s s
C alifo rn ia
th e m ost ex trem e p r o v i s i o n g o v e rn in g t h i s
o f w h ic h c a n n o t be su m m a riz e d h e r e , b u t one s e c н
c an n o t be
shares
th at
a t w h ic h t h e y were p u r c h a s e d .
co n tain
a ll
c e r t a i n problem s
as d e te r m in e d by th e d i r e c t o r s ,
is unusual in th a t
tio n
shares
t h e p r i c e m ay b e f i x e d b y t h e
th an the p r ic e
have
ow nership o f such s h a r e s .
the
s to c k s h a l l n o t be v o te d .
fo r the
to s e t t l e
sta te s
ig n o red ;
i.e .,
t h e r e q u i r e m e n t t h a t w he n
purchased o u t of e it h e r earn ed o r p a id - in
the earn ed su rp lu s
or p a id -in
su rp lu s,
m u s t .be r e d u c e d b y a n a m o u n t e q u a l
to
as th e
the
su rp lu s,
c a s e may b e ,
to ta l
purchase
383
p rice
o f the
m ent,
by i n te r p r e t a t i o n ,
the books
shares
to
purchased.
sh o w t h e
E sse n tia lly
h olds
in I l l i n o i s .
su rp lu s,
s u c h a way- a s t o
and w hich a r e
o r by c la s s if y in g
cords,
th erefo re
sta te s
co n sid ered .
A ll of
the
sta te s
d iv e rg e w id ely
th erefro m
req u ire
A rkansas,
M in n eso ta,
d ire c to rs
so r e l y ,
to
the
C alifo rn ia
New M e x i c o , a n d
tw en ty -n in e
sta te s
The r e s p e c t i v e
p ro b ab ly has
the m ost
tech n iq u e and d e t a i l r e q u ir e d
D elaw are,
and O hio, have
now t o b e
s p e c if ic req u irem en ts
in d ic a te d by th e f a c t
C a lifo rn ia ,
law s o f
a m in u te book and a l l ,
The I m p o r t a n c e o f t h e r e c o f d s
is
s u c h purchases
T his q u e s t i o n i s
New H a m p s h i r e ,
in reg ard
d isc u ssio n of the
in the r e c o f d s .
in
problem o f th e b o o k s, r e н
t h a t books o f a c c o u n t be m a in ta in e d .
e x te n siv e
acco u n ts
fo r d iv id en d s.
a sto ck r e g i s te r ;
d e a lin g w ith the r e c o r d s .
made
su rp lu s
To w h a t e x t e n t d o t h e
ju risd ic tio n sf
South C a ro lin a , r e q u i r e
sta te s
as d e d u ctio n
of a c o rp o ra tio n o rg an ized w ith in
e x c e p t G eo rg ia, M i s s i s s i p p i ,
req u ire
the
not a v ailab le
d e a l w ith the
and s ta te m e n ts
th e ir resp ec tiv e
M ichigan re q u ire s
show t h e a m o u n t a p p o r t i o n e d t o
Books and s t a t e m e n t s .
the v a rio u s
sa m e r e q u i r e н
cum ulative e f f e c t o f such p u rch ases
e i t h e r b y show ing th e c o s t o f s u c h p u r c h a s e s
from th e
the
G eo rg ia,
sectio n s
and s ta te m e n ts
th a t eig h t s ta te s ,
K ansas,
Illin o is,
w hich p e rm it t h e b o a rd o f
to r e l y on th e books and s t a t e m e n t s ,
a n d when t h e y
n o c h a r g e o f n e g l i g e n c e m ay b e b r o u g h t f o r
any
384
j u d g m e n t w h i c h was d e p e n d e n t o n a k n o w l e d g e o f t h e f i n a n c i a l
a ffa irs,
presum ably d i s c lo s e d by the
sta te m e n ts.
th e r e g u l a t o r y com m ission o f tw e n ty -n in e
sta te s
D i s t r i c t o f C o l u m b i a m ak e i t m a n d a t o r y f o r t h e
a c o rp o r a tio n to
Some o f
th ese
com m issions r e q u i r e m e r e ly d a ta
A rizona,
M ich ig an ,
req u ire
issu an ce;
C olorado,
M isso u ri,
m ent o f the
New H a m p s h i r e ,
N ebraska,
and V erm ont,
of
L astly ,
th e r e rem ain s
the s h a re h o ld e r
(1)
sta te s
m ent be g i v e n on r e q u e s t
to re c e iv e
of th e c o rp o ra tio n .
(2)
req u irin g
sta te s
shares,
the
sta te s
p rin cip al o ffice
in th is
group;
be d i s t r i b u t e d
to
sta te s
group.
in th is
of th e
(3}
a sta te н
T his d i s н
are th ree
ow ning a c e r t a i n
group th e re
th at a fin a n c ia l
e ith er
are
sta te н
In th e new spaper or
co rp o ratio n ,
sta te s
th ere
to be
th at a fin a n c ia l s ta te н
in th is
req u irin g
m e n t b e p u b l i s h e d I n some m a n n e r ,
in
th at
to s h a re h o ld e rs
o u tstan d in g
sta te s;
the
M assach u setts,
fin an c ia l a ffa irs
p rin c ip a l groups;
co n cern in g
Illin o is,
c u s s i o n may b e s u m m a r iz e d b y i n d i c a t i n g
th irte e n
of
K ansas,
the r i g h t
per cent of th e
o fficers
i n c o n t r a s t some o f t h e
a f in a n c ia l sta te m e n t.
co n sid ered
and the
subm it a r e p o r t o f c e r t a i n f i n a n c i a l a f f a i r s .
c a p i t a l ' s t o c k and i t s
sta te s,
S eco n d ly ,
th ere are
e ig h t
r e q u i r i n g :th at' the s ta te m e n t
each sh a reh o ld e r a n n u a lly ,
th ere are fo u r
385
S ectio n B
C o n clu sio n
The l a c k o f u n i f o r m i t y
the p r e s e n t c o n d itio n s
in c o rp o ratio n law s.
o f s t o c k h o ld i n g where
sp re a d d i f f u s i o n o f ow nership,
of th e
to ta l eq u ities
tiv e ly
sm all in v e s to rs
m anagem ent,
d iffic u lt,
are
in
if
the
h is
c o n ta c t w ith the
in th e c o rp o ra te
th e averag e
in v esto r
w hich th e
c o rp o ratio n
is
D elaw are
A. B e r l e ,
in
Jr.,
in
B ecause o f th e s e
the c o r p o r a tio n law s,
p rin cip al
in d icates
the
some c h a n g e o f e m p h a s i s
when d i s c u s s i n g
tim e
in the
the r e v i s i o n s
of the
? The o b v i o u s d e s i g n o f t h e
am endm ents
p o r a t e m anagem ents a s e r i e s
in g he
co rp o ratio n .
c o r p o r a t i o n law s a i d ,
Act and th e
sta te
c o u p l e d w i t h a g r o w i n g t e n d e n c y t o w a r d maximum
to have a r r i v e d f o r
A.
re ta in н
o rg a n iz e d as w e ll as a s tu d y o f th e
o f the
freedom and f l e x i b i l i t y
lav/.
to
a n i n v e s t o r m u s t make a c a r e f u l a n d
s e a r c h o f t h e c o r p o r a t i o n law s o f th e
appears
it
w hich power v i t a l l y
in te n siv e
co n d itio n s,
law makes
To kno w t h e p o w e r s o f t h e
board of d ir e c to r s ,
in te re st,
c h a r t e r an d by-law s
of r e la н
power o v e r th e f i n a n c i a l a f f a i r s
ed b y the b o a rd o f d i r e c t o r s .
c o rp o ra tio n and i t s
is w ideн
p ro p o rtio n
of m illio n s
mho h a v e no d i r e c t
n o t im possible> f o r
know a c c u r a t e l y
a ffects
an d where a l a r g e
the hands
th e w ide v a r i a t i o n
th ere
Under
th ere to
of ab so lu te
t h a t no a t t e m p t
is
to v e s t
in c o rн
pow ers? and c o n tin u н
i s made t o
l a y do wn s t a n d -
a r d s w hich m ig h t g o v e rn managem ent i n th e e x e r c i s e
o f such
pow er.
As h a s b e e n s h o w n i n t h e f o r e g o i n g p a g e s a n d a s
e m p lifie d by the d i f f i c u l t i e s
sum m arize
the r e s u l t s
o f c o r p o r a tio n law .
d ic tio n s have
of th e
It
than th e
in g u n if o r m ity ,
tru e
are
e ffo rts
on U n ifo rm S t a t e
is
no b a s i c
some f e w o f t h e
o n some p o i n t s ,
It
is
but
core
ju risн
In
t h e y a r e more s i g н
a lso
m ade t o w a r d
as f o r exam ple,
L o u isian a,
B usin ess
th at
th ere
so w ide t h a t
f a r have n o t been s u f f i c i e n t
Idaho,
stu d y ,
sim ila ritie s.
th e re have been a b le
C om m issioners
enco u n tered in attem p tin g to
s im ila r pro v isio n s
g e n e r a l the v a r i a t i o n s
n ific a n t
is
exн
tru e
t h a t w hile
the end o f a t t a i n н
th e c o d e . p ro m u lg a te d by the
Laws i n 1 9 2 8 ,
4
to m eet the need .
the r e s u l t s
Three s t a t e s ,
and W ash ing to n , have a d o p te d th e U niform
C o r p o r a t i o n A?c t w i t h m i n o r m o d i f i c a t i o n s .
The s t a t e
leg islato rs
do n o t a p p e a r t o h a v e w o rk e d o u t a n y s p e c i f i c
p h ilo so p h y ,
c e r t a i n l y n o t o n e w h i c h c a n b e summed u p i n a
few w ords n o r one w hich h a s any g e n e r a l a p p l i c a t i o n .
v ario u s
sta te s
so
h a v e a d o p t e d much more r a p i d l y
The
s u c h la v / s a s
5 A .A . B e r l e ,
J r . , " I n v e s t o r s and th e R e v is e d D elaw are
C o r p o r a t i o n A c t . " C o l u m b i a Law R e v i e w , XXIX ( A p r i l , 1 9 2 9 ) ,
p. 564.
^ U niform B u sin e ss C o r p o ra tio n A c t d r a f t e d b y th e
N a t i o n a l C o n f e r e n c e o f C o m m i s s i o n e r s o n U n i f o r m S t a t e Lav/s
an d b y i t a p p r o v e d an d recom m ended f o r e n a c t m e n t t o a l l t h e
S ta te s a t the T h ir t y - e i g h t h Annual C onference a t S e a t t l e ,
W ashington, J u ly 1 7 -2 3 , 1928.
387
th e U nifrom B i l l
o f L ading Act
U niform S a le s A ct
(th irty -th re e
b le
(f o r t y - e i g h t
I n s trum ent A ct
house R e c e ip t Act
T r a n s f e r Act
(fo rty -six
(tw en ty -sev en s t a t e s ) ,
sta te s),
s ta te s ),
sta te s)
(tw en ty -e ig h t s ta te s ) ,
th e U niform N e g o tit h e U n i f o r m W are н
and th e U niform S to c k
but. i n
the f i e l d
p o r a t i o n la w t h e r e h a s b e e n no c r y s t a l l i z a t i o n
P r o b a b ly one r e a s o n f o r t h e r e l a t i v e
sta tic
co rp o rate
d iffic u lt
law i s
consent of a l l
the f a c t
the p a r t i e s
th at
it
is
the
in te reste d ,
of
of corн
the law .
ch aracter of th e
and a l s o
to o b ta in
the
the f a c t
t h a t a s a r e s u l t o f t h e m az e o f c o n f l i c t i n g a n d c o m p e t i n g
sta tu tes,
p o rate
the
sta te s
corн
law s g a i n c o n s i d e r a b l e r e v e n u e fro m o r g a n i z a t i o n f e e s
and from c o r p o r a te
Elw yn D a v i e s
tio n
w ith th e m ost l e n i e n t and f l e x i b l e
tax es.
As a n i n d i c a t i o n
in d isc u ssin g th e
rev isio n of
o f the
co n d itio n s,
th e Ohio C o r p o r a н
Law, w h i c h h a d h a d n o t h o r o u g h r e v i s i o n
sin ce
1852,
w rote as f o llo w s :
T h a t t h e a c t i s s t i l l d e f i c i e n t i n some r e s p e c t s I s
due n o t e n t i r e l y to i t s a m a te u r d r a f t s m e n , b u t p a r t l y
t o t h e p r a c t i c a l n e c e s s i t y o f com prom ise w i t h t r a d i t i o n н
a l p o lic y and p r a c t i c e in the i n t e r e s t o f a f a v o ra b le
r e c e p t i o n by th e l e g i s l a t u r e , . . .
.5
Hence,
th e m o tiv e
of s e l f - i n t e r e s t as w e ll as s t a t e
has m i l i t a t e d a g a in s t
law.
rig h ts
the a d o p tio n o f a u n ifo rm c o r p o r a t io n
In t h o s e s t a t e s t h a t have r e c e n t l y a d opted a new law ,
c
-
Elw yn D a v i e s , " R e f l e c t i o n s o f t h e A m ateur D r a f ts m e n
o f t h e Ohio G e n e r a l C o r p o r a t i o n A c t . "
W i s c o n s i n Law R e v i e w .
X II (June 1937), p. 488.
388
one f i n d s
th at
th ese
law s
tend
to d e fin e
c u r a t e l y and a r e more l o g i c a l l y
th ey a re d e f i n i t e l y
the
ten d in g
term s more a c н
o rg an ized , b u t
tow ard th e
e s ta b lis h m e n t of the v a rio u s
it
seem s
th at
l i b e r a l v iew p o in t in
fin a n c ia l p ro v isio n s.
jud gm ent seem s w a r r a n t e d on th e b a s i s
It
the
T his
o f an ex am in atio n of
the
law s.
s h o u ld be p o i n t e d o u t , h o w e v e r,
the
o l d e r s t a t u t e s b e c a u s e of. l a c k o f a d e q u a t e d e f i n i t i o n o f
term s have been i n t e r p r e t e d
A stu d y
study
th ere
degree
of th is
q u ite
in c o n t r a s t .
