Aside from these market and psychologi cal considerations, theoretically the results should be the same in the long run whether the corporation gives its stockholders rights or sells at the full obtainable price. Assume in the case of our corporation that the direc tors were able to sell the stock at 133, the same price as that of the old stock. The sale of $3,000,000 of par value would then realize $3,990,000. If the corporation, as before, earns 10 per cent on the capital committed to the enterprise, net earnings will now in crease by $399,000, from $1,200,000 to $1, 599,000, or 131 per cent on the $12,000,000 of stock now outstanding. Theoretically the stockholder would be a little better off in this case than in the distribution of rights. According to our earlier calculation, if the corporation received par for its new stock, net earnings on the total stock would be 194 per cent. The corporation could carry 41 per cent to surplus and distribute 8 per cent. If the corporation could sell all the new stock at 133, it would, as just stated, be making 131 per cent on its total stock. It could carry 41 per cent to surplus and dis tribute 8.831 per cent to stockholders. A stockholder owning four shares of stock and purchasing a fifth at 100 would have five shares on which he would be receiving an annual income of $40. If he should purchase one of the new shares at 133, he would, under the conditions assumed, have five shares from which he would have an annual income of $44.161. This would be a difference amount ing to 124 per cent on his extra investment of $33. This is really, however, at the ex pense of the surplus of the corporation, be cause the 42 per cent on the stock carried to the surplus account is $540,000, but in the latter case it is on greater assets and there fore really a smaller surplus reserve.
Highly theoretical considerations of this kind, however, have little value, and we have not attempted, in the discussion at this point, to do much more than bring out that fact. The legal situations discussed are usu
ally controlling, and if they should not be con trolling market considerations would govern the decision of the directors as to the method of placing the new stock on the market.
Question may arise in the mind of some one about the rights of preferred stock holders to participate in a distribution of new stock. The New York courts, at least, have held that when preferred stock is en titled to cumulative dividends at a fixed rate and to preference in the distribution of assets, and to no further dividend or distribution, and the preferred dividends are paid and the capital of the corporation unimpaired, the corporation is not obliged to allow pre ferred stockholders to subscribe to the new stock. It hardly needs saying that the holders of convertible bonds do not have a right to subscribe to new stock. The stockholder's legal right to subscribe is limited to new stock sold for cash. The presumptive right of the stockholder does not apply to an issue of stock in payment for property.
The discussion set out in this chapter has sought to bring out the possibility of a corporation financing new capital require ments by an appeal to its own stockholders and to show the considerations surrounding that possibility. Incidentally have been mentioned as briefly as possible some legal considerations governing the issuance of new stock, which indicate that the directors of a corporation, when they contemplate financ ing on new stock, may not have a free hand to do whatever they might consider most desirable as a financial expedient. Questions arise which are matters of grave considera tion for the lawyers in charge of the legal side of the new issuance, and involve careful scrutiny of the statutes and decisions of the particular jurisdictions involved.