If the corporation has no treasury stock at its disposal, it may, nevertheless, not have exhausted its authority to issue stock: that is, it may not have issued all the stock au thorized by the charter. If it has not, the stock not yet issued is called, as we have in dicated, "authorized and unissued stock." If the corporation has exhausted its author ity to issue stock, it must procure additional authority from the State before it can finance itself on stock. Unless the charter permitted by the law of the State gives to the corpor ation authority to sell unissued stock without first offering it to stockholders, the directors must offer the existing stockholders a right to purchase, in proportion to their present holdings, the stock about to be issued and sold. Directors who have treasury stock of the corporation available are generally not obliged to give existing stockholders a chance to purchase ahead of any one else. They can come to a fair bargain with bank ers and sell them the treasury stock. As already stated, the price need not be equal to par or it may be any price above par.
Since stock which is merely "authorized and unissued" is often called "treasury" stock, we need to emphasize the distinction. Treasury stock has been issued or "gotten out," to use a common phrase, and in some way, usually by gift, returned to the corpora tion. That is, the corporation has a right to sell the stock for the benefit of the corpora tion. The incorporators can generally get the stock issued at the time of incorporation more easily than later. Property is being turned over to the corporation for which stock can be issued in payment. It is agreed that some of the stock be given back just in order to afford the corporation the greater freedom of action in disposing of it. A corporation cannot as a general principle buy back its own stock. That would diminish the fund to which creditors have a right to look for security. As already stated stock received back by the corporation cannot be an asset, any more than a promissory note bought back by the maker before its due date is an asset of the maker. Special statutory provisions in some jurisdic tions to some extent modify the general prin ciple that a corporation cannot buy back its own stock, but even these are likely to amount to provisions for a reduction of capital stock and require essentially an amendment of the charter.
When arranging for the issuance and sale of unissued stock, the directors must first offer the stock to the existing shareholders. That requirement would not in itself irk somely restrict the management. But some jurisdictions clearly hold that existing stock holders have a right to subscribe, in propor tion to their holdings, to the new stock at par. If the stock is worth more than par, obviously a sale of new stock at par amounts to a partial distribution of surplus. Though the management may not consider such a course good policy, they cannot help them selves in such jurisdictions on a sale of au thorized and unissued stock. Since the right of the existing stockholder to subscribe at par for new stock seems in accord with the principles of the common law, the manage ment would make the offering at par unless in a jurisdiction where statute or judicial decision had established another principle.
Massachusetts, for example, by statute re quires that quasi-public corporations must offer any increase in capital stock to their shareholders at a price to be determined by the Public Service Commissioners of the State.
This necessity for offering unissued stock first to existing shareholders requires that the bankers, if they are called in, handle the situation in a special way. It may be that the management of the corporation feels it to be important that the funds for which the stock is being sold should be assured. They may not be willing to take the chance that stockholders will supply all of it. Or, if the situation is such that they might feel rea sonably confident that the appeal to the stockholders would procure all the funds, they may wish to have the whole transaction handled by those who are expert in the busi ness, and be willing to pay bankers for their services. In any event, bankers cannot make an absolute purchase of the stock on their own account unless they are ready to turn round and offer the stock to share holders at the same price the bankers have just paid to the corporation for it. If the stockholders should take it all at this price, the bankers have had their labor for noth ing. If the stockholders should not take it all, the bankers, in order to get any return for their work, would have to offer the rest to their clients at a higher price. Since such a matter as the price to the stockholders can not be kept secret, obviously the bankers would not meet with success in offering the stock to their clients at a higher price.
Under such circumstances the corpora tion, instead of arranging for an immediate sale of the stock to the bankers, gets the bankers to underwrite the issue. The terms and "underwriting," as we shall consider in a later discussion, mean various things as loosely used in current financial talk of the street. Just at this point we are using the word in its more nearly original sense in the business of insuring. The bankers, on the payment of a stipulated sum called an "underwriting commission," the equivalent in this case of a premium for insuring the success of the transaction, agree to "take up" or purchase any of the stock which the existing stockholders do not buy. Or, it may be that the corporation, after offering the new stock to its stockholders, may make a public offering of the stock. It could make a public offering, and prefer the applications of its own stockholders. In any event, the bankers agree to buy at the issue price any of the stock or other security which the corporation does not succeed in selling. Since the bankers are receiving an under writer's commission for their service as in surers, they can continue to offer the stock to their clients at the same price that the corporation was asking, and, if they are suc cessful in selling, they will have received something for the transaction.