As h a s b e e n d e m o n s t r a t e d i n t h e
sim ila rity .
' I n some s t a t e s
T h i s w i l l s h o w t h e maxim um d e g r e e
m ust be r e c e i v e d p r i o r
to
th e
be s o l d f o r l e s s
of
In o th e r
If
c o n sid era tio n
o f d isн
shares
v a lu e m ust be
sta te s
the
s h a r e s may
so r e c e i v e d
is
to be
sh a re s w ith o u t p ar v alu e
c o r p o r a t i o n may be r e q u i r e d
the c o n s id e r a ti o n as c a p i t a l ,
a p a rt of th e
and t h i s
th an p ar and th e v alu e
sta tu to ry c a p ita l.
the
p ar v a lu e o f p ar v alu e
issu an ce,
co n sid ered s ta tu to r y c a p ita l.
issu ed ,
the e x a c t
p r o v i s i o n w i t h t h e m o s t l e n i e n t p r o v i s i o n on
p o in ts.
are
in the law s;
v a r i a t i o n w i l l be shown b y c o m p a r in g t h e m o s t
the v a rio u s
co n sid ered
l i b e r a l l y b y the c o u r t s .
is co n sid era b le v a r ia tio n
c o n serv ativ e
t h a t many o f
to c o n s i d e r none
o r m ay b e r e q u i r e d t o
as s t a t u t o r y c a p i t a l ,
view
o r m ay b e
W i l e y B. R u t l e d g e , " S i g n i f i c a n t T r e n d s i n I n c o r p o r a н
tio n S ta tu te s."
W a s h i n g t o n U n i v e r s i t y Law Q u a r t e r l y , X X I I ,
( A p r i l , 1 9 3 7 ) , p . 3 1 2 , and E. M e r r i c k Dodd, J r . , " S t a t u t o r y
D e v e l o p m e n t s i n B u s i n e s s C o r p o r a t i o n L aw , 1 8 8 6 - 1 9 3 6 . " H a r v a r d
Law R e v i e w . ( N o v e m b e r , 1 9 3 6 ) , p . 3 8 .
389
req u ired
to c o n s id e r th e
c a p ita l.
the
e n tire
T h i s may be so i n
some j u r i s d i c t i o n s
s h a re s w ith o u t p ar v a lu e have l i q u i d a t i o n
some s t a t e s
tio n
are
preference;
issu ed a t le a s t the
p r e f e r e n c e m ust be c a r r i e d
through
to
sta tu to ry
the a p p l i c a t i o n o f th e s e .l a w s ,
sa m e s e c u r i t i e s
o u tstan d in g ,
in
the
if
s h a r e h o l d e r s was
shares
a c o rp o r a tio n hav in g
but i t
sta te s.
used
th e amount c o n t r i b u t e d b y th e
to be c o n s id e r e d
is
sta tu to ry
The p r i n c i p l e
c a p i t a l and w ith p a r v alu e
t h e a m o u n t was t o b e a t l e a s t e q u a l t o
re n t p rin cip le
th o u g h t
was t h a t
Thus,
and h a v in g r e c e iv e d th e
o rg an ized in d if f e r e n t
o ld er.law s
liq u id a н
c a p ita l.
same a s s e t v a l u e s , m i g h t h a v e a w i d e l y v a r y i n g
c ap ita l
even though
r e q u i r e . t h a t when s h a r e s w i t h o u t p a r v a l u e h a v н
ing l i q u i d a t i o n p re fe re n c e
the
amount r e c e iv e d as s t a t u t o r y
to d e f in e
par.
sta tu to ry c a p ita l.
The c u r н
T his
is
to be n e c e s s a ry because o f sh a re s w ith o u t par v a lu e ,
has d e s t o r te d the
o f th e m a tte r
is
th at
the
idea of s t a t u t o r y c a p i t a l .
sa m e p r i n c i p l e ;
nam ely,
th e amount c o n tr i b u te d be c o n s id e re d c a p i t a l ,
been r e ta in e d .
If
The f a c t
th at a ll
m ig h t w e ll have
t h a t m e th o d h a d b e e n r e t a i n e d many a c c o u n t н
in g an d l e g a l p ro b lem s w ould have b e e n a b o l i s h e d .
Some s t a t e s
assets
co n tro l rig id ly
to be r e c e i v e d
th at
the a g g re g a te
v a l u a t i o n and ty p e of
in payment o f s h a r e s .
p o i n t o f v a l u a t i o n one s t a t e
so
the
req u ires
a c t u a l v alu e
the
of the
Prom t h e
s to c k to be
assets
view н
issu ed
receiv ed
390
s h a l l be e q u al to
o t h e r extrem e
is
the v a lu e o f th e
the
sta te
shares
issued,
allo w in g c e r t a i n
ty p es
to be r e c e i v e d a t any a r b i t r a r y v a l u a t i o n .
shares
ed by
b ein g ab le
have
the
to a s s u re th em selv es
co n trib u ted a f a i r
i n some j u r i s d i c t i o n s
am ount.
cash,
of a s s e ts
p ric e d eterm in н
c u rre n t sh areh o ld ers
th at
not
t h e new s h a r e h o l d e r s
As f o r t h e
p ro p erty ,
type o f a s s e t s ,
or serv ices rendered
o r t o b e r e n d e r e d may b e a c c e p t e d i n p a y m e n t o f s h a r e s
so
th ro u g h th e w hole gamut o f p o s s i b l e
m ost s tr in g e n t
su b scrib er
the
I n some s t a t e s
w i t h o u t p a r v a l u e m ay b e s o l d f o r t h e
the b o a rd o f d i r e c t o r s ,
and a t
a rran g em en ts
j u r i s d i c t i o n w h ic h makes
and
to th e
I t necessary fo r
t o p a y c a s h f o r the- s h a r e s r e c e i v e d u n l e s s
the
the
c h a r te r p rovides o th e rw ise .
Thus, w ith t h e
sta tu to ry
v a r i e t y o f ways one comes t o
c a p ita l estab lish ed
on th e payment of d iv id e n d s .
th a t a leg al
surp lu s
the
of d iv id e n d s.
or net p ro fit,
law im p o ses,
A read in g
is
It
i n the
is e v id en t
n e ce ssa ry b e fo re th e
o f the
sta tu tes
rev eals
a s s u m i n g p r o v i s i o n h a s b e e n made f o r l o s s e s a n d
I f any, but
ment Is n o t n e c e s s a r i l y
tru e.
th at a ll
attem p t
is
im pairm ent,
tru e
of th e
The
surp lus
c a p ita l
is
a rath er
to view a l l
su rp lu s,
It
payment
su rp lu s.
la w seem t o a r i s e b e c a u s e
as p r o f i t.
the
d e te rm in e d b y w hatever
c o n fu s e d u n d e r s ta n d in g o f what c o n s t i t u t e s
d iffic u ltie s
th is
th e problem o f d e te rm in in g
re stric tio n s
stan d ard s
in
the co n v erse o f th e
The d i f f i c u l t y
arises
p ro fit
sta te н
because
391
o f th e f a i l u r e
to u n d e r s ta n d t h a t p r o f i t ,
Income o v e r e x p e n s e s ,
over l i a b i l i t i e s
series
is
is
n o t the
and s t a t e d c a p i t a l .
found the
d ictio n s
tal,
some
and a t th e
id ea
of th e
leaseh o ld s,
if
n o t im p o ssib le
p erm its d iv id en d s
w hile a t
su rp lu s
to
to
ju stify .
It
from th e n e t p r o f i t s
th e o t h e r ex trem e a r e
type,
or p ro fits
d iv id en d s
a risin g
of a sse ts.
the
e tc .,
is
source
sta te
(th at
w hich
earned s u r н
is,
of a sse ts} ,
su rp lu s
and s u rн
F re q u e n tly the
source of d iv id e n d s.
should be e n t i t l e d
a re from p r o f i t s
surp lu s
for
from th e b u s i н
those s t a t e s
of the
from n o n - r e c u r r in g
from c o n t r i b u t e d
the
from any s u r p l u s :
sh areh o ld ers
know w h e t h e r t h e d i v i d e n d s
p a te n ts,
As f o r
from o r i g i n a l c o n t r i b u t i o n s .
w o u ld seem t h a t t h e
is m o d ified In
the m ost c o n s e r v a tiv e
need n o t be n o t i f i e d
ju risн
The j u s t i f i c a t i o n
c re a te d by an e n tr y w r itin g up the v a lu e
sh areh o ld ers
is
im pairm ent o f c a p i н
from u n r e a l i z e d a p p r e c i a t i o n
p lu s r e s u ltin g
c ap ita l
the d e p le tio n o f w a stin g
e tc .
a lio ?/ c a s h and s h a r e d iv id e n d s
p lu s,
the
o ff fo r leaseh o ld s,
of cash or share d iv id e n d s,
ness,
c a p i t a l o r w hile
im pairm ent o f c a p i t a l
p a te n ts,
ex clu sio n of th e w rite
d iffic u lt
of a ssets ?
o t h e r e x trem e are fo u n d th o s e
j u r i s d i c t i o n s when a p p l i e d
a sse ts,
of
At one e x tre m e o f th e
th a t allo w d iv id e n d s d e s p ite
T his
su rp lu s
su rp lu s
p r o v is io n t h a t d iv id e n d s s h a l l n o t be
p a i d when t h e i r p a y m e n t i m p a i r s
im paired,
same a s
th a t Is
to
of a recu rrin g
o p eratio n ,
or so -c alled
or u n rea liz ed a p p re cia tio n
392
In re g a rd
d iv id en d s a re
to
the
issu ed ,
am ount t o be c a p i t a l i z e d when s h a r e
some s t a t e s
allo w such d iv id e n d s
i s s u e d w i t h o u t a n y e n t r y b e i n g made i n d o l l a r s
O ther s t a t e s
req u ire
to
c a p i t a l a n amount e q u a l to
sta tu to ry
shares
the c o r p o r a tio n to
to be
and c e n ts .
t r a n s f e r from s u rp lu s
the p ar v a lu e
issu e d o r th e e s tim a te d f a i r v alu e
of
the
of the
shares
w ith н
o u t par v alu e.
A d iffic u lty c lo sely rela te d
u to ry
c ap ita l
chase
its
acq u ire
Is
the e x te n t
own s h a r e s .
the
o th er s ta te s
Some s t a t e s
can h o ld the
a llo w the
the problem o f s t a t н
t o w h i c h a c o r p o r a t i o n may p u r н
s to c k o n ly to p r o t e c t
and even th e n i t
to
allo w
the
the
c o rp o ratio n
to
c o r p o r a t i o n from l o s s
sto ck o n ly f o r a lim ite d p eriod;
c o rp o ra tio n
to a c q u ir e
such sto c k
a n y s u r p l u s w i t h no r e g u l a t i o n on t h e l e n g t h o f tim e
it
from
can
be h e l d .
The l a w s d e a l i n g w i t h t h e b o o k s o f a c c o u n t a r e a s
w id ely v a rie d as
g reat-d etail
the
o th e r p ro v isio n s.
is- l i s t e d
In a few o f th e
as bein g r e q u ir e d e s p e c i a l l y
s e p a r a t io n o f th e n e t w orth a c c o u n ts ,
I t m an d ato ry f o r
the d i r e c t o r s
to
the
the
supply th e
sta te s
make
shareholders
statem en t an n u alн
sh areh o ld ers h o ld in g a c e r t a i n
s h a r e s may r e q u e s t s t a t e m e n t s .
do n o t
A few s t a t e s
w ith a d e t a i l e d and com prehensive f i n a n c i a l
ly and a ls o
I n the
b u t many s t a t e s
ev en m en tio n t h a t a c c o u n ts m ust be k e p t . -
sta te s
C o n v ersely ,
per cent of
i n some
no s t a t e m e n t i s made i n t h e la w s r e g a r d i n g
the r e n d e r -
393
Ing o f s ta te m e n ts
of fin a n c ia l co n d itio n .
o f a f i n a n c i a l r e p o r t to th e
fo r-th is
report
is th e
The i m p o r t a n c e
i n v e s to r c a n n o t he m in im ized ,
p rim a ry means by w hich th e
person can endeavor to a p p ra is e
in te reste d
the p o s i t io n o f th e
corpoн
ratio n .
Need f o r a r e v i s i o n
of co rp o rate
a n t in view ing th e rem ark ab le
p rise
to rem em ber t h a t th e
tio n of th e
sta te .
co rp o ratio n
I t d e p en d s on th e
if
is
Any r i g i d i t y
sta te
for
serio u s
serio u s
in eq u itie s
in v esto rs,
e q u ities
and l i a b i l i t i e s .
w ith the
current fin a n c ia l,
and m ethodology in v iew .
c lu d e
in the
sh areh o ld ers
to
m anagers and d i r e c t o r s
th e o th e r.
d rafted
so a s
to
the m a n ife s t
the
c o rp o ratio n
o f bo th
s h o u ld be u n d e r t a k e n
some o f t h e
law s h o u ld n o t ip s o f a c t o
law s.
c la sses,
sta te s
preн
There a re d e f i n i t e
areas
law s n o t o n ly as b e tw e e n
b u t a l s o betw een th e
on one h a n d an d t h e
The c o r p o r a t e
and
and' a c c o u n tin g te c h n iq u e
p re se n t co rp o rate
of v ario u s
pow er.
and to h o ld e rs
M erely b e c a u se
an e x am in atio n o f th e s e
of co n flict
th e
leg a l,
e n te rн
i n o u r econom ic l i f e ' and
The a n a l y s i s
have r e c e n t l y r e v i s e d t h e i r
its
or lack of a d a p ta tio n to
d iffic u ltie s
to the
im portн
f a r from s e t t l e d
a ll. to o e v id e n t need f o r a re e x a m in a tio n o f the
law s w i l l c a u se
is
p e cu lia rly a creaн
la w s h o u l d accom m odate i t s e l f
cu rren t needs.
