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WITH SUGGESTED BIBLIOGRAPHY
The habit of searching for truth and of energizing it, of marshalling facts in logical order and of extracting a principle, of seeing where that principle can be applied and of applying it, is the real goal of education. Ladling science, Laputa-wise, into the brain of a student to save time is as harmful as ladling soup into his gullet to save teeth. To save our teeth we must use them; to know truth we must find it; to win in the long struggle of life we must struggle until we love the struggle. All these seeming paradoxes are equally true. Education should not-indeed, cannot-be made easy.
The purpose of this book is to provide a field for vigorous training in finance. It can best be used with an instructor to drive and to guide. The lash of the interrogation should be constantly felt by the student, especially where the aim is utilitarian. He who can give the reason for the difference between one form and another when both seem to have the same general purpose, who can discover a general principle involved in a given excerpt, will have a training far more useful than that of the student who has the principles supplied to him predigested. What would happen if this paragraph or this sentence were omitted ? If a corporation acquired property or lost property or sold or exchanged property, what effect would this provision have on its stockholders or its creditors ? Can you think of a method whereby the directors can evade the limitations placed on them by this provision? How have the drafters of this agreement anticipated such a method of evasion and provided against it? If the figures were thus and so instead of those given, would the plan have to be changed ? Questions such as these should constantly be asked and answered.
No claim is made that the order of presenting the various forms and reports is the best possible order. Indeed it will be found necessary to refer to different parts of the book adequately to conquer any given subject. The question of bonds, for example, will probably be discussed in full in connection with the Jones-Laughlin Steel Company mortgage, but many other parts of the book will be used for collateral reading, for example, the certificate of incorporation of the Atchison, Topeka & Santa Fé Railway, the plan of readjustment of the Hudson & Manhattan Company, the bond circular of Spencer Trask, etc. The parts of the book, therefore, have not been numbered. It will be found, however, that in general the following order has been observed: Kinds of business associations; organization and legal management of corporations; kinds of stock and rights of stockholders; corporate bonds, notes and mortgages; control of the issue of securities by the State; sale of stocks and bonds to stockholders and to the public; prospectuses; Wall Street market; promotion; intercorporate relations; financial management and provision of working capital; readjustments and reorganizations.
A brief commentary on each form will aid the student in preparing his work. First of all be it said that with hardly an exception these forms and reports have been used in actual practice. In a very few cases, where personal relations are involved, the names have been changed, but in most cases the originals have been faithfully reproduced.
The partnership agreement (p. 1) with which the book opens was drawn by a firm of New York lawyers and was used for a period of over ten years. The names have been changed. The certificate of limited partnership (p. 4) is interesting because it illustrates a form of business association which is growing in favor in this country, and has been extensively used in Germany. It is a product of the civil law and was first adopted into the common law in the United States by the State of New York. The joint stock company articles (p. 6) are not very important in present-day finance. The most important joint stock companies at present are the large express companies. The so-called “Massachusetts Trust” (p. 11) has been extensively heralded in certain quarters as “an effective substitute for incorporation,” giving the benefits of incorporation without the concomitant disadvantages of public interference. One of the most important Massachusetts Trusts in existence is the New England Investment and Security Company, which is one of the financial corporations of the New York, New Haven & Hartford Railroad system. A complete legal explanation of the Massachusetts Trust is contained in a book entitled Trust Estates as Business Companies, by John H. Sears.
In the chart showing the legal attributes of the various forms of business associations (p. 22) the most important attributes only have been included. A working explanation of the legal problems involved can be found in any elementary book on commercial law.
The New York classification of corporations (p. 24) does not follow the old classical classification into corporations sole and aggregate, etc. It does, however, give the modern practical classification. Notice that in the business man's language the words “public," "quasi public” or “public service” and “private” are frequently applied to corporations. These words correspond closely to "municipal,” “transportation" and "business” as used in the statute. The statute takes to cognizance of the classification of corporations on the basis of products produced, e. g., railroad, public utilities, mining and lumbering, real estate and industrial. This classification, from the standpoint of finance, is most important and could be carried out with more detail to advantage.
