The St. Louis and San Francisco presents another situation. Its capitalization is: — Common $29,000,000 (paying 0) 1st preferred 4 per cent non-cumulative (redeemable) 5,000,000 (paying 4 per cent) ed preferred 4 per cent noncumulative (redeemable) 16,000,000 (paying 0) First and second preferred in this case are protected against the issuance of further se curities of equal or prior rank, by a special veto power. No such further securities can be issued without a consent of a majority of the securities equal or junior to them in rank.
The American Smelters Securities Company has standing: Common $10,000,000 (not paying) Preferred per cent cumulative 17,000.000 (paying 6 per cent) Preferred B-5 per cent cumulative 30,000,000 (paying 5 per cent) Recall that in this case the preferred stock has no voting power unless dividends for one year remain unpaid. This provision, consid ering the fact that both classes of preferred, acting together, would give a large majority, together with the fact that the stock is cumu lative, serves to protect it.
H. B. Clajlin Company is capitalized at: Common $3,820,100 (pays 6 per cent) 1st preferred 2,600,300 (pays 5 per cent) Yd Preferred 2,570,600 (pays 6 per cent) The general principle of trading on the equity goes farther in the case of the corpor ate form than in the case of an individual en gaged in a business. So far, we have consid ered the matter as if capital invested in a given business always had the same earn ing power. As a matter of fact the earning power of capital depends very largely on the ability of those controlling and administer ing the particular enterprise in which it is employed.
When an individual proprietor trades on the equity he assumes more of the risk than any one else investing capital. The exception to this general rule is the silent partner of a partnership. He invests his money in the business without assuming any power in the management, yet he assumes just as much risk on his capital as those who actively man age the affairs of the undertaking. He does this because of his confidence in the ability of the active partners in the special business. He is willing to assume a risk equal to theirs, be cause he believes they are able to make his capital return him a large income.
If we may, for an immediate convenience, use the word "uncontrolling," it is the "un controlling" shareholders who are the silent partners of a corporation. Though they are " uncontrolling," they are not necessarily the minority shareholders. They may hold, and frequently do hold, a majority of the shares of the corporation. They own the scattered shares, and the controlling shareholders own the shares that are massed. It is a well-known
fact of American finance that, if the majority shares are scattered, a rather small minority of the stock held by an individual share holder, or a little group of shareholders work ing together, can control the corporation almost as surely as if they held an absolute majority of all the stock outstanding. This works on the mathematical basis of an in verse ratio. The more shareholders there are in a particular corporation the fewer shares can control. That fact forms part of the found ation for the desire on the part of the pro moters of a corporation that the shares should be broadly distributed. If the corporation's bankers should chance to be essentially dis tinct from the promoters, their desire for a wide distribution of the shares arises from the fact that the shares probably will then be more tightly held and therefore afford a better basis for the market in the security. This is an im portant reason for seeking a wide distribution of corporate financial paper. It is another subject, however, from the one under consid eration.
We do not have to seek far for the reason why from a quarter to a third of the shares of an American corporation will usually assure control. Scattered shareholders, though own ing a majority of the stock, have no means of getting together in order to act in concert. They have no means of making their major ity effective. Since they bought their stock relying on the ability of those in control, they will continue, at least so long as the affairs of the corporation go well, to rely on the group working in concert. So long as the corpora tion pays dividends, the isolated owner of the comparatively small number of shares is likely to assume that the affairs of the cor poration are running well. When he bought his stock he had no intention of taking an active interest in the affairs of the enterprise. Frequently the periodic reports of the cor poration do not contain any really informing matter. Whether they do or not the isolated shareholders seldom take the trouble to read them, and usually would not understand them if they did. Naturally when the con centrated minority in control ask the isolated shareholder for his proxy he either does the easy, and as far as he knows the best thing, fills out the convenient blank they have sent, and returns his proxy as requested, or else he does the one easier thing, simply drops re quest and blank in the waste-basket and does not bother to send his proxy to any one. Very rarely any one outside the group in control asks him for his proxy, in fact, practically never, unless the corporation's affairs have been going from bad to worse.