It
grow th o f th e c o r p o r a te
O ur e c o n o m i c a n d c o m m e r c i a l l i f e
m ature and th e
law .
sh areh o ld ers
on
law s have a p p a r e n t l y n o t b e e n
give a ssu ra n c e
th at
the
in te rests
of a ll
394
p arties
w i l l be p r o t e c te d ,
d ictio n s
fo r gross
bou n d aries
the
fact
lim its
the
in eq u ities
o f le g a l conduct,
th at
to
im pose u p o n th e
law h a s ,
lack of u n ifo rm ity in
v isio n .
C learly ,
a c tiv itie s
is
p o ssib le
i n some j u r i s н
th is
of course,
are
It
eith er
b e in g due to
too b ro a d o r
sh o u ld be th e f u n c t i o n o f
c o rp o ra tio n s
c e r ta in reaso n ab le
T his
it
co m parison o f th e p r o v is io n s
is hoped,
the
focused a tte n tio n
the v a r i a t i o n
n o t so d i f f e r e n t
in
in
the
the v a rio u s
sta te s
M oreover,
present
tim e m ost b u s i n e s s e s
on an i n t e r s t a t e
se cu ritie s
o perate
a re w id ely h e ld ,
a g r e a te r degree of u n ifo rm ity .
w ill op erate
m ent to
as a re a s o n a b le
p ro tect
fle x ib ility
the
a d eq u ate
fin a n c ia l needs.
in v esto r,
o u tsid e
W hat i s
c h e c k on t h e
sin ce
th ere
as
a t the
scale
sh o u ld be
needed Is
lav/s t h a t
c o n t r o l o f- m a n a g e н
b u t a lso have a degree
of
N a t h a n W i l l i a m M a c C h e s n e y , who f a v o r s
in an ad d ress
said
th at
o f c a p i t a l doing an i n t e r s t a t e
th e power o f
to
t o k e e p p a c e w i t h c h a n g i n g e c o n o m i c and
u n ifo rm c o r p o r a t io n law ,
v a st ag gregations
on the
form s o f b u s i n e s s
such w id e ly d iv e r g e n t law s.
th eir
of
law s an d t h e n eed f o r t h e i r r e н
ju stify
and s in c e
the
p rac tic es.
R ecom m endation.
co rp o rate
is
to be p e r p e t r a t e d w i t h i n th e
in ad eq u ately d e fin e d .
sta te
it
th o se b o u n d a rie s
m in im u m b u s i n e s s
the
for
th ere
a
are
bu sin ess
th e f e d e r a l governm ent to r e g u l a t e
and
395
beyond th e power o f t h e
sta te
I t w ould a p p e a r t h a t
to c o n t r o l .
ry
th e m o st s a t i s f a c t o r y m ethod o f
o b t a i n i n g c o n t r o l a s w e l l as u n i f o r m i t y w ould be
F ed eral In co rp o ratio n
to a l l
the
co rp o ratio n s
co rp o ratio n s
b u t very
sim ple
lim ita tio n s
a ttem p t
Act o r a F e d e r a l L ic e n s e A ct t o a p p ly
in
in te rstate
comm erce,
doing an I n t r a s t a t e
ty p es
and th e n ,
for
b u sin e ss a uniform ,
t y p e o f ?i n c o r p o r a t i o n a c t ,
on th e
th ro u g h a
of s e c u ritie s
to h av e one law t o g o v e rn b o t h
w ith d e f in ite
to be i s s u e d . ^
the la rg e
The
c o rp o ra tio n
w ith a hundred m illio n d o l l a r c a p i t a l i z a t i o n
and a c o r p o r a н
t i o n w i t h two t h o u s a n d d o l l a r c a p i t a l i z a t i o n
Is n o t f e a s ib le
nor ten ab le.
The l a w u n d e r s u c h c i r c u m s t a n c e s
s a t i s f a c t o r y f o r b o th ty p es o f c o rp o ra tio n s .
c o r p o r a t i o n A ct,
c a n n o t be
The F e d e r a l I n н
a c c o r d i n g t o M i c h a e l O? R e i l l y ,
so much a p o l i c y o f p r o h i b i t i o n a n d r e s t r i c t i o n ,
guidance and le a d e r s h ip
tow ard a s t a b i l i z e d
w ould b e n o t
b u t one o f
econom ic
control.о
^ N a th an W illia m M acChesney, U n ifo rm L aw s: A Needed
P r o t e c t i o n to and S tim u lu s o f I n t e r s t a t e I n v e s t m e n t . A ddress
b e fo r e the F o u rth A nnual C o n v en tio n o f N a tio n a l A s s o c ia tio n
o f R e a l E s t a t e E x ch an g es. D en v er, C o lo ra d o , J u l y 19, 1911. p .4.
O
Lowe W a t k i n s , " F e d e r a l i z a t i o n o f C o r p o r a t i o n s . ? '
T e n n e s s e e Law R e v i e w , X I I I ( F e b r u a r y , 1 9 3 5 ) p . 9 5 ; W i l e y B.
R u t l e d g e J r . , " S i g n i f i c a n t T ren d s i n M odern I n c o r p o r a t i o n
S t a t u t e s . " W a s h i n g t o n U n i v e r s i t y Law Q u a r t e r l y , X X I I ( A p r i l ,
1 9 3 7 ) , p . 3 4 0 ; Jam es J . R o b b i n s , " F e d e r a l L i c e n s i n g o f B u s i н
n e s s C o r p o r a t i o n s . " T u l a n e Law R e v i e w . X I I I ( F e b r u a r y , 1 9 3 9 ) ,
p . 2 1 4 f f . ; E d w a r d G. J e n n i n g s , " F e d e r a l I n c o r p o r a t i o n o f ?
I n t e r s t a t e C o r p o r a t e B u s i n e s s . ? M i n n e s o t a Law R e v i e w , X I I I
( A p r i l , 1 9 3 9 ) , p . 7 10 f f .
^ M ic h a e l J . O?R e i l l y , ?A C o n s i d e r a t i o n o f F e d e r a l I n н
c o r p o r a t i o n . ? . S t . J o h n ? s Law R e v i e w , X I I ( N o v e m b e r , 1 9 3 5 ) . p . 99.
396
Many y e a r s w i l l p r o b a b l y e l a p s e b e f o r e
in co rp o rate
the
acq u ain t
to
the
fund am en tal te n e ts
th em selv es w ith
the o th e r
co rp o rate
in stru m en t in
to be
i n the
c o n flict
s t a t u t o r y law w i l l be r e c o n c i l e d . - B oth th e
law y er and th e a c c o u n ta n t w i l l f i n d
ine
the
in
it
necessary
of th e ir resp ectiv e
the
co n trib u tio n
th e i r a ttem p t to d r a f t
the
to reexam н
field s
and to
t h a t e a c h c a n m ak e
la w so a s
t o make
form o f o r g a n i z a t i o n as s a t i s f a c t o r y a s o c i a l
the
field
field
of fin an ce
of pro d u ctio n .
as
i t has
proved i t s e l f
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*
??
?╗
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B altim o re;
King
G e n e r a l Laws o f t h e Commonwea1 t h o f M a s s a c h u s e t t s , T e r c e n t e н
n a ry E d itio n , 1952.
W i l l i a m E . D o r m a n a n d H e n r y D.
W iggins, e d i t o r s , 5 v o l s . ; B oston: W right and P o t t e r ,
1952.
A cts and R e s o lu tio n s P assed a t
s e t t s In th e Year 1955.
.
. . . , 195 4 .
,
. . . , 1955.
.
.. . , 1 9 5 6 .
.
.... . , 1957.
.
.. . , 1 9 5 8 .
.
. . . , 193 9 .
the
G en eral C o urt o f M assachuн
State of Michigan, General Corporation Laws.
Compiled under
the supervision of Leon D. Case.
Lansing:
Franklin
DeKleine Company, 19 3 8 .
P u b lic and L o c a l A c t s o f t h e L e g i s l a t u r e o f the S t a t e o f
M ichigan -Passed a t the R e g u la r S e s s i o n . 1 9 3 9 .
L an sin g:
F r a n k l i n D eK leine C o . , 193 9 .
A c t , Chapter 300 Laws of
M i n n e s o t a , 1933 as amended to A p r i l 1 8 , 1 9 3 5 .
Issued by
Mike Holm, S e c r e t a r y o f S t a t e , 193 6 .
Minnesota Business Corporation
S e s s i o n Laws o f t h e S t a t e o f M i n n e s o t a , 1937.
.
. . .,
1939.
403
C o r p o r a t i o n s C h a p t e r 1 0 0 M i s s i s s i p p i Code o f 1 9 5 0 , a s
a m e n d e d b y C h a p t e r 2 4 0 , Laws o f 1 9 3 2 , a n d C h a p t e r 3 1 ,
Laws o f 1 9 3 5 .
I s s u e d b y W a l k e r Wood, S e c r e t a r y o f S t a t e .
Laws o f t h e
S ta te o f M i s s i s s i p p i , A p p r o p r ia tio n s , G eneral
L e g i s l a t i o n and R e s o l u t i o n s , 1938.
.
.
.
. . .
.,
E x tra o rd in a ry S essio n ,
?,
1940.
1938.
G e n e r a l C o r p o r a t i o n Laws a n d M i s c e l l a n e o u s P r o v i s i o n s o f t h e .
S t a t e o f M i s s o u r i , R e v i s e d S t a t u t e s o f 1929 a n d am enda-'
to r y a c ts to 1933.
C o m p i l e d b y D w i g h t H. B r o w n , S e c r e н
ta ry of S tate.
G i l l e s p i e *s 1 9 5 7 C u m u l a t i v e A n n o t a t e d S u p p l e m e n t t o t h e R e н
v is e d S t a tu t e s o f M is s o u r i, 1929.
John P. G i l l e s p i e and
C l a u d i o r De L e t a l a , e d i t o r s .
S t. L o u is:
Thomas Law B ook
C o ., 1937.
Laws o f M i s s o u r i P a s s e d a t
1939.
the
S ix tieth
;
G en eral A ssem bly,
R e v i s e d Codes o f M o n ta n a , 1935.
5 v o ls.
H a r o l d K. A n d e r s o n
a n d C a r l M c F a r l a n d , Code C o m m i s s i o n e r s .
H elena:
S tate
P u b lis h in g C o., 1936.
L a w s , R e s o l u t i o n s , a n d M e m o r i a l s o f t h e S t a t e .of. M o n t a n a ,
2 5 t h L e g i s l a t i v e A ssem bly, 1937.
H elena: S ta te P u b lis h н
ing C o ., 1937.
C om piled S t a t u t e s o f N e b ra s k a , 1929.
C o m p i l e d b y W i l l i a m C.
D orsey.
L in c o ln , N ebraska:
S t a t e J o u r n a l C o., 1930.
C u m u la tiv e S u p p le m e n t 1957 to th e C om piled S t a t u t e s o f ?
N eb rask a, 1929.
C o m p i l e d b y Homer L . K y l e .
L in co ln ,
N ebraska:
BrOwn P r i n t i n g S e r v i c e , 1 9 3 7 .
S e s s i o n Laws P a s s e d b y t h e L e g i s l a t u r e
N e b ra sk a , 1939.
.
.
.
.,
o f the
S tate
of
1940.
S t a t e o f N evada, D o m e stic a n d F o r e i g n C o r p o r a t i o n Laws.
Comн
p i l e d b y M alcolm M cE achin,
S ecretary of S ta te .
C arson
C ity : S ta te P r in tin g O ffic e , 1937.
404
S t a t u t e s o f t h e S ta t e o f Nevada P a s s e d a t th e T h i r t y - n i n t h
S e ss io n o f the L e g i s l a t u r e , 1939.
C arson C ity :
S tate'
P rin tin g O ffic e , 1939.
B u s i n e s s C o r p o r a t i o n Law a n d R e g i s t r a t i o n o f F o r e i g n C o r p o r a н
tio n s , 1937.
C o n c o r d , New H a m p s h i r e :
D epartm ent of
S ta te , 1937.
? Laws o f t h e S t a t e o f New H a m p s h i r e
Sess i o n , 1939. -
Passed a t th e
January
??lj h e G e n e r a l C o r p o r a t i o n Law o f New J e r s e y , I n c l u d i n g a l l
S u p p l e m e n t s a n d A m e n d m e n ts t h e r e t o , t o t h e e n d o f t h e
L e g is la tiv e S e ssio n o f 1938.
P u blished under a u th o r ity
o f th e D epartm ent o f S t a t e .
R e v i s e d S t a t u t e s C u m u l a t i v e S u p p l e m e n t , Laws o f 1 9 3 8 , Laws o f
1939.
Jerom e S a r n o f f , e d i t o r .
Neward:
G a nn P u b l i s h i n g
C o., 1940.
A c t s o f t h e One H u n d r e d a n d S i x t y - f o u r t h L e g i s l a t u r e
S t a t e o f New J e r s e y , 1 9 4 0 .
of the
C o r p o r a t i o n Laws o f t h e S t a t e o f New M e x i c o , 1 9 2 8 .
C om piled
a n d A n n o t a t e d b y J u a n A. A. S e d i l l o .
S a n t a F e , New Mexн
ico :
P u b l i s h e d b y th e S t a t e C o r p o r a t i o n Com m ission.
