It is becoming more and more the practice of cor porations to enlist the interest of their employes in the welfare of the concern by giving them an oppor tunity to become stockholders. When this is done, subscriptions are usually taken which are payable in small monthly instalments. Interest is allowed on the partial payments, and when the amount sub scribed has been fully paid, stock certificates are issued.
11. Stock notes.—It appears to be illegal in many jurisdictions for a corporation to accept the note of a subscriber as full or part. payment for stock, par ticularly unless the issue of certificates is withheld until the note has been paid. A note is not payment, but a promise to pay. It can hardly be construed to fulfil the statutory requirement that stock shall not be issued until it is paid for.
If no stock is issued against it, such a note should be entered and considered as a mere accommodation to the company on the part of the subscriber, and not a settlement for stock. The note may in this manner be taken, indorsed and discounted without fear of exceeding corporate powers or violating the law. When it is paid, the accommodation is automatically discharged and stock may be issued.
When such notes are taken in exchange for stock, contrary to the intent of the law, banks with a knowl edge of the circumstances should not discount them, for they may prove to be uncollectible. The courts of most states, however, enforce the payment of such notes, and, when stock may be legally issued for property other than cash, the subscriber may apply in payment of subscriptions the notes and bonds of other companies which he owns, if the directors will accept them. The issuance of stock notes is always of doubtful financial expediency because of the legal dif ficulties surrounding their use.
12. Treasury stock.—It is well to indicate at this point the difference between certain terms that are often confused. The following terms should be clearly distinguished from one another: (1) Author ized Stock, (2) Issued Stock, (3) Stock, (4) Treasury Stock, (5) Bonus Stock.
The "authorized stock," as already stated, consists of the number of shares, or the total par value of shares, which the company's charter permits it to issue. The issued stock consists of that portion of the author ized capital represented by outstanding certificates. The technical point should be noted that stock which has not been issued may have been paid for. The term, "issued stock," refers to the certificates actually issued, and not to stock subscribed and paid for. But the term, "outstanding stock," more properly applies to the actual amount of stock that has been paid for, whether certificates have been issued or not, since the certificate is not essential to the ownership of the stock. "Unissued stock" is merely that part of the
authorized issue not represented by outstanding cer tificates. Issued stock plus the unissued stock equals the authorized stock. It is customary for paid or outstanding stock to be issued immediately.
Unissued stock is frequently confused with treas ury stock. Treasury stock consists of shares which have been paid for and issued by the corporation and have come back into the possession of the company by purchase or gift. In most states companies are per mitted to buy their own shares and to receive their own shares in gift. Unissued stock can be sold only by the corporation for its par value in cash, property or services. But treasury stock may be sold at any price, or given away, if desired, since it has already been once legally paid for and issued. Treasury stock, as we shall see, is frequently acquired by the corporation at a nominal price from promoters who have purchased it originally from the company in ex change for greatly overvalued property or services. Having been legally issued in this manner as full-paid stock, and returned to the treasury of the company, such shares are at the disposal of the officers to be given away with bonds or preferred stock, as an in ducement to investors.
When stock is given out in this manner, to assist in securing additional capital, it is called bonus stock. Treasury stock need not necessarily be used for the purpose of paying bonuses, but may be sold for cash to secure working capital.
Unissued stock, on the other hand, cannot be legally given away as a bonus. But note how easily the rule is thwarted. The corporation has power to borrow on whatever terms it is able to procure, and therefore, to sell its bonds at any price. All that is necessary, therefore, to legalize the stock bonus is to offer the stock and bonds together at a lump sum, inferring a discount on the bonds equal to the par value of the accompanying stock. In other words, the amount of stock given with the bonds is treated legally not as a bonus, but as a reduction in the selling price of the bonds. For example, if a company desires to market debenture bonds, and is only able to do so by giving a 25 per cent bonus in common stock, it will legally accomplish this by selling to the investor $250 in com mon stock at par and $1,000 in its debenture bonds at seventy-five, receiving in exchange one thousand dol lars in cash. This is really giving unissued stock as a bonus, without receiving payment at par, but the books should show that the discount is upon the bonds and not upon the stock, in order that the law may be satisfied.