TREASURY STOCK AND ITS TREATMENT 1. Treasury stock defined.—Treasury stock is that stock of a corporation which has once been issued for value and which subsequently has been reacquired thru purchase or thru donation or in exchange for a debt. The term "treasury stock" is frequently mis used in place of unsubscribed stock or unissued stock. Treasury stock as defined above, is an asset and rep resents value received, while unissued or unsubseribed stock does not represent value. As long as the treas ury stock is held by the corporation it does not par ticipate in dividends nor can it be voted at the meet ings of the corporation.
'Creating treasury stock by donation from the in corporatots, to whom the stock was originally issued by the corporation as consideration for the purchase of assets, or for services performed, is often made a device for giving away stock as a bonus with bonds or for selling stock below par. The laws of some states prohibit the issue of capital stock for less than \par, and where it is desired to do this, a board of directors will go solemnly thru the farce of voting to issue stock for property or for services in. greater axnount than the property or services are worth and subsequently acknowledge the donation of stock from those who originally received it. This stock the corporation may sell for any price and in that manner accomplish practically the issue of stock at a price below par.
This procedure is perfectly legal, owing to the fact that the board of directors has sole authority to place a valuation upon assets and the courts will up hold whatever valuation they do place upon assets acquired so long as no fraud can be proved.
As an illustration, let us assume that the owner of a patent organized a corporation for the purpose of working his patent and received in return for the transfer of his patent rights, $50,000 in preferred stock and $50,000 in common stock. Manifestly he is in no better position after this procedure has been effected than he was in the first place and in order that the necessary funds with which to manufacture the device may be forthcoming, he donates back to the company part of his stock to be sold for what ever price it will bring in the market. If the device
proves to be successful and in demand, the value of the remaining shares he holds will be considerably en hanced. Custom seems to have sanctioned the book ing of treasury stock at par but if it is known at the time of donation what price it will bring, the stock may be taken up on the books at the price it is ex pected to realize. The complementary credit will be either a capital surplus account, or stock donation ac count, or a reserve for working capital account. If any of the stock is sold at less than the price for which it was booked, the difference between the price at which it was taken up on the books and the sales price realized will be adjusted thru the account which was credited at the time the treasury stock was orig inally taken up in the accounts.
After all the treasury stock has been disposed of, the corporation presumably will have cash or other valuable property representing the proceeds of treas ury stock sold and the reserve account or the capital surplus account will still remain open on the books for the adjusted amount.
2. Disposition of donation reserve next question to be decided is the disposition of the credit in the reserve or donation account. There is no legal reason why this amount may not be distrib uted in the form of dividends. Since this action would defeat the purpose of the donation if it were taken during the probation period of the life of the corporation and since the donor in all probability will retain sufficient control of the corporation to prevent its disposition for that purpose, it is probakle that the surplus will not be disbursed in the form of divi dends. Some authorities suggest that the credit be used to write down the inflated assets. However, in asmuch as this would be an admission on the part of the board of directors that the assets were over valued in the first place, in all probability the board would not take kindly to this suggestion. The amount standing at the credit of the reserve or dona Lion account will therefore remain until such time as the company is in a fairly prosperous condition when the amount will find its way to surplus and ulti mately be distributed.