1 9 5 8 S u p p l e m e n t t o t h e New M e x i c o S t a t u t e s A n n o t a t e d 19 2 9
C o m p i l a t i o n . W i l l i a m H. C o u r t r i g h t a n d H e n r y C. A l l e n ,
e d ito rs '.
D enver:
W. H. C o u r t r i g h t , 1 9 5 8 .
Laws o f t h e S t a t e o f New M e x i c o P a s s e d a t t h e S p e c i a l S e s s i o n
1938 and th e F o u r t e e n t h R e g u la r S e s s i o n ' 1958- 1 9 5 9 .
Las V egas:
The O p t i c P u b l i s h i n g Co.
S t a t e o f New Y o r k , D e p a r t m e n t o f S t a t e , Etc t r a c t s f r o m t h e
S t o c k C o r p o r a t i o n Law, G e n e r a l C o r p o r a t i o n Law, T a x Law,
E x e c u t i v e Law a n d P e n a l L a w , E d i t i o n o f 1 9 3 8 .
Prepared
u n d e r t h e d i r e c t i o n o f E d w a r d T. F l y n n , b y F r a n k S . S h a r p ,
C hief o f C o rp o ra tio n D iv is io n .
Laws o f t h e S t a t e o f New Y o r k , 1 9 3 9 .
J . B. L y o n P r i n t i n g C o . , 1 9 3 9 .
.,
1940.
2 v o ls.
A lbany:
405
S t a t e o f N o rth C a r o l i n a , C o r p o r a t i o n h a w s , Ch. 2 2 .
(As a m e n d e d ) , 1 9 3 5 .
R a le ig h , N orth C a r o lin a :
of S ta te ;
S t a c e y W. Wade, S e c r e t a r y o f S t a t e ,
G. S .
D epartm ent
1935. ?
1 9 5 7 S u p p l e m e n t t o t h e N o r t h C a r o l i n a Code o f 1 9 5 5 .
A nnotated.
C h a r l o t t e s v i l l e , V i r g i n i a : M i c h i e Company, 1 9 3 5 .
S t a t e o f North C a r o l i n a , P u b l i c Laws and R e s o l u t i o n s P assed
b y t h e G eneral A sse m b ly , 1938.
.
. . ?,
1939.
C o r p o r a t i o n Laws o f t h e S t a t e o f N o r t h D a k o t a :
G e n era l and
C o o p e ra tiv e . R e v ised to J u ly 1, 1925.
Issu ed by R obert
B yrne, S e c r e ta r y o f S t a te .
? S u p p l e m e n t C o n t a i n i n g 1 9 2 7 - 1 9 2 9 - 1 9 5 1 A m e n d m e n ts t o t h e 1 9 2 5
R e v i s i o n o f t h e C o r p o r a t i o n Laws o f N o r t h D a k o t a .
.
. . .,
1933 a n d 1935 A m endm ents.
.
. . .,
1937 A m endm ents.
Laws P a s s e d a t the Twenty- s e v e n t h S e s s i o n o f th e L e g i s l a t l v e
S e s s i o n o f t h e S t a t e o f North D a k o t a , 1 9 3 9 .
The G e n e r a l a n d F o r e i g n C o r p o r a t i o n A c t s o f t h e S t a t e o f
O hio. 1939.
A nn o tated .
Issu ed by E a rl G r i f f i t h , S ecreн
tary of S ta te .
C om piled S t a t u t e s
0 . Bunn.
1922.
o f O klahom a, 1921.
2 v o ls.;
In d ian ap olis:
A nnotated b y C lin to n
The B o b b s - M e r r i l l Co . ,
1 9 2 6 S u p p l e m e n t to B u n n 1s C o m p i l e d S t a t u t e s
1 9 2 1 , b y Vfox. W H o r t o n .
S tate
o f Oklahom a,
S e s s i o n Laws,
Sess ion Laws. 1929.
Session Laws, 1931.
Sess ion Laws, 1933.
Session Laws'. 1935.
1927.
o f O klahom a,
406
S t a t e ?o f O k l a h o m a , . S e s s i o n h a w s , 1 9 5 6 - 1 9 3 7 .
.
.
.
.,
S e s s io n Laws, 1939.
O regon C o r p o r a t i o n Law s, I n c l u d i n g a l l S t a t u t o r y m a t t e r r e н
l a t i n g to th e O r g a n iz a t i o n and R e g u la ti o n o f C o rp o ra н
tio n s (w ith A n n o ta tio n s ), 1936.
C om piled and a r r a n g e d
b y C h a r l e s H. C a r e y , C o r p o r a t i o n C o m m i s s i o n e r .
Oregon Laws E n acted and J o i n t R e s o l u t i o n s . Concurrent R e s o l u н
t i o n s and Memorials A d op ted , 193 7 .
1939.
:
P u r d o n 1s P e n n s y l v a n i a
1938.
76 v o l s . ;
C o., 1938.
S t a t u t e s , A n n o ta te d Perm anent E d it i o n ,
S t. P au l, M innesota:
West P u b l i s h i n g
Laws o f the G eneral Assembly o f the Commonwea 1 t h o f P e n n s y l н
v a n i a , E xtra S e s s i o n 1 93 8 .
. . . ? , 1939.
G eneral C o r p o r a t io n Law o f the S t a t e o f Rhode I s l a n d ,
C h a p t e r 2 4 8 o f t h e G e n e r a l Laws a s a m e n d e d t o 1 9 3 2 .
O ffic e o f the S e c r e ta r y o f S t a t e , 1936.
R h o d e I s l a n d G e n e r a l Laws o f 1 9 3 8 , A n n o t a t e d .
Thompson a n d T hom pson, I n c . , 1 9 3 8 .
A cts
P rovidence:
and R e s o lv e s P a s s e d b y th e G e n e ra l A ssem bly o f th e
G eneral A ssem b ly o f t h e S t a t e o f Rhode I s l a n d and P r o v i н
d ence P l a n t a t i o n s , 1939.
.
.
.
.,
1940.
C od e o f Laws o f S o u t h C a r o l i n a . 1 9 3 2 .
4 v o ls.;
v i l l e , V irg in ia:
The M i c h i e C o m p a n y , 1 9 3 2 .
1958 S u p p le m e n t to
C h a rlo ttesн
t h e Code o f Laws o f S o u t h C a r o l i n a , 1 9 3 2 .
A c ts a nd J o i n t R e s o l u t i o n s o f t h e G e n e ra l A ssem bly o f
S t a te o f South C a r o l i n a , 1939.
.,
1940
the
407
C o r p o r a t i o n Laws o f S o u t h D a k o t a , 1 9 3 8 .
C om piled a n d I s s u e d
b y The S e c r e t a r y o f S t a t e , P i e r r e -, S o u t h D a k o t a :
H ippie
P r i n t i n g C om pany.
The Laws P a s s e d a t t h e T w e n t y - s i x t h S e s s i o n o f t h e L e g i s l a н
t u r e o f th e Sta te o f South D a k o ta , 1939.
P ie rre :
H ip p ie P r i n t i n g C o., 1939.
D o m e s t i c a n d F o r e i g n C o r p o r a t i o n Laws o f T e n n e s s e e C h a p t e r 5 ,
P u b l i c A c ts o f 1 9 3 1 , M od., C h a p t e r 1 2 , P u b l i c A c ts o f
1 9 2 9 , M o d . , C h a p t e r 1 3 , P u b l i c A c t s o f 1 9 2 9 , Mod.
P u b l i s h e d b y E r n e s t N. Has t o n , S e c r e t a r y o f S t a t e , 1 9 3 6 .
A n n o t a t e d Code o f T e n n e s s e e , 1 9 3 4 , w i t h c u m u l a t i v e s u p p l e н
m ent.
S a m u e l C. 7 / i l l i a m s , e d i t o r .
8 v o ls .; In d ian ap o lis:
The B o b b s M e r r i l l P u b l i s h i n g C o . , 1 9 3 5 .
V e r n o n *s T e x a s S t a t u t e s . 1 9 3 6 C d n t e n n i a l E d i t i o n .
C ity ;
V e r n o n Law B o ok C o . , 1 9 3 6 .
G e n e r a l Laws o f t h e
.
. . .,
o f Texas,
1937.
1939.
R ev ised S ta tu te s
C o., 1933.
Laws o f
S ta te
Kansas
the
S tate
of U ta h , 1933.
K ay sv ille:
In lan d P rin tin g
o f U ta h , 1935.
.
. . .,
S p e c ia l S essio n ,
.
. . .,
1937.
.
. . .,
1939.
1935
P u b l i c Laws o f t h e S t a t e o f V e r m o n t R e l a t i n g
P u b lis h e d b y A u th o r ity , 1934.
to
C o rp o ratio n s.
A m e n d m e n t s a n d A d d i t i o n s t o t h e P u b l i c Laws R e l a t i n g t o C o r н
p o r a t i o n s E n a c te d b y th e G e n e ra l A s s e m b lie s o f 1955 an d
1957.
A c ts a n d R e s o l v e s P a s s e d b y th e G e n e r a l A ssem bly o f t h e S t a t e
o f Verm ont a t t h e T h i r t y - f i f t h B i e n n i a l S e s s i o n , 1939.
408
V i r g i n i a C o r p o r a t i o n Law# w i t h a l l a m e n d m e n t s t o J u n e 2 1 ,
1938.
C om piled and P u b l i s h e d b y th e S t a t e C o r p o r a t i o n
C om m ission,
R ichm ond, 1938.
A cts o f th e
1940.
G e n e ra l A ssem bly o f t h e
Laws ' C o n c e r n i n g P r i v a t e
C o rp o ratio n s.
Reeves,
Secretary of S tate.
P r i n t i n g P l a n t , 193 7 .
S e s s i o n Laws o f t h e
.
.
.
.,
Commonwea1 t h o f V i r g i n i a ,
S tate
P u blished by B elle
Olympia, Washington:
State
o f W ashington. 1937.
1939.
C o r p o r a t i o n Laws o f W e s t V i r g i n i a ╗ A d o p t e d b y L e g i s l a t u r e
? S p e c i a l S e s s i o n , M arch 1930 w i t h am endm ents t o d a t e o f
Issue.
The W est V i r g i n i a Code o f 1 9 3 7 .
C om plete A n n o t a t i o n .
A. H e n s o n M i c h i e a n d C h a r l e s W. S u b l e t t , e d i t o r s .
C h a r lo tte s v ille , V irg in ia:
M i c h i e Company Law P u b l i s h e r s ,
1937.
A cts o f th e
L eg islatu re
o f W est V i r g i n i a . 1 9 3 9 .
S ta t u t e s o f W is c o n s in R e l a t i n g . to P riv a te C o r p o r a t i o n s . 1937.
P r e p a r e d u n d e r t h e d i r e c t i o n o f T h e o d o r e Dammann.
M adison, W isco n sin .
W isco n sin S t a t u t e s , 1939.
e d ito r.
F iftee n th E d itio n .
E. E. B o s s a rd ,
W i a c o n s i n S e s s i o n Laws л 1 9 3 9 .
Wyoming R e v i s e d S t a t u t e s , 1 9 3 1 .
C o u rtrig h t.
S e s s i o n Lav/s o f t h e S t a t e
.
. . ., S p e c ia l S essio n ,
.
. . . , 1935.
.
. . . , 1937.
.
. . . , 1939.
A n n o t a t e d b y W i l l i a m H.
o f Wyoming,, 1 9 3 3 .
1933.
409
B.
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A m erican I n s t i t u t e o f A c c o u n ta n ts ,
A ccounting T erm in o lo g y ;
P r e l i m i n a r y R e p o r t o f a S p e c i a l C om m ittee on T e r m in o l o g y .
New Y o r k :
The C e n t u r y C o . , 1 9 3 1 .
126 p p .
B a l l a n t i n e , H e n r y W i n t h r o p a n d G raham L e e S t e r l i n g , J r . ,
C a l i f o r n i a C o r p o r a t i o n Law, 1 9 3 8 E d i t i o n .
Los A n g e l e s :
P a r k e r a n d B a i r d C om pany , 1 9 3 8 .
639 p p .
B e n n e tt> R obert Joseph, C o rp o ratio n A ccounting.
The R o n a l d - P r e s s C o . , 1 9 1 8 .
563 p p .
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B e n t l e y , H a rry C la r k , and R uth S. L e o n a rd ,
B ib lio g rap h y of
W ork s o n A c c o u n t i n g b y A m e r i c a n A u t h o r s , 1 7 9 6 - 1 9 3 5 .
2 v o l s . ; B oston:
H a r r y C. B e n t l e y , 1 9 3 5 .
B e r l e , J r . , A dolph A . ,
F i n a n c e .. C h i c a g o :
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C a l l a g h a n a n d Company,. 1 9 2 8 .
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396 pp.
The M o d e r n C o r p o r a t i o n a n d
The M a c m i l l a n Com pany,
B uxton, J r . , Jo sep h T ., e d i t o r ,
U n i f o r m Laws A n n o t a t e d , 1 9 3 2
w ith Perm anent S upplem ent.
V o l. IX;
N o r t h P o r t , New
Y ork:
E d w a r d T h o m p s o n Company, 1 9 3 2 .
C anning, John B .,
The E c o n o m i c s o f A c c o u n t i n g .
The R o n a l d P r e s s C o m p a n y , 1 9 2 9 .
367 pp.
New Y o r k :
D ew ing, A r t h u r S t o n e ,
A Study o f C o rp o ra te S e c u r i t i e s :
T h e i r N a tu re and Uses i n F i n a n c e .
New Y o r k :
The R o n a l d
P re s s , 1934.
426 pp.
Dodd, D avid L . ,
S tock W a te rin g .
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333 p p .
New Y o r k :
Colum bia
Press.,
F i n n e y , H. A . ,
P rin c ip le s o f A ccounting.
R evised E d itio n ,
2 v o ls.;
New Y o r k :
P r e n t ic e - H a l l, I n c . , 1928.
