When a corporation has two or three classes of stock differing only in voting powers, the only pref erence consists in the voting control thus granted. Sometimes such stock is termed "voting" and "non voting" common stock. Practically the only reason for issuing a stock of such limited preference is to retain the division of authority in a partnership which is being incorporated. It may be desirable to retain the management in the hands of the senior partner, all partners, however, retaining similar financial interests.
This may be done thru the issue of voting and non voting stock.
When preferred is in the minority, and its vote would ordinarily be powerless against the control of common, it is customary to provide that certain pol icies which are vital to the interests of preferred stock holders shall not be adopted without their consent. Such matters as increasing the bonded debt, issuing additional preferred stock, etc., must often receive the assent of a certain percentage of the outstanding pre ferred to become effective.
9. Preferred stock in large industrial combines formed during the past twenty years consist mainly of holding companies of limited bonding power. The holding companies, as a rule, paid the owners of the securities which they pur chased, in bonds and preferred stocks of the combine, with a bonus of common as an inducement. Bonds and preferred stock were issued to the full demon strated value of the properties acquired, the common stock representing values supposed to reside in the good-will and in the economies of combination. The common stock was thus made to depend for its divi dends upon the realization of these anticipated econ omies. Plant owners naturally were not willing to accept such common stock for their proper ties, but were willing to take bonds and preferred stock.
In many cases, the individual plants had not been profitable, and the owners feared the competition of the new combine. They were not inclined to be over particular as to the kind of preferred stock which they received. As a result, while the original preferred issues of most of the large industrial combines are preferred as to principal and cumulative dividends, they carry but little contingent control and impose very few restrictions upon the management.
10. Issue of preferred to obtain new capital.— When preferred stock is issued to obtain new capital in the market, and is subjected to the cold scrutiny of outside investors, it becomes necessary to surround it with various forms of contingent control and special forms of protection, of which the following are the most usual: 1. Preference as to principal and cumulative divi
dends 2. No new preferred stock to be issued, except upon the vote of a large majority of the exist ing preferred 3. Bonded debt not to be increased without the consent of a liberal majority of the pre ferred 4. Preferred to participate in surplus profits 5. Preferred to have general voting power, or else power to elect a certain number of di rectors 6. Preferred to have voting power or voting con trol in the event dividends are not paid when due 7. No dividends to be paid upon common stock until a certain surplus has been created, or a special reserve fund set aside for retiring por tions of the preferred stock 8. The right of conversion into common stock upon liberal terms.
Of course, not all of these restrictions are to be found in any one issue, but usually several of them will be included in preferred that has been issued to obtain new capital.
Cumulative dividends require that if the stated divi dend is not paid each year, it accumulates in favor of the preferred stockholder and must be paid up in full out of earnings before any dividend is paid to com mon. Thus, if a preferred stock bearing seven per cent cumulative dividend had received no dividends for two years, it would have to be paid 21 per cent accumulated dividends the third year before common stockholders could expect anything.
11. Cumulative preferred stock in Canada.—The heavy capitalization of a large number of corporations, the issue of substantial blocks of cumulative preferred stock, and the decline of their profits on account of de pressed general conditions have proved an unhappy combination of circumstances for the cumulative pre ferred dividend in Canada. During the period fol lowing the outbreak of war in 1914, and also prior to that date, a large number of corporations were com pelled to pass dividends on that type of stock. The unpaid dividends continued to accumulate rapidly.
Some companies were able to pay their 'arrears by securing large war orders, but without the help of this special circumstance the shareholders would probably have had to wait still longer for their dividends.
The record of the cumulative preferred dividend in Canada has been such as to impress upon the share holder that this form of stock is frequently erratic in its dividend action, and that when buying, too much value should not be attached to the cumulative fea ture.