Of course, a contract to buy or sell unissued shares at less than par cannot be enforced, since it is ultra vires on the part of the corporation. If executed on one side, however, the courts will usually compel per formance by the other, or a reinstatement of the par ties to their original position. Thus, if a subscriber has paid for stock at less than par, under the terms of the contract, and a subsequent officer refuses to issue the certificate, the court will ordinarily compel the company to issue the certificate upon payment of the real balance due, or return the money of the Subscriber and cancel his subscription.
Since promoters rely mainly upon watered stocks for their compensation, it is evident that a strict en forcement of the rule that stock must be paid for at par, in actual value, would prevent the promotion of many new enterprises.
8. Intangible property as a basis for watering stock.—Patents, trade marks, and good-will are per sonal property. Intangible assets of this nature pos sess such uncertain values, that directors are safe in issuing almost any amount of stock in exchange for them. Who would undertake to prove, for instance, that the patent processes and good-will of the ten steel companies, whose control was acquired by the United States Steel Company, were worth less than the half billion dollars par value in common stock issued for them? The law permitted the Steel Company to ac quire the stock of other companies, and the directors of the Steel Company were under the necessity of fixing a price upon the value of the shares to be ac quired. A large part of this value arose from the possession of intangible assets of problematical value.
9. Capitalization of patent rights.—No one can foretell the value of a patent. A new invention may at any time be superseded, or it may be annulled in court for infringement. The protection which it af fords is limited by law to seventeen years, and its value as a patent expires with this protection. The entire value of a patent, and oftentimes of the capital invest ment required to exploit it, disappear when the pro tection afforded by law ceases.
It is plain that the value of any patent actually de pends upon the profit which results to the company from its use or possession. The cost of acquiring, pro tecting and exploiting the patent are elements in fluencing its value, and the shorter its period of life the smaller will be the product and the greater will be the unit cost of production. Therefore, any time
lost in taking advantage of a patent, or time and money lost in establishing its validity, or fighting in fringements, materially affects its value as an asset. These factors cannot be foreseen, and no one, there fore, knows the value of a patent.
One of the world's greatest inventors, who has since died, a few years ago patented a device and organized, to exploit it, a company capitalized at $1,500,000, practically all the stock of which was issued to him for the patent. The company then succeeded in borrow ing $100,000 working capital from a bank. The only real capital of the concern consisted in the borrowed money, and upon this beginning a small and fairly prosperous business has been erected. And yet in the city of Pittsburgh, three men of mechanical genius, but limited means, have perfected and pat ented a similar device, superior in every way to that of the great inventor, but having, as yet, no financial backing. What is the relative value of these two patents ? In the one case a bank, with almost criminal care lessness, loaned $100,000 of its depositors' good money upon the strength of a patent which had not yet demonstrated its success and which is now super seded by a better device. The loan was really based upon the reputation of the inventor and the bold front of a prominent attorney. On the other hand, the in vention of the three mechanics, altho now several years old and rapidly approaching expiration, has repre sented nothing but expense and trouble to them, the difficulty being that they are themselves financially unable to produce and market the device and yet are unwilling to sell at a sacrifice price to those who have adequate capital. No patent, as a rule, can be mar keted for a large sum until it has been thoroly demon strated, and these three gentlemen are not able to in vest the capital required to properly demonstrate their invention. As each year elapses, their expense grows greater, and the value of their patent becomes less. The capitalization of patented processes, unseen nat ural resources and good-will at excessive values is the most ordinary form of "painless dentistry" used to extract safely the savings of the unwary.