F l e t c h e r , W illia m Meade,
C y c l o p e d i a o f :the Law o f P r i v a t e
C o rp o ratio n s.
R e v ise d and Perm anent E d it i o n ,
20 v o l s . ;
C hicago:
C a l l a g h a n a n d Company, 1 9 3 1 .
410
G ilm an, S te p h e n ,
A ccounting C oncepts o f P r o f i t .
The R o n a l d P r e s s C o . , 1 9 3 9 .
635 p p .
New York:-
G r a h a m , W i l l a r d J . a n d W i l b e r G. K a t z ,
A c c o u n t i n g i n haw
P ractice.
Second E d i t i o n ;
C hicago:
C a lla g h a n and C o.,
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5 53 p p .
' K e s t e r , Roy B . ,
A ccounting:
Theory and P r a c t i c e
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E d itio n R ev ised ,
2 v o ls.;
New Y o r k :
The R o n a l d P r e s s
C o., 1925.
K i e k h o f e r , W illiam H. , .
P o licie s.
New.'Y ork:
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The J o u r n a 1 o f A c c o u n t a n c y , LIV
(November, 1 9 3 2 ) , 3 3 6 -3 5 0 .
M orrison, P aul L .,
"R ep o rts to S to c k h o ld e r s ."
i n g R eview ,
X (M arch, 1 9 3 5 ), 7 7 -8 3 .
The A c c o u n t н
. 417
Nussbaum, A r t h u r ,
" A c q u i s i t i o n b y a C o r p o r a t i o n o f i t s Own
S to ck ."
C o l u m b i a Law R e v i e w , XXXV ( N o v e m b e r , 1 9 3 5 ) ,
971-1006.
O 'R e i l ly , M ichael J . ,
"A C o n s i d e r a t i o n o f F e d e r a l I n c o r p o r a н
tio n ."
S t . J o h n r s Law R e v i e w ,
X II (Novem ber, 1 9 3 5 ) ,
91-99.
Payne, R o b ert E .,
" A c c o u n t i n g a s A f f e c t e d b y t h e New
I l l i n o i s and P e n n sy lv a n ia C o rp o ra tio n A c ts ."
The
C e r t i f i e d P u b l i c A c c o u n t a n t , X II (November, 1 9 3 3 ) ,
669-676i
. .
. .,
" T h e E f f e c t o f R e c e n t Laws o n A c c o u n t a n c y . "
A c c o u n tin g R e v ie w , X (M arch, 1 9 3 5 ) , 8 4 -9 5 .
The
.
. . .,
"The I m p o r t a n c e o f C l a r i t y I n B a l a n c e S h e e t
D e sc rip tio n ."
The A c c o u n t i n g . R e v i e w .
V I I I (Decem ber,
1933), 292-301.
.
. . .,
" N e t W orth u n d e r th e D e la w a re a n d M i c h ig a n C o r p o r a н
t i o n L aw s."
The A c c o u n t i n g . R e v i e w , V I I I ( M a r c h , 1 9 3 3 ) ,
? 1- 10.
P i n k e r t o n , P a u l W .,
" R e c e n t C o r p o r a t i o n Laws o n S t a t e d .
C a p ita l, T re a su ry S tock, S urplus and D iv id e n d s."
N a t i o n a l A s s o c i a t i o n o f Cos t A c c o u n t a n t s B u l l e t i n , XV,Na21
S e c tlo n I ( J u ly 1, 1 9 37), 1255-1278.
R o b b i n s , James J . , " F e d e r a l L i c e n s i n g o f B u s i n e s s C o rp o ralio n s*
T u l a n e Law R e v i e w , X I I I ( F e b r u a r y , 1 9 3 9 ) , 2 1 4 - 2 3 3 .
R o b in so n , L elan d Rex,
"'Are P r e s e n t F o r m s o f F i n a n c i a l S t a t e н
m ents S a t i s f a c t o r y ? "
The J o u r n a l o f A c c o u n t a n c y , L X I I
(D ecem ber, 1 9 3 6 ), 4 2 6 -4 4 7 .
R o h rlic h , C h ester,
" T h e New D e a l I n C o r p o r a t i o n L a w . "
C o l u m b i a Law Re v i e w , XXXV ( D e c e m b e r , 1 9 3 5 ) , 1 1 6 7 - 1 1 9 5 .
R u t l e d g e , J r . , W iley B . ,
" S i g n i f i c a n t T re n d s i n M odern I n н
c o rp o ra tio n S ta tu te s ."
W a s h i n g t o n U n i v e r s i t y Law Q u a r t e r lг ,
XXII ( A p r i l , 1 9 3 7 ) , 3 0 5 - 3 4 3 .
S a n d e r s , T. H . ,
" A c c o u n t i n g R e s e a r c h : O b j e c t i v e s an d M ethods."
The A c c o u n t i n g R e v i e w , XV ( M a r c h , 1 9 4 0 ) , 7 7 - 8 9 .
.
.
. .,
"R eport to S to c k h o ld e rs ."
IX ( S e p t e m b e r , 1 9 3 4 ) , 2 0 1 - 2 1 9 .
The A c c o u n t i n g R e v i e w ,
418
F ritz,
nI s A p p r e c ia tio n P r o f i t ? "
R e v ie w , VI (D e ce m b e r, 1 9 3 1 ) , 2 8 9 - 2 9 3 .
S c h m i d t ,
The A c c o u n t i n g
S h e r e r , Hugh A . ,
"L eg al-A cco u n tin g
F e a t u r e s o f th e O hio
G eneral C o rp o ratio n A c t."
The J o u r n a l o f A c c o u n t a n c y ,
LVII ( J u n e , 1 9 3 4 ),
440-447.
.S h ie ls , John H .,
" C o r p o r a t i o n s - - L i m i t a t i o n s U pon D i v i d e n d s :
A C om parison o f th e Y /isconsin S t a t u t e s w ith th e S t a t u t e s
o f O ther S t a t e s . "
V / i s c o n s l n Law R e v i e w , V I I I ( A p r i l ,
1933), 261-265.
S i e g e l , Seymour N . ,
"S tock D iv id e n d s."
R e v i e w ^ XI ( O c t o b e r , 1 9 3 2 ) , 7 6 - 8 7 .
H arvard B u siness
S o l e t h e r , P . L . a n d E d w a r d G,. J e n n i n g s , " T h e M i n n e s o t a
B usiness C orp o ratio n A c t."
W i s c o n s i n Law R e v i e w , X I I
(June, 1937), 419-452.
S p a r g e r , C. B . ,
" P r o f i t s , S u r p l u s , a n d t h e Payment o f D i v i н
d e n d s."
N o r t h C a r o l i n a Law R e v i e w , V I I I ( D e c e m b e r , 1 9 2 9 ) ,
14-30.
" S ta tu to r y P ro v isio n s R e la tin g to T reasu ry S to c k ."
B u lle tin
o f t h e A m e ric a n I n s t i t u t e o f A c c o u n t a n t s , (Decem ber 1 5,
1938), 25-28.
S t e r l i n g , J r . , Graham L . ,
"M odernizing C a l i f o r n i a ?s C orp o raн
t i o n Law ."
W i s c o n s i n Law R e v i e w ,
X II (Ju n e, 1937),
451-472.
S t r a i n , Mryon M .,
The C e r t i f i e d
371-372.
"C o rp o rate E a rn in g s and th e S to c k h o ld e r ."
P ublic A cco u n tan t,
XI (D ecem b er, 1 9 3 1 ) ,
S w e e n e y , H e n r y W .,
"C a p ita l."
(S eptem ber, 1933), 185-199.
The A c c o u n t i n g . R e v i e w , V I I I
Thompson, R. R . ,
" C a p i t a l and Revenue P r o f i t s and L o s s e s . "
The A c c o u n t i n g R e v i e w , ' V I I ( S e p t e m b e r , 1 9 3 2 ) , 1 5 3 - 1 6 8 .
T racy, John E v a rts ,
"The E f f e c t s o f . t h e D e p r e s s i o n on
C e r t a i n Modern D e v e lo p m e n ts i n C o r p o r a t e F i n a n c e . "
M ich ig an S t a t e Bar J o u r n a l , X II ( J a n u a r y , 1 9 3 3 ), 1 2 9 -1 4 4 .
"T reasu ry S to c k ."
E d ito ria l,
The A c c o u n t i n g R e v i e w , V I I I
(Decem ber, 1 9 3 3 ),
336-339.
419
W a k e fie ld , E. E . ,
11When L a w y e r s a n d A c c o u n t a n t s D i s a g r e e . "
The J o u r n a l o f A c c o u n t a n c y ,
L V III (A u g u st, 1934) 1 1 7 -1 2 0 .
W a r r e n , E d w a r d H.
" P r o g r e s s o f Lay*r."
XXX.IV ( J a n u a r y , . 1 9 2 1 } , ' 2 8 2 - 3 0 8 .
H a r v a r d Law R e v i e w ,
W a t k i n s , Lowe,
" F e d e ra liz a tio n of C o rp o ratio n s."
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Tennessee
W einer, J . L . ,
" A m o u n t A v a i l a b l e f o r D i v i d e n d s W h ere N o - P a r
S h a r e s Have B e e n I s s u e d . "
C o l u m b i a Law R e v i e w ,
XXIX
(N ovem ber, 1 9 2 9 ) , 9 0 6 - 9 1 7 .
.
. . . , " T h e o r y o f A n g l o - A m e r i c a n D i v i d e n d Law:
A m erican
S t a t u t e s a n d - C a s e s . ? C o l u m b i a Law R e v i e w , XXIX ( A p r i l ,
1929), 461-482.
.
. . . , " T h e o r y o f A n g l o - A m e r i c a n D i v i d e n d Law: t h e E n g l i s h
C a se s."
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1046-1060.
.
. . . , a n d J . C. B o n b r i g h t ,
"-Theory o f A n g l o - A m e r i c a n
D i v i d e n d Law:
S u rp lu s and B r o f i t s . "
C o l u m b i a Law R e н
v i e w , XXX ( M a rch ,- 1 9 3 0 ) , 3 3 0 - 3 5 8 .
.
. . . , a n d J . C. B o n b r i g h t ,
"Theory o f A nglo-A m erican
D i v i d e n d Law: S u r p l u s a n d P r o f i t s . "
C o l u m b i a Law R e v i e w ,
XXX ( N o v e m b e r , 1 9 3 0 ) ,
954-985.
W e s t r u p , V i n c e n t W .,
"A C o m p a r a t i v e S t u d y o f t h e C o r p o r a t i o n
Laws o f t h e S t a t e s o f New J e r s e y , D e l a w a r e , M a r y l a n d , a n d
New Y o r k . "
New Y o r k U n i v e r s i t y Law Q u a r t e r l y R e v i e w XI
(M arch, 1 9 3 4 ), 3 4 9 -3 6 9 .
W ildm an, J . R . ,
in g R eview ,
"A S y m p o s i u m o n A p p r e c i a t i o n . "
V ( M a r c h , 1 9 3 0 ) , 44-.
The A c c o u n t н
W i l l i a m s , J r . , C. C . ,
"D iv id en d s from W asting A s s e t s ."
W e s t V i r g i n i a Law Q u a r t e r l y . X L I I I ( D e c e m b e r , 1 9 3 6 ) ,
53-62.
W inakor, A r th u r H . ,
R e sp o n sib ility ."
1934),
247-253.
" C re d ito rs P r o te c tio n and S to c k h o ld e rs '
The A c c o u n t i n g R e v i e w .
IX ( S e p t e m b e r ,
w.
rig h ts
the a d o p tio n o f a u n ifo rm c o r p o r a t io n
In t h o s e s t a t e s t h a t have r e c e n t l y a d opted a new law ,
c
-
Elw yn D a v i e s , " R e f l e c t i o n s o f t h e A m ateur D r a f ts m e n
o f t h e Ohio G e n e r a l C o r p o r a t i o n A c t . "
W i s c o n s i n Law R e v i e w .
X II (June 1937), p. 488.
388
one f i n d s
th at
th ese
law s
tend
to d e fin e
c u r a t e l y and a r e more l o g i c a l l y
th ey a re d e f i n i t e l y
the
ten d in g
term s more a c н
o rg an ized , b u t
tow ard th e
e s ta b lis h m e n t of the v a rio u s
it
seem s
th at
l i b e r a l v iew p o in t in
fin a n c ia l p ro v isio n s.
jud gm ent seem s w a r r a n t e d on th e b a s i s
It
the
T his
o f an ex am in atio n of
the
law s.
s h o u ld be p o i n t e d o u t , h o w e v e r,
the
o l d e r s t a t u t e s b e c a u s e of. l a c k o f a d e q u a t e d e f i n i t i o n o f
term s have been i n t e r p r e t e d
A stu d y
study
th ere
degree
of th is
q u ite
in c o n t r a s t .
As h a s b e e n d e m o n s t r a t e d i n t h e
sim ila rity .
' I n some s t a t e s
T h i s w i l l s h o w t h e maxim um d e g r e e
m ust be r e c e i v e d p r i o r
to
th e
be s o l d f o r l e s s
of
In o th e r
If
c o n sid era tio n
o f d isн
shares
v a lu e m ust be
sta te s
the
s h a r e s may
so r e c e i v e d
is
to be
sh a re s w ith o u t p ar v alu e
c o r p o r a t i o n may be r e q u i r e d
the c o n s id e r a ti o n as c a p i t a l ,
a p a rt of th e
and t h i s
th an p ar and th e v alu e
sta tu to ry c a p ita l.
the
p ar v a lu e o f p ar v alu e
issu an ce,
co n sid ered s ta tu to r y c a p ita l.
issu ed ,
the e x a c t
p r o v i s i o n w i t h t h e m o s t l e n i e n t p r o v i s i o n on
p o in ts.
are
in the law s;
v a r i a t i o n w i l l be shown b y c o m p a r in g t h e m o s t
the v a rio u s
co n sid ered
l i b e r a l l y b y the c o u r t s .
is co n sid era b le v a r ia tio n
c o n serv ativ e
t h a t many o f
to c o n s i d e r none
o r m ay b e r e q u i r e d t o
as s t a t u t o r y c a p i t a l ,
view
o r m ay b e
W i l e y B. R u t l e d g e , " S i g n i f i c a n t T r e n d s i n I n c o r p o r a н
tio n S ta tu te s."
