So the man whom the controlling minority has designated as the person for the isolated shareholder to make his proxy out to, con tinues to go annually to the legal head office of the company and vote his suit-case of proxies in favor of the prepared list of resolu tions. All this is neither in adverse nor favor able criticism of the system. Though it often works badly, it more often works well; and perhaps greater activity on the part of the isolated shareholder would not much reduce the percentage of failures. All this is a matter of common knowledge, and has been rede scribed here simply to show how the isolated shareholders, perhaps owning a large majority of the shares of the company, come to occupy the position of a silent partner in a partner ship, and add their capital to enable a con trolling group to trade on an even thinner equity than they otherwise could.
For we cannot continue to assume, as we have assumed up to this point, that any busi ness can be engaged in on a scale to suit any body's purse. It takes millions to measure the necessities of modern corporate enterprise. A group of men, having confidence in their own judgment of an enterprise, and their ability to manage it, may not, even after extending their borrowing capacity to the utmost, be able to raise enough money to engage in a particular project. They must take in part ners, that is to say, other shareholders. Yet they base their confidence in the project partly on their own ability as managers, and would not entrust their own funds in it unless they felt assured that they would continue in the management. They can at the very least practically double their own funds and corre spondingly increase their borrowing capacity without running any risk of having their management interfered with. They can do
this even if the people who take 49 per cent of the stock form a close group, concentrat ing the voting power, or control value of the stock. If they judiciously scatter the stock, they can let from 70 to 80 per cent pass out of their own possession and still run no substan tial danger of losing control.
See what this accomplishes. Assume that in a business of the kind they purpose engag ing in, it is possible to raise, say, 661 per cent of the capital on bonds. If their own capital amounts to $300,000, they can sell enough stock to realize $700,000 more, and make an investment in the enterprise of $1,000,000 represented by common stock. They can now borrow $2,000,000 more, and have en tire control of a business with $3,000,000 of invested capital, or ten times their own capi tal employed in it. If the project were one requiring at least that amount of capital, they could not have taken it up and have retained control without resorting to the corporate form. Acting as individuals, with their $300, 000 on hand they could have borrowed $600, 000 more, and had a total of only $900,000, or less than a third of the amount required. If it had been possible for them, Under a partner ship form, to raise the entire amount re quired, they could not at the same time have retained the undisturbed management. They could not accomplish anything like the same result even with the additional partners in the minority. Such partners would have an active voice in the management. Their acts, even unauthorized by the other partners, would bind the entire partnership. The corporate form, then, offers what is substantially a much enlarged opportunity for trading on the equity.