Since it is the essential idea of a stock that its holders possess immediate control of the company, such securities as these are on the border-line between stocks and bonds. They help show, however, the possibilities in a cor poration of dividing and recombining the ele ments of ownership. A stock like Dayton & Michigan Railroad preferred, which carries no voting power whatever, is hardly a stock at all, but essentially an income bond.
So far consideration of particular stocks has brought out only special features of each. Several representative stocks, giving all the features of each, are: — Boston & Maine Railroad 6 per cent non-cumulative pre ferred; Atchison, Topeka & Santa Fe Rail way 5 per cent non-cumulative, preferred both as to dividends and assets, requiring consent of a majority of the preferred out standing for any increase in the preferred or any further mortgage; Interborough Metro politan Company 5 per cent cumulative, pre ferred both as to assets and dividends; Minne apolis, St. Paul & Sault Ste. Marie Railway 7 per cent non-cumulative, sharing equally with common after common pays 7 per cent; The American Cotton Oil Company 6 per cent preferred, non-cumulative, subject to call at 105; Associated Merchants Company 5 per cent cumulative first preferred (pre ferred both as to dividends and assets), con vertible at par into either common stock or second preferred.
On first thought it may appear that the only control bonds have is purely contingent. If the corporation does not pay interest the bondholders possess either a right to have a receiver appointed to manage the property in their interest, or to foreclose and sell the pro perty for their benefit; that is, they have a right to assume the entire control, but only under certain contingencies. As a matter of fact, the corporate mortgage has become a most elaborate document, and through it the bondholders secure to themselves very sub stantial amounts of actual present control. This does not mean that bondholders have a right to appear at shareholders' meetings and cast a vote in any way. The control they pos sess is of a definite kind and consists not of the right to initiate policies, but rather of lim itations, in favor of the bondholders, on the power of the shareholders. If .the corporation has only voting stock, the general law and the corporation's charter lay down the only limit ations on the shareholders' control or direc tion of the business. When the corporation
issues bonds, however, investors will prob ably insist, as a condition precedent to pur chase, on limiting within narrower lines the scope of action of the shareholders.
The very issuing of bonds is in a way a granting of control to the bondholder. It compels the shareholder to be in the position of a borrower for the term of the bonds. It gives the bondholder control to the extent that he can for a term of years insist that a certain part of the corporation's income be used in a special manner, namely, to pay in terest on his debt. If the bonds are callable the shareholder has refused to part with so large an amount of control as giving the right to the stipulated income for the maximum term involves. Suppose an issue of 5 per cent 20-year bonds callable at any time as an en tire issue at 105. In the absence of other lim itations the shareholders can by paying the amount stipulated cancel all the ownership of the bondholders.
As illustrations of the way in which a part of control may rest in the bondholder through limiting the power of the shareholder, we may call attention to several issues. Armour & Company has outstanding $30,000,000 real estate first mortgage 41- per cent 30-year bonds, due June 1, 1939. They are a first mortgage on real estate valued at $40,000, 000. The mortgage provides that the unin cumbered quick assets of the company and its auxiliary companies shall at all times ex ceed the aggregate debt of the company and auxiliary companies, including the outstand ing bonds of this issue. The company can pay dividends only from earnings made subse quent to the fiscal year ending October 24, 1908. Such a stipulation gives the bond holders a very definite share of control in the conduct of the business. Shareholders have parted with control to such an extent that they can create further indebtedness only under special conditions, namely, that the corporation has quick assets of a certain amount. They have so far parted with con trol that they cannot realize on their quick assets to an extent that will reduce them below a certain proportion.