W a s h i n g t o n U n i v e r s i t y Law Q u a r t e r l y , X X I I ,
( A p r i l , 1 9 3 7 ) , p . 3 1 2 , and E. M e r r i c k Dodd, J r . , " S t a t u t o r y
D e v e l o p m e n t s i n B u s i n e s s C o r p o r a t i o n L aw , 1 8 8 6 - 1 9 3 6 . " H a r v a r d
Law R e v i e w . ( N o v e m b e r , 1 9 3 6 ) , p . 3 8 .
389
req u ired
to c o n s id e r th e
c a p ita l.
the
e n tire
T h i s may be so i n
some j u r i s d i c t i o n s
s h a re s w ith o u t p ar v a lu e have l i q u i d a t i o n
some s t a t e s
tio n
are
preference;
issu ed a t le a s t the
p r e f e r e n c e m ust be c a r r i e d
through
to
sta tu to ry
the a p p l i c a t i o n o f th e s e .l a w s ,
sa m e s e c u r i t i e s
o u tstan d in g ,
in
the
if
s h a r e h o l d e r s was
shares
a c o rp o r a tio n hav in g
but i t
sta te s.
used
th e amount c o n t r i b u t e d b y th e
to be c o n s id e r e d
is
sta tu to ry
The p r i n c i p l e
c a p i t a l and w ith p a r v alu e
t h e a m o u n t was t o b e a t l e a s t e q u a l t o
re n t p rin cip le
th o u g h t
was t h a t
Thus,
and h a v in g r e c e iv e d th e
o rg an ized in d if f e r e n t
o ld er.law s
liq u id a н
c a p ita l.
same a s s e t v a l u e s , m i g h t h a v e a w i d e l y v a r y i n g
c ap ita l
even though
r e q u i r e . t h a t when s h a r e s w i t h o u t p a r v a l u e h a v н
ing l i q u i d a t i o n p re fe re n c e
the
amount r e c e iv e d as s t a t u t o r y
to d e f in e
par.
sta tu to ry c a p ita l.
The c u r н
T his
is
to be n e c e s s a ry because o f sh a re s w ith o u t par v a lu e ,
has d e s t o r te d the
o f th e m a tte r
is
th at
the
idea of s t a t u t o r y c a p i t a l .
sa m e p r i n c i p l e ;
nam ely,
th e amount c o n tr i b u te d be c o n s id e re d c a p i t a l ,
been r e ta in e d .
If
The f a c t
th at a ll
m ig h t w e ll have
t h a t m e th o d h a d b e e n r e t a i n e d many a c c o u n t н
in g an d l e g a l p ro b lem s w ould have b e e n a b o l i s h e d .
Some s t a t e s
assets
co n tro l rig id ly
to be r e c e i v e d
th at
the a g g re g a te
v a l u a t i o n and ty p e of
in payment o f s h a r e s .
p o i n t o f v a l u a t i o n one s t a t e
so
the
req u ires
a c t u a l v alu e
the
of the
Prom t h e
s to c k to be
assets
view н
issu ed
receiv ed
390
s h a l l be e q u al to
o t h e r extrem e
is
the v a lu e o f th e
the
sta te
shares
issued,
allo w in g c e r t a i n
ty p es
to be r e c e i v e d a t any a r b i t r a r y v a l u a t i o n .
shares
ed by
b ein g ab le
have
the
to a s s u re th em selv es
co n trib u ted a f a i r
i n some j u r i s d i c t i o n s
am ount.
cash,
of a s s e ts
p ric e d eterm in н
c u rre n t sh areh o ld ers
th at
not
t h e new s h a r e h o l d e r s
As f o r t h e
p ro p erty ,
type o f a s s e t s ,
or serv ices rendered
o r t o b e r e n d e r e d may b e a c c e p t e d i n p a y m e n t o f s h a r e s
so
th ro u g h th e w hole gamut o f p o s s i b l e
m ost s tr in g e n t
su b scrib er
the
I n some s t a t e s
w i t h o u t p a r v a l u e m ay b e s o l d f o r t h e
the b o a rd o f d i r e c t o r s ,
and a t
a rran g em en ts
j u r i s d i c t i o n w h ic h makes
and
to th e
I t necessary fo r
t o p a y c a s h f o r the- s h a r e s r e c e i v e d u n l e s s
the
the
c h a r te r p rovides o th e rw ise .
Thus, w ith t h e
sta tu to ry
v a r i e t y o f ways one comes t o
c a p ita l estab lish ed
on th e payment of d iv id e n d s .
th a t a leg al
surp lu s
the
of d iv id e n d s.
or net p ro fit,
law im p o ses,
A read in g
is
It
i n the
is e v id en t
n e ce ssa ry b e fo re th e
o f the
sta tu tes
rev eals
a s s u m i n g p r o v i s i o n h a s b e e n made f o r l o s s e s a n d
I f any, but
ment Is n o t n e c e s s a r i l y
tru e.
th at a ll
attem p t
is
im pairm ent,
tru e
of th e
The
surp lus
c a p ita l
is
a rath er
to view a l l
su rp lu s,
It
payment
su rp lu s.
la w seem t o a r i s e b e c a u s e
as p r o f i t.
the
d e te rm in e d b y w hatever
c o n fu s e d u n d e r s ta n d in g o f what c o n s t i t u t e s
d iffic u ltie s
th is
th e problem o f d e te rm in in g
re stric tio n s
stan d ard s
in
the co n v erse o f th e
The d i f f i c u l t y
arises
p ro fit
sta te н
because
391
o f th e f a i l u r e
to u n d e r s ta n d t h a t p r o f i t ,
Income o v e r e x p e n s e s ,
over l i a b i l i t i e s
series
is
is
n o t the
and s t a t e d c a p i t a l .
found the
d ictio n s
tal,
some
and a t th e
id ea
of th e
leaseh o ld s,
if
n o t im p o ssib le
p erm its d iv id en d s
w hile a t
su rp lu s
to
to
ju stify .
It
from th e n e t p r o f i t s
th e o t h e r ex trem e a r e
type,
or p ro fits
d iv id en d s
a risin g
of a sse ts.
the
e tc .,
is
source
sta te
(th at
w hich
earned s u r н
is,
of a sse ts} ,
su rp lu s
and s u rн
F re q u e n tly the
source of d iv id e n d s.
should be e n t i t l e d
a re from p r o f i t s
surp lu s
for
from th e b u s i н
those s t a t e s
of the
from n o n - r e c u r r in g
from c o n t r i b u t e d
the
from any s u r p l u s :
sh areh o ld ers
know w h e t h e r t h e d i v i d e n d s
p a te n ts,
As f o r
from o r i g i n a l c o n t r i b u t i o n s .
w o u ld seem t h a t t h e
is m o d ified In
the m ost c o n s e r v a tiv e
need n o t be n o t i f i e d
ju risн
The j u s t i f i c a t i o n
c re a te d by an e n tr y w r itin g up the v a lu e
sh areh o ld ers
is
im pairm ent o f c a p i н
from u n r e a l i z e d a p p r e c i a t i o n
p lu s r e s u ltin g
c ap ita l
the d e p le tio n o f w a stin g
e tc .
a lio ?/ c a s h and s h a r e d iv id e n d s
p lu s,
the
o ff fo r leaseh o ld s,
of cash or share d iv id e n d s,
ness,
c a p i t a l o r w hile
im pairm ent o f c a p i t a l
p a te n ts,
ex clu sio n of th e w rite
d iffic u lt
of a ssets ?
o t h e r e x trem e are fo u n d th o s e
j u r i s d i c t i o n s when a p p l i e d
a sse ts,
of
At one e x tre m e o f th e
th a t allo w d iv id e n d s d e s p ite
T his
su rp lu s
su rp lu s
p r o v is io n t h a t d iv id e n d s s h a l l n o t be
p a i d when t h e i r p a y m e n t i m p a i r s
im paired,
same a s
th a t Is
to
of a recu rrin g
o p eratio n ,
or so -c alled
or u n rea liz ed a p p re cia tio n
392
In re g a rd
d iv id en d s a re
to
the
issu ed ,
am ount t o be c a p i t a l i z e d when s h a r e
some s t a t e s
allo w such d iv id e n d s
i s s u e d w i t h o u t a n y e n t r y b e i n g made i n d o l l a r s
O ther s t a t e s
req u ire
to
c a p i t a l a n amount e q u a l to
sta tu to ry
shares
the c o r p o r a tio n to
to be
and c e n ts .
t r a n s f e r from s u rp lu s
the p ar v a lu e
issu e d o r th e e s tim a te d f a i r v alu e
of
the
of the
shares
w ith н
o u t par v alu e.
A d iffic u lty c lo sely rela te d
u to ry
c ap ita l
chase
its
acq u ire
Is
the e x te n t
own s h a r e s .
the
o th er s ta te s
Some s t a t e s
can h o ld the
a llo w the
the problem o f s t a t н
t o w h i c h a c o r p o r a t i o n may p u r н
s to c k o n ly to p r o t e c t
and even th e n i t
to
allo w
the
the
c o rp o ratio n
to
c o r p o r a t i o n from l o s s
sto ck o n ly f o r a lim ite d p eriod;
c o rp o ra tio n
to a c q u ir e
such sto c k
a n y s u r p l u s w i t h no r e g u l a t i o n on t h e l e n g t h o f tim e
it
from
can
be h e l d .
The l a w s d e a l i n g w i t h t h e b o o k s o f a c c o u n t a r e a s
w id ely v a rie d as
g reat-d etail
the
o th e r p ro v isio n s.
is- l i s t e d
In a few o f th e
as bein g r e q u ir e d e s p e c i a l l y
s e p a r a t io n o f th e n e t w orth a c c o u n ts ,
I t m an d ato ry f o r
the d i r e c t o r s
to
the
the
supply th e
sta te s
make
shareholders
statem en t an n u alн
sh areh o ld ers h o ld in g a c e r t a i n
s h a r e s may r e q u e s t s t a t e m e n t s .
do n o t
A few s t a t e s
w ith a d e t a i l e d and com prehensive f i n a n c i a l
ly and a ls o
I n the
b u t many s t a t e s
ev en m en tio n t h a t a c c o u n ts m ust be k e p t . -
sta te s
C o n v ersely ,
per cent of
i n some
no s t a t e m e n t i s made i n t h e la w s r e g a r d i n g
the r e n d e r -
393
Ing o f s ta te m e n ts
of fin a n c ia l co n d itio n .
o f a f i n a n c i a l r e p o r t to th e
fo r-th is
report
is th e
The i m p o r t a n c e
i n v e s to r c a n n o t he m in im ized ,
p rim a ry means by w hich th e
person can endeavor to a p p ra is e
in te reste d
the p o s i t io n o f th e
corpoн
ratio n .
Need f o r a r e v i s i o n
of co rp o rate
a n t in view ing th e rem ark ab le
p rise
to rem em ber t h a t th e
tio n of th e
sta te .
co rp o ratio n
I t d e p en d s on th e
if
is
Any r i g i d i t y
sta te
for
serio u s
serio u s
in eq u itie s
in v esto rs,
e q u ities
and l i a b i l i t i e s .
w ith the
current fin a n c ia l,
and m ethodology in v iew .
c lu d e
in the
sh areh o ld ers
to
m anagers and d i r e c t o r s
th e o th e r.
d rafted
so a s
to
the m a n ife s t
the
c o rp o ratio n
o f bo th
s h o u ld be u n d e r t a k e n
some o f t h e
law s h o u ld n o t ip s o f a c t o
law s.
c la sses,
sta te s
preн
There a re d e f i n i t e
areas
law s n o t o n ly as b e tw e e n
b u t a l s o betw een th e
on one h a n d an d t h e
The c o r p o r a t e
and
and' a c c o u n tin g te c h n iq u e
p re se n t co rp o rate
of v ario u s
pow er.
and to h o ld e rs
M erely b e c a u se
an e x am in atio n o f th e s e
of co n flict
th e
leg a l,
e n te rн
i n o u r econom ic l i f e ' and
The a n a l y s i s
have r e c e n t l y r e v i s e d t h e i r
its
or lack of a d a p ta tio n to
d iffic u ltie s
to the
im portн
f a r from s e t t l e d
a ll. to o e v id e n t need f o r a re e x a m in a tio n o f the
law s w i l l c a u se
is
p e cu lia rly a creaн
la w s h o u l d accom m odate i t s e l f
cu rren t needs.
It
grow th o f th e c o r p o r a te
O ur e c o n o m i c a n d c o m m e r c i a l l i f e
m ature and th e
law .
sh areh o ld ers
on
law s have a p p a r e n t l y n o t b e e n
give a ssu ra n c e
th at
the
in te rests
of a ll
394
p arties
w i l l be p r o t e c te d ,
d ictio n s
fo r gross
bou n d aries
the
fact
lim its
the
in eq u ities
o f le g a l conduct,
th at
to
im pose u p o n th e
law h a s ,
lack of u n ifo rm ity in
v isio n .