The early corporations were formed under special act of the legislature. The constitutions of most States now provide that the legislature cannot create corporations by special act (p. 26) "except in cases where, in the judgment of the legislature, the object of the corporation cannot be attained under the general laws." (Constitution of the State of New York, Article 8, Section 1.) The object of this provision undoubtedly is to prevent the creation of such banking companies as Aaron Burr's Manhattan Company. Notice that the legislatures frequently give special charters to philanthropic institutions and to business concerns which are to carry on several businesses that would necessitate incorporation under two different general acts.
At this time, when France, Germany and England are at war, as they were one hundred years ago, the first general corporation law (p. 31) is doubly interesting. The belligerents in that day had as little respect for the rights of others as they have at this time. Unfortunately-or perhaps fortunately-America was the principal victim. The Berlin and Milan decrees and the Orders in Council produced in America a famine of European manufactures, and everywhere the cry was for "goods made in America.” New York did its share by providing an easy method for the incorporation of manufacturing corporations. (For a history of the general corporation acts
( in the United States, see Kent's Commentaries, Volume II, page 272. For a general history of corporation laws, see Machen's Modern Law of Corporations, Chapter I.)
While the Illinois law (p. 34) has been given in the book, the laws of the State in which the students reside should generally be studied in relation to the organization and legal management of the corporation. A convenient and inexpensive book is Where and How, published by the Broun-Green Company, New York (fifty cents). It gives a digest of the corporation laws of the nine most important incorporating States with outlined forms of certificates of incorporation, object clauses, etc. The charted digest (p. 51) of corporation laws may well be used as the basis of the question of where to incorporate.
One of the remedies proposed by the Federal Railroad Securities Commission (see report of November 1, 1911) for the evil of stockwatering was the plan for the issuance of shares of stock without par value. Shortly afterwards the State of New York (p. 43 and p. 47) passed a law providing for the formation of corporations issuing stock without par value. The method of determining the amount of stockholders' income, stockholders' liabilities, etc., under this statute should be carefully observed.
The Atchison, Topeka & Santa Fé charter (p. 54) is a good example of a charter procured through reorganization. Notice the vetoing power of the preferred stock and the use of "adjustment income bonds. For an account of the reorganization see Stuart Daggett's Railroad Reorganization, Chapter VI.
The United States Steel Corporation (p. 59) is the largest industrial in the world. It was originally formed as a $3,000 company in order that contracts could be made before the news of the creation of the gigantic corporation got abroad; but within a few months the capital stock was increased. The corporation has been written up a number of times. See Wilgus' United States Steel Corporation, Report of the Commissioner of Corporations, and the report of the Stanley Committee of Congress.
The bylaws of the United States Steel Corporation (p. 66) are not unusual. The student will do well to make a chart showing the relation of the committees and officers to each other. Section 8 of Article 2 is worthy of special study. For a study of the legal principles involved, see Machen's Modern Law of Corporations, Chapters XXIV, XXV and XXVI. See also the account of the United States Steel Corporation bond conversion, Chapter VIII of Ripley's Trusts, Pools and Corporations.
The minutes of organization meetings (p. 80) must always be drawn up with the utmost care. Important property rights are usually at stake and frequently become involved in litigation, the outcome of which depends on the care with which the minutes have been drafted.
It has been brought out very clearly in recent investigations that one company can control another without owning fifty per cent of its stock. The reason for this is to be found partly in the American system of sending out notices of meetings, attaching thereto proxies directed to persons associated with the management (p. 88). These proxies are returnable in envelopes addressed to the company and properly stamped. Thousands of stockholders in this way, without questioning the expediency of the appointment, regularly send in their proxies to persons in control.
The care with which notices of meetings (p. 89) are drawn up is very important. An improper notice may invalidate subsequent ac