7. Embarrassment of excess capital.—The excess capital probably cannot be invested safely and profit ably outside the business, even if power to do so exists. Either the funds must lie idle, thus depress ing dividends and encouraging extravagant manage ment, or be returned to the stockholders thru a reduc tion of capitalization, or be employed in a forced ex pansion of doubtful expediency. Such a situation is likely to discredit the management, tho it is by no means as serious as a shortage of capital. The second United States Bank failed in 1836 from the attempt to find use for its excessive capital, and a number of modern concerns owe the beginning of their downfall to the same cause. A more chronic difficulty, how ever, is the shortage of capital. Who ever knew a business man under fifty who was not short of cash? 8. Difficulties of capital shortage.—If the lower estimates are adopted and full-paid stock issued ac cordingly, the company may later find itself em barrassed on account of lack of funds with which to complete the undertaking. The failure to provide adequate capital will then reflect unfavorably upon the enterprise and cause distrust of the management. The stockholders cannot legally be called upon to pay more on their full-paid shares and may not be willing either to authorize or to purchase additional stock. Their distrust will naturally spread to outside inves tors and to the banks.
Under such conditions, if additional funds are pro cured at all, it will probably be on most unfavorable terms, such as will permanently injure the credit of the company and discredit the management. The fear of loss easily stampedes the investment and loan market, even if based upon nothing more serious than the failure of the management to estimate correctly and provide adequate capital in advance.
0. Remedy found in part-paid stock.—To provide against such exigencies, part-paid or assessable stock is sometimes issued. A typical certificate of full-paid and non-assessable common stock appears upon the following page. The term "assessable stock" means merely that the stock is issued before its full par or stated value has been paid to the company, part being paid at the time of issue and the balance being payable on stated future dates or upon the call of directors. Certain restrictions may be placed upon these calls, as, for instance, the requirement that the directors shall not call more than ten per cent in any one month, but in any event the stockholder is not liable for more than the par or stated value, and the stock becomes full paid and non-assessable when the par or stated value has been paid. The certificates representing assessable stock are supposed to indi cate that fact, and may or may not show the amount paid upon the stock or the amount still subject to call. The full par value of the stock may never be called if not required.
The uncertainty of the demands that may be made upon stockholders in the future renders assessable stock unpopular with investors. A stockholder may lose his stock entirely inability to meet an assess ment, or he may hesitate to pay an assessment, fearing that the condition of the company is unsound. If
this fear is justified, to pay the assessment may be only to send good money after bad. And yet there is the hope that additional funds may enable the com pany to survive. What shall he do, pay or refuse to pay? Only a few weeks before this chapter was writ ten, the writer was under the painful necessity of ad vising a young man who had purchased ten thousand shares of stock at twenty-five cents a share to forfeit his stock rather than meet another assessment of ten cents a share which the directors had just levied. In this case investigation proved that the mining com pany needed an undertaker instead of additional cap ital. It should be noted that the predicament of the stockholder would have been about as serious had the company been good, but he unable to find a market for the shares or to raise the funds required to meet the assessment. Those who do not pay such assess ments are usually shut out by judicial sale in favor of a syndicate representing those who do pay.
10. Paying for stock in instalments.—Assessable stock should not be confused with subscriptions paid by instalment. The investment of capital funds is a gradual process usually, and the corporation does not require all of its subscribed capital at one time. It may take, for instance, two years to construct and place in operation a steel mill, during which time the construction will be paid for as rapidly as com pleted. Working capital may not be required until the plant begins operation. Nevertheless, stock sub scriptions are taken in the beginning for the full cap ital, with the intention of issuing full-paid and non assessable stock. Obviously, gradual payments upon these subscriptions will not inconvenience the com pany, while investors may be more easily interested if the stock can be paid for out of their incomes on the instalment plan,. This is particularly true of small investors, who are afraid of assessable stock but will buy non-assessable shares on the instalment plan. One instance is recalled in which subscriptions were payable 20 per cent down and 20 per cent every four months.
When payments are arranged on this plan, interest is often allowed on them from the date made until the full subscription is paid and the stock issued, when the regular dividends begin to apply. The better practice, however, is to issue full-paid stock to the extent of each payment as made, the regular dividend rate applying thereon from the date issued, so that the amount of stock issued by the company at all times agrees with the amount received upon subscriptions. When the company desires for some good reason to withhold issuing certificates until subscriptions have been paid in full, interest should be paid at the same rate as the prevailing rate of dividend, if possible; otherwise, at the current rate of interest for short term notes. The usual reason for withholding the issue of certificates is to support the market for the stock, which might otherwise be broken by a flood of selling offerings interfering with the further collection of subscriptions and the trade credit of the company.