C learly ,
a c tiv itie s
is
p o ssib le
i n some j u r i s н
th is
of course,
are
It
eith er
b e in g due to
too b ro a d o r
sh o u ld be th e f u n c t i o n o f
c o rp o ra tio n s
c e r ta in reaso n ab le
T his
it
co m parison o f th e p r o v is io n s
is hoped,
the
focused a tte n tio n
the v a r i a t i o n
n o t so d i f f e r e n t
in
in
the
the v a rio u s
sta te s
M oreover,
present
tim e m ost b u s i n e s s e s
on an i n t e r s t a t e
se cu ritie s
o perate
a re w id ely h e ld ,
a g r e a te r degree of u n ifo rm ity .
w ill op erate
m ent to
as a re a s o n a b le
p ro tect
fle x ib ility
the
a d eq u ate
fin a n c ia l needs.
in v esto r,
o u tsid e
W hat i s
c h e c k on t h e
sin ce
th ere
as
a t the
scale
sh o u ld be
needed Is
lav/s t h a t
c o n t r o l o f- m a n a g e н
b u t a lso have a degree
of
N a t h a n W i l l i a m M a c C h e s n e y , who f a v o r s
in an ad d ress
said
th at
o f c a p i t a l doing an i n t e r s t a t e
th e power o f
to
t o k e e p p a c e w i t h c h a n g i n g e c o n o m i c and
u n ifo rm c o r p o r a t io n law ,
v a st ag gregations
on the
form s o f b u s i n e s s
such w id e ly d iv e r g e n t law s.
th eir
of
law s an d t h e n eed f o r t h e i r r e н
ju stify
and s in c e
the
p rac tic es.
R ecom m endation.
co rp o rate
is
to be p e r p e t r a t e d w i t h i n th e
in ad eq u ately d e fin e d .
sta te
it
th o se b o u n d a rie s
m in im u m b u s i n e s s
the
for
th ere
a
are
bu sin ess
th e f e d e r a l governm ent to r e g u l a t e
and
395
beyond th e power o f t h e
sta te
I t w ould a p p e a r t h a t
to c o n t r o l .
ry
th e m o st s a t i s f a c t o r y m ethod o f
o b t a i n i n g c o n t r o l a s w e l l as u n i f o r m i t y w ould be
F ed eral In co rp o ratio n
to a l l
the
co rp o ratio n s
co rp o ratio n s
b u t very
sim ple
lim ita tio n s
a ttem p t
Act o r a F e d e r a l L ic e n s e A ct t o a p p ly
in
in te rstate
comm erce,
doing an I n t r a s t a t e
ty p es
and th e n ,
for
b u sin e ss a uniform ,
t y p e o f ?i n c o r p o r a t i o n a c t ,
on th e
th ro u g h a
of s e c u ritie s
to h av e one law t o g o v e rn b o t h
w ith d e f in ite
to be i s s u e d . ^
the la rg e
The
c o rp o ra tio n
w ith a hundred m illio n d o l l a r c a p i t a l i z a t i o n
and a c o r p o r a н
t i o n w i t h two t h o u s a n d d o l l a r c a p i t a l i z a t i o n
Is n o t f e a s ib le
nor ten ab le.
The l a w u n d e r s u c h c i r c u m s t a n c e s
s a t i s f a c t o r y f o r b o th ty p es o f c o rp o ra tio n s .
c o r p o r a t i o n A ct,
c a n n o t be
The F e d e r a l I n н
a c c o r d i n g t o M i c h a e l O? R e i l l y ,
so much a p o l i c y o f p r o h i b i t i o n a n d r e s t r i c t i o n ,
guidance and le a d e r s h ip
tow ard a s t a b i l i z e d
w ould b e n o t
b u t one o f
econom ic
control.о
^ N a th an W illia m M acChesney, U n ifo rm L aw s: A Needed
P r o t e c t i o n to and S tim u lu s o f I n t e r s t a t e I n v e s t m e n t . A ddress
b e fo r e the F o u rth A nnual C o n v en tio n o f N a tio n a l A s s o c ia tio n
o f R e a l E s t a t e E x ch an g es. D en v er, C o lo ra d o , J u l y 19, 1911. p .4.
O
Lowe W a t k i n s , " F e d e r a l i z a t i o n o f C o r p o r a t i o n s . ? '
T e n n e s s e e Law R e v i e w , X I I I ( F e b r u a r y , 1 9 3 5 ) p . 9 5 ; W i l e y B.
R u t l e d g e J r . , " S i g n i f i c a n t T ren d s i n M odern I n c o r p o r a t i o n
S t a t u t e s . " W a s h i n g t o n U n i v e r s i t y Law Q u a r t e r l y , X X I I ( A p r i l ,
1 9 3 7 ) , p . 3 4 0 ; Jam es J . R o b b i n s , " F e d e r a l L i c e n s i n g o f B u s i н
n e s s C o r p o r a t i o n s . " T u l a n e Law R e v i e w . X I I I ( F e b r u a r y , 1 9 3 9 ) ,
p . 2 1 4 f f . ; E d w a r d G. J e n n i n g s , " F e d e r a l I n c o r p o r a t i o n o f ?
I n t e r s t a t e C o r p o r a t e B u s i n e s s . ? M i n n e s o t a Law R e v i e w , X I I I
( A p r i l , 1 9 3 9 ) , p . 7 10 f f .
^ M ic h a e l J . O?R e i l l y , ?A C o n s i d e r a t i o n o f F e d e r a l I n н
c o r p o r a t i o n . ? . S t . J o h n ? s Law R e v i e w , X I I ( N o v e m b e r , 1 9 3 5 ) . p . 99.
396
Many y e a r s w i l l p r o b a b l y e l a p s e b e f o r e
in co rp o rate
the
acq u ain t
to
the
fund am en tal te n e ts
th em selv es w ith
the o th e r
co rp o rate
in stru m en t in
to be
i n the
c o n flict
s t a t u t o r y law w i l l be r e c o n c i l e d . - B oth th e
law y er and th e a c c o u n ta n t w i l l f i n d
ine
the
in
it
necessary
of th e ir resp ectiv e
the
co n trib u tio n
th e i r a ttem p t to d r a f t
the
to reexam н
field s
and to
t h a t e a c h c a n m ak e
la w so a s
t o make
form o f o r g a n i z a t i o n as s a t i s f a c t o r y a s o c i a l
the
field
field
of fin an ce
of pro d u ctio n .
as
i t has
proved i t s e l f
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In d ian a p o lis:
W i l l i a m B. B u r f o r d P r i n t i n g C o . , 1 9 3 9 .
Code o f I o w a , 1 9 3 5 .
E d i t e d b y U. G.
S t a t e o f Iow a, 1935.
W hitney.
Des M o i n e s :
A c ts a n d J o i n t R e s o l u t i o n s P a s s e d a t .t h e R e g u l a r S e s s i o n o f
th e G e n e r a l A ssem bly o f th e S ta te o f Io w a , 1 9 3 7 .
.
..
. , 1939.
G eneral S ta tu te s of K ansas,
A nn otated 1935.
F ran k lin
C o rrick , e d ito r .
Topeka:
The K a n s a s S t a t e P r i n t i n g
P la n t, 1935.
S tate
of K ansas,
S e s s io n Laws, 1937.
*
??
?╗
S e s s i o n Laws,
.
..
.,
S e s s io n Laws╗ 1939.
1938.
C a r r o l l ' s K entucky S t a t u t e s .
A n n o tated B a ld w in 's
E d itio n .
C lev elan d :
B ank-B aldw in, 1936.
A cts
o f the
1936.
.
.
.
.,
G e n e ra l A ssem bly o f
1936
t h e Commonwea1 t h o f K e n t u c k y ,
'
1936-1937.
.
..
., 1938.
.
. .
. , 1940.
G e n e r a l C o r p o r a t i o n Laws o f t h e S t a t e o f L o u i s i a n a , J a n u a r y
.1 , 1938.
Batc>n R o u g e :
P u b lish e d by A u th o rity .
A cts P a s s e d by th e L e g i s l a t u r e
the R e g u la r S e s s io n , 1940.
o f th e S ta te o f L o u isia n a
at
S t a t e o f M a i n e , P f o v i s i o n s o f Law i n F o r c e R e l a t i n g t o t h e
B u s in e s s C o r p o r a tio n s . A u g u s ta , M aine:
I s s u e d from the
O ffic e o f the S e c r e ta r y o f S t a t e , 1937.
402
A cts and R eso lv es a s P a ssed b y th e B ig h ty - e i g h t h and E ig h ty n i n t h L e g I s l a t u r e s o f t h e S t a t e o f M a i n e , F r o m A p r 11 2 4 ,
1957 to A p r i l 2 1 , 1 9 5 9 .
P o rtlan d ;
A. J . Hus t i n , 1 9 5 9 .
Laws o f M a r y l a n d R e l a t i n g t o B u s i n e s s C o r p o r a t i o n s ? A n n o н
t a t e d T w e l f t h E d i t i o n , ?1937.
M cKenney W. E g e r t o n ,
ed ito r.
I s s u e d a n d P u b l i s h e d b y t h e S t a t e Tax C o m m i s s i o n
o f M aryland.
Laws o f t h e S t a t e o f M a r y l a n d , 1 9 5 9 .
B r o th e r s , 1959.
B altim o re;
King
G e n e r a l Laws o f t h e Commonwea1 t h o f M a s s a c h u s e t t s , T e r c e n t e н
n a ry E d itio n , 1952.
W i l l i a m E . D o r m a n a n d H e n r y D.
W iggins, e d i t o r s , 5 v o l s . ; B oston: W right and P o t t e r ,
1952.
A cts and R e s o lu tio n s P assed a t
s e t t s In th e Year 1955.
.
. . . , 195 4 .
,
. . . , 1955.
.
.. . , 1 9 5 6 .
.
.... . , 1957.
.
.. . , 1 9 5 8 .
.
. . . , 193 9 .
the
G en eral C o urt o f M assachuн
State of Michigan, General Corporation Laws.
Compiled under
the supervision of Leon D. Case.
Lansing:
Franklin
DeKleine Company, 19 3 8 .
P u b lic and L o c a l A c t s o f t h e L e g i s l a t u r e o f the S t a t e o f
M ichigan -Passed a t the R e g u la r S e s s i o n . 1 9 3 9 .
L an sin g:
F r a n k l i n D eK leine C o . , 193 9 .
A c t , Chapter 300 Laws of
M i n n e s o t a , 1933 as amended to A p r i l 1 8 , 1 9 3 5 .
Issued by
Mike Holm, S e c r e t a r y o f S t a t e , 193 6 .
Minnesota Business Corporation
S e s s i o n Laws o f t h e S t a t e o f M i n n e s o t a , 1937.
.
. . .,
1939.
403
C o r p o r a t i o n s C h a p t e r 1 0 0 M i s s i s s i p p i Code o f 1 9 5 0 , a s
a m e n d e d b y C h a p t e r 2 4 0 , Laws o f 1 9 3 2 , a n d C h a p t e r 3 1 ,
Laws o f 1 9 3 5 .
I s s u e d b y W a l k e r Wood, S e c r e t a r y o f S t a t e .
Laws o f t h e
S ta te o f M i s s i s s i p p i , A p p r o p r ia tio n s , G eneral
L e g i s l a t i o n and R e s o l u t i o n s , 1938.
.
.
.
. . .
.,
E x tra o rd in a ry S essio n ,
?,
1940.
1938.
G e n e r a l C o r p o r a t i o n Laws a n d M i s c e l l a n e o u s P r o v i s i o n s o f t h e .
S t a t e o f M i s s o u r i , R e v i s e d S t a t u t e s o f 1929 a n d am enda-'
to r y a c ts to 1933.
C o m p i l e d b y D w i g h t H. B r o w n , S e c r e н
ta ry of S tate.
G i l l e s p i e *s 1 9 5 7 C u m u l a t i v e A n n o t a t e d S u p p l e m e n t t o t h e R e н
v is e d S t a tu t e s o f M is s o u r i, 1929.
John P. G i l l e s p i e and
C l a u d i o r De L e t a l a , e d i t o r s .
S t. L o u is:
Thomas Law B ook
C o ., 1937.
Laws o f M i s s o u r i P a s s e d a t
1939.
the
S ix tieth
;
G en eral A ssem bly,
R e v i s e d Codes o f M o n ta n a , 1935.
5 v o ls.
H a r o l d K. A n d e r s o n
a n d C a r l M c F a r l a n d , Code C o m m i s s i o n e r s .
H elena:
S tate
P u b lis h in g C o., 1936.
L a w s , R e s o l u t i o n s , a n d M e m o r i a l s o f t h e S t a t e .of. M o n t a n a ,
2 5 t h L e g i s l a t i v e A ssem bly, 1937.
H elena: S ta te P u b lis h н
ing C o ., 1937.
C om piled S t a t u t e s o f N e b ra s k a , 1929.
C o m p i l e d b y W i l l i a m C.
D orsey.
L in c o ln , N ebraska:
S t a t e J o u r n a l C o., 1930.
C u m u la tiv e S u p p le m e n t 1957 to th e C om piled S t a t u t e s o f ?
N eb rask a, 1929.
C o m p i l e d b y Homer L . K y l e .
L in co ln ,
N ebraska:
BrOwn P r i n t i n g S e r v i c e , 1 9 3 7 .
S e s s i o n Laws P a s s e d b y t h e L e g i s l a t u r e
N e b ra sk a , 1939.
.
.
.
.,
o f the
S tate
of
1940.
S t a t e o f N evada, D o m e stic a n d F o r e i g n C o r p o r a t i o n Laws.
Comн
p i l e d b y M alcolm M cE achin,
S ecretary of S ta te .
C arson
C ity : S ta te P r in tin g O ffic e , 1937.
404
S t a t u t e s o f t h e S ta t e o f Nevada P a s s e d a t th e T h i r t y - n i n t h
S e ss io n o f the L e g i s l a t u r e , 1939.
C arson C ity :
S tate'
P rin tin g O ffic e , 1939.
