Income from preferred stock may vary in another way through a right of conversion into common stock. If a preferred stock is convertible, its holder may under certain con ditions exchange it for common stock. This is ordinarily called a "privilege" of conver sion. Since it is stipulated for and cannot be taken away, it is really a right 'rather than a privilege. It may be exercised immediately, or after a certain date, or within certain dates, according to the conditions. It may be exchangeable par for par, or in any other proportions provided. Since the right has not been given to preferred stocks nearly so often as to bonds, the conversion idea will be dis cussed more fully in connection with bonds. It is enough here to note that it is applied to stocks.,..Of course the _conversion of a pre ferred stock into common does not make nearly so great a change as the conversion of a bond into stock. As the preferred stock generally possesses equal voting power with the common, conversion of the stock would not ordinarily make any change in the quality of control, except as affected by the quantity of each class outstanding. The holder gives up a lesser risk in favor of a greater income.
The Associated Merchants Company has an issue of 5 per cent first preferred and one of 6 per cent second preferred. The holder of the first preferred may exchange into either com mon or second preferred. Dominion Iron and Steel Company has an issue of 7 per cent pre ferred, convertible at any time into common. Dominion Coal Company preferred did carry a right of conversion which expired May 1, 1910. Allis Chalmers preferred is convertible into common any first of May up to and in cluding May 1, 1921.
The element of lessened risk gives preferred stock its name. Of all the stock in the cor poration that part which is "preferred" must receive dividends to a certain amount be fore the corporation can pay any on that other part, which in distinction from the pre ferred is called "common." If the corporation has no preferred shares, its stock is still fre quently called to indicate the lack of preference. Such nomenclature, however, seems unnecessary.
If the corporation does not pay the stated rate of dividend on the preferred stock in any year or series of years, and, by stipulation, it must make up the deficiency out of earnings of later years before it can pay any return to deferred shareholders, the stock is called "cu mulative." Otherwise it is "non-cumulative." In the event of a dissolution of the corpora tion all shareholders without special stipula tion, both common and preferred, will share equally in the distribution of assets. The pre ferred stock may carry the stipulation, how ever, that preferred shareholders are entitled to receive up to the par value of their stock in any distribution of assets before the common shareholders are entitled to anything. In that
case the stock is said to be "preferred as to assets." By statute preferred stock may be preferred as to assets without such special stipulation. This is the case in New Jersey.
Ordinarily the right of control vested in preferred stock ranks equally with the amount of control vested in the common. Sometimes the control vested in the preferred is not as great as that vested in the common. Usually in such cases so long as the income stipulated for remains unimpaired the pre ferred shareholders accept a less control. If the control vested in the preferred is greater than that vested in the common, usually it is for some specific purpose; especially, the pre ferred often can veto any increase of bonds or the amount of the preferred itself. Such an extra power obviously protects the lesser risk the preferred shareholder stipulates for. It will be noted that in many cases the extra con trol represents a special caution of takers of securities issued as a result of a reorganization.
Examples of this veto power are: Atchison, Topeka & Santa Fe: A majority of all preferred outstanding must consent to any increase in preferred or to any new mort gage. (Reorganization.) Erie: A majority of all first preferred out standing must consent to any increase in first preferred or any new mortgage. (Reorgan ization.) A majority of all second preferred outstanding must consent to any increase in either second or first preferred or any new mortgage. (Reorganization.) Chicago, Great Western Railroad : A ma jority of all preferred outstanding must con sent to any increase in preferred or any addi tional mortgage. (Reorganization.) Southern Railway: A majority of all pre ferred outstanding must consent to any in crease in preferred or to any mortgage in excess of $120,000,000. (Reorganization.) Reading Company: A majority of all first preferred outstanding must consent to any increase in this stock or any additional mort gage; except that if the company paid 4 per cent dividends for two years it could issue 420,000 ($50) shares to convert the second preferred. A majority of all second preferred must consent to any increase of either first or second preferred or any additional mortgage. (Reorganization.) As examples of cases in which not a ma jority of total stock, taking all classes to gether, is necessary for action, but a majority of each class must approve, may be cited: St. Louis & San Francisco first and second pre ferred and common and Oregon Railroad and Navigation Company preferred and common. In both cases a majority of each class must consent to the issue of further stock of equal rank, or the placing of any mortgage. This, however, is the common situation.