B u s i n e s s C o r p o r a t i o n Law a n d R e g i s t r a t i o n o f F o r e i g n C o r p o r a н
tio n s , 1937.
C o n c o r d , New H a m p s h i r e :
D epartm ent of
S ta te , 1937.
? Laws o f t h e S t a t e o f New H a m p s h i r e
Sess i o n , 1939. -
Passed a t th e
January
??lj h e G e n e r a l C o r p o r a t i o n Law o f New J e r s e y , I n c l u d i n g a l l
S u p p l e m e n t s a n d A m e n d m e n ts t h e r e t o , t o t h e e n d o f t h e
L e g is la tiv e S e ssio n o f 1938.
P u blished under a u th o r ity
o f th e D epartm ent o f S t a t e .
R e v i s e d S t a t u t e s C u m u l a t i v e S u p p l e m e n t , Laws o f 1 9 3 8 , Laws o f
1939.
Jerom e S a r n o f f , e d i t o r .
Neward:
G a nn P u b l i s h i n g
C o., 1940.
A c t s o f t h e One H u n d r e d a n d S i x t y - f o u r t h L e g i s l a t u r e
S t a t e o f New J e r s e y , 1 9 4 0 .
of the
C o r p o r a t i o n Laws o f t h e S t a t e o f New M e x i c o , 1 9 2 8 .
C om piled
a n d A n n o t a t e d b y J u a n A. A. S e d i l l o .
S a n t a F e , New Mexн
ico :
P u b l i s h e d b y th e S t a t e C o r p o r a t i o n Com m ission.
1 9 5 8 S u p p l e m e n t t o t h e New M e x i c o S t a t u t e s A n n o t a t e d 19 2 9
C o m p i l a t i o n . W i l l i a m H. C o u r t r i g h t a n d H e n r y C. A l l e n ,
e d ito rs '.
D enver:
W. H. C o u r t r i g h t , 1 9 5 8 .
Laws o f t h e S t a t e o f New M e x i c o P a s s e d a t t h e S p e c i a l S e s s i o n
1938 and th e F o u r t e e n t h R e g u la r S e s s i o n ' 1958- 1 9 5 9 .
Las V egas:
The O p t i c P u b l i s h i n g Co.
S t a t e o f New Y o r k , D e p a r t m e n t o f S t a t e , Etc t r a c t s f r o m t h e
S t o c k C o r p o r a t i o n Law, G e n e r a l C o r p o r a t i o n Law, T a x Law,
E x e c u t i v e Law a n d P e n a l L a w , E d i t i o n o f 1 9 3 8 .
Prepared
u n d e r t h e d i r e c t i o n o f E d w a r d T. F l y n n , b y F r a n k S . S h a r p ,
C hief o f C o rp o ra tio n D iv is io n .
Laws o f t h e S t a t e o f New Y o r k , 1 9 3 9 .
J . B. L y o n P r i n t i n g C o . , 1 9 3 9 .
.,
1940.
2 v o ls.
A lbany:
405
S t a t e o f N o rth C a r o l i n a , C o r p o r a t i o n h a w s , Ch. 2 2 .
(As a m e n d e d ) , 1 9 3 5 .
R a le ig h , N orth C a r o lin a :
of S ta te ;
S t a c e y W. Wade, S e c r e t a r y o f S t a t e ,
G. S .
D epartm ent
1935. ?
1 9 5 7 S u p p l e m e n t t o t h e N o r t h C a r o l i n a Code o f 1 9 5 5 .
A nnotated.
C h a r l o t t e s v i l l e , V i r g i n i a : M i c h i e Company, 1 9 3 5 .
S t a t e o f North C a r o l i n a , P u b l i c Laws and R e s o l u t i o n s P assed
b y t h e G eneral A sse m b ly , 1938.
.
. . ?,
1939.
C o r p o r a t i o n Laws o f t h e S t a t e o f N o r t h D a k o t a :
G e n era l and
C o o p e ra tiv e . R e v ised to J u ly 1, 1925.
Issu ed by R obert
B yrne, S e c r e ta r y o f S t a te .
? S u p p l e m e n t C o n t a i n i n g 1 9 2 7 - 1 9 2 9 - 1 9 5 1 A m e n d m e n ts t o t h e 1 9 2 5
R e v i s i o n o f t h e C o r p o r a t i o n Laws o f N o r t h D a k o t a .
.
. . .,
1933 a n d 1935 A m endm ents.
.
. . .,
1937 A m endm ents.
Laws P a s s e d a t the Twenty- s e v e n t h S e s s i o n o f th e L e g i s l a t l v e
S e s s i o n o f t h e S t a t e o f North D a k o t a , 1 9 3 9 .
The G e n e r a l a n d F o r e i g n C o r p o r a t i o n A c t s o f t h e S t a t e o f
O hio. 1939.
A nn o tated .
Issu ed by E a rl G r i f f i t h , S ecreн
tary of S ta te .
C om piled S t a t u t e s
0 . Bunn.
1922.
o f O klahom a, 1921.
2 v o ls.;
In d ian ap olis:
A nnotated b y C lin to n
The B o b b s - M e r r i l l Co . ,
1 9 2 6 S u p p l e m e n t to B u n n 1s C o m p i l e d S t a t u t e s
1 9 2 1 , b y Vfox. W H o r t o n .
S tate
o f Oklahom a,
S e s s i o n Laws,
Sess ion Laws. 1929.
Session Laws, 1931.
Sess ion Laws, 1933.
Session Laws'. 1935.
1927.
o f O klahom a,
406
S t a t e ?o f O k l a h o m a , . S e s s i o n h a w s , 1 9 5 6 - 1 9 3 7 .
.
.
.
.,
S e s s io n Laws, 1939.
O regon C o r p o r a t i o n Law s, I n c l u d i n g a l l S t a t u t o r y m a t t e r r e н
l a t i n g to th e O r g a n iz a t i o n and R e g u la ti o n o f C o rp o ra н
tio n s (w ith A n n o ta tio n s ), 1936.
C om piled and a r r a n g e d
b y C h a r l e s H. C a r e y , C o r p o r a t i o n C o m m i s s i o n e r .
Oregon Laws E n acted and J o i n t R e s o l u t i o n s . Concurrent R e s o l u н
t i o n s and Memorials A d op ted , 193 7 .
1939.
:
P u r d o n 1s P e n n s y l v a n i a
1938.
76 v o l s . ;
C o., 1938.
S t a t u t e s , A n n o ta te d Perm anent E d it i o n ,
S t. P au l, M innesota:
West P u b l i s h i n g
Laws o f the G eneral Assembly o f the Commonwea 1 t h o f P e n n s y l н
v a n i a , E xtra S e s s i o n 1 93 8 .
. . . ? , 1939.
G eneral C o r p o r a t io n Law o f the S t a t e o f Rhode I s l a n d ,
C h a p t e r 2 4 8 o f t h e G e n e r a l Laws a s a m e n d e d t o 1 9 3 2 .
O ffic e o f the S e c r e ta r y o f S t a t e , 1936.
R h o d e I s l a n d G e n e r a l Laws o f 1 9 3 8 , A n n o t a t e d .
Thompson a n d T hom pson, I n c . , 1 9 3 8 .
A cts
P rovidence:
and R e s o lv e s P a s s e d b y th e G e n e ra l A ssem bly o f th e
G eneral A ssem b ly o f t h e S t a t e o f Rhode I s l a n d and P r o v i н
d ence P l a n t a t i o n s , 1939.
.
.
.
.,
1940.
C od e o f Laws o f S o u t h C a r o l i n a . 1 9 3 2 .
4 v o ls.;
v i l l e , V irg in ia:
The M i c h i e C o m p a n y , 1 9 3 2 .
1958 S u p p le m e n t to
C h a rlo ttesн
t h e Code o f Laws o f S o u t h C a r o l i n a , 1 9 3 2 .
A c ts a nd J o i n t R e s o l u t i o n s o f t h e G e n e ra l A ssem bly o f
S t a te o f South C a r o l i n a , 1939.
.,
1940
the
407
C o r p o r a t i o n Laws o f S o u t h D a k o t a , 1 9 3 8 .
C om piled a n d I s s u e d
b y The S e c r e t a r y o f S t a t e , P i e r r e -, S o u t h D a k o t a :
H ippie
P r i n t i n g C om pany.
The Laws P a s s e d a t t h e T w e n t y - s i x t h S e s s i o n o f t h e L e g i s l a н
t u r e o f th e Sta te o f South D a k o ta , 1939.
P ie rre :
H ip p ie P r i n t i n g C o., 1939.
D o m e s t i c a n d F o r e i g n C o r p o r a t i o n Laws o f T e n n e s s e e C h a p t e r 5 ,
P u b l i c A c ts o f 1 9 3 1 , M od., C h a p t e r 1 2 , P u b l i c A c ts o f
1 9 2 9 , M o d . , C h a p t e r 1 3 , P u b l i c A c t s o f 1 9 2 9 , Mod.
P u b l i s h e d b y E r n e s t N. Has t o n , S e c r e t a r y o f S t a t e , 1 9 3 6 .
A n n o t a t e d Code o f T e n n e s s e e , 1 9 3 4 , w i t h c u m u l a t i v e s u p p l e н
m ent.
S a m u e l C. 7 / i l l i a m s , e d i t o r .
8 v o ls .; In d ian ap o lis:
The B o b b s M e r r i l l P u b l i s h i n g C o . , 1 9 3 5 .
V e r n o n *s T e x a s S t a t u t e s . 1 9 3 6 C d n t e n n i a l E d i t i o n .
C ity ;
V e r n o n Law B o ok C o . , 1 9 3 6 .
G e n e r a l Laws o f t h e
.
. . .,
o f Texas,
1937.
1939.
R ev ised S ta tu te s
C o., 1933.
Laws o f
S ta te
Kansas
the
S tate
of U ta h , 1933.
K ay sv ille:
In lan d P rin tin g
o f U ta h , 1935.
.
. . .,
S p e c ia l S essio n ,
.
. . .,
1937.
.
. . .,
1939.
1935
P u b l i c Laws o f t h e S t a t e o f V e r m o n t R e l a t i n g
P u b lis h e d b y A u th o r ity , 1934.
to
C o rp o ratio n s.
A m e n d m e n t s a n d A d d i t i o n s t o t h e P u b l i c Laws R e l a t i n g t o C o r н
p o r a t i o n s E n a c te d b y th e G e n e ra l A s s e m b lie s o f 1955 an d
1957.
A c ts a n d R e s o l v e s P a s s e d b y th e G e n e r a l A ssem bly o f t h e S t a t e
o f Verm ont a t t h e T h i r t y - f i f t h B i e n n i a l S e s s i o n , 1939.
408
V i r g i n i a C o r p o r a t i o n Law# w i t h a l l a m e n d m e n t s t o J u n e 2 1 ,
1938.
C om piled and P u b l i s h e d b y th e S t a t e C o r p o r a t i o n
C om m ission,
R ichm ond, 1938.
A cts o f th e
1940.
G e n e ra l A ssem bly o f t h e
Laws ' C o n c e r n i n g P r i v a t e
C o rp o ratio n s.
Reeves,
Secretary of S tate.
P r i n t i n g P l a n t , 193 7 .
S e s s i o n Laws o f t h e
.
.
.
.,
Commonwea1 t h o f V i r g i n i a ,
S tate
P u blished by B elle
Olympia, Washington:
State
o f W ashington. 1937.
1939.
C o r p o r a t i o n Laws o f W e s t V i r g i n i a ╗ A d o p t e d b y L e g i s l a t u r e
? S p e c i a l S e s s i o n , M arch 1930 w i t h am endm ents t o d a t e o f
Issue.
The W est V i r g i n i a Code o f 1 9 3 7 .
C om plete A n n o t a t i o n .
A. H e n s o n M i c h i e a n d C h a r l e s W. S u b l e t t , e d i t o r s .
C h a r lo tte s v ille , V irg in ia:
M i c h i e Company Law P u b l i s h e r s ,
1937.
A cts o f th e
L eg islatu re
o f W est V i r g i n i a . 1 9 3 9 .
S ta t u t e s o f W is c o n s in R e l a t i n g . to P riv a te C o r p o r a t i o n s . 1937.
P r e p a r e d u n d e r t h e d i r e c t i o n o f T h e o d o r e Dammann.
M adison, W isco n sin .
W isco n sin S t a t u t e s , 1939.
e d ito r.
F iftee n th E d itio n .
E. E. B o s s a rd ,
W i a c o n s i n S e s s i o n Laws л 1 9 3 9 .
Wyoming R e v i s e d S t a t u t e s , 1 9 3 1 .
C o u rtrig h t.
S e s s i o n Lav/s o f t h e S t a t e
.
. . ., S p e c ia l S essio n ,
.
. . . , 1935.
.
. . . , 1937.
.
. . . , 1939.
A n n o t a t e d b y W i l l i a m H.
o f Wyoming,, 1 9 3 3 .
1933.
409
B.
BOOKS
A m erican I n s t i t u t e o f A c c o u n ta n ts ,
A ccounting T erm in o lo g y ;
P r e l i m i n a r y R e p o r t o f a S p e c i a l C om m ittee on T e r m in o l o g y .
New Y o r k :
The C e n t u r y C o . , 1 9 3 1 .
126 p p .
B a l l a n t i n e , H e n r y W i n t h r o p a n d G raham L e e S t e r l i n g , J r . ,
C a l i f o r n i a C o r p o r a t i o n Law, 1 9 3 8 E d i t i o n .
Los A n g e l e s :
P a r k e r a n d B a i r d C om pany , 1 9 3 8 .
639 p p .
B e n n e tt> R obert Joseph, C o rp o ratio n A ccounting.
The R o n a l d - P r e s s C o . , 1 9 1 8 .
563 p p .
New Y o r k :
B e n t l e y , H a rry C la r k , and R uth S. L e o n a rd ,
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