Corporation finance ...

Part I Capitalization Part II Distributing Securities Reorganizations By Hastings Lyon

Counselor-at-Law, New York City. Lecturer on Finance, Columbia University we CODD ——— <=

BOSTON NEW YORK CHICAGO HOUGHTON MIFFLIN COMPANY Che Viverside Press Cambridge | a ee SS. eee ey ee rie a Se

COPYRIGHT, I916, BY HASTINGS LYON

ALL RIGHTS RESERVED

The Riverside Press CAMBRIDGE . MASSACHUSETTS U e Ss ° A

Preface

SrnceE the publication of Capitalization in 1912 suggestions have been made from time to time that a discussion in the same general manner of other topics of corporation finance would be helpful to students of the subject. Messrs. Houghton Miffiin Company agreed to an extension of the work that would amount to another volume, and to a change of the title to one sufficiently inclusive to cover the new matter. So the title Corpora-~ tion Finance has been adopted for the entire - work and the new chapters are being published as Part II.

The new volume deals more especially with two topics, the distribution of corporate securities and the financial side of corporate reorganizations. It also presents some discussion of the disposition made of corporate income. Though both law and accounting must be referred to in explaining financial matters, I hold an opinion that corporation finance has a distinct channel, and that it is the duty of any one undertaking a presentation of any aspect of the subject to steer a course between the legal and the accounting sides of corporate business.

Iv PREFACE

Since Capitalization was written, I have changed my mind about the special desirability of using as illustrations existing securities and corporations, and in this second volume have confined the examples mostly to hypothetical cases. The passage of a few years, with their varying economic, social, and personal winds, makes the facts presented in an old corporation manual resemble the snows of yesterday.

The book has been written out of the experience of a number of years in association with banking houses engaged in the business of buying and selling corporate securities and as a lawyer occupied in working out the financial arrangements of corporations. It assumed form in the course of presenting the subject in courses of college and graduate students.

I hope the book will continue to be used by students of the subject, not only in the schools, but especially by the many young men engaged in financial work who find difficulty in getting help to understand the complex matter of their profession. It will be useful, also, I believe, to the large number of people who invest in corporation securities, either _on their own account or for financial institutions. The number of investors who want a thorough comprehension of what they are

PREFACE Vv doing increases rapidly. It may in some cases possibly help a lawyer to get a better understanding of the needs of his client. And all citizens who want to base on knowledge their opinion of the proper attitude of the Government toward corporations will find in the book a statement of the fundamental prin- _ ciples of corporation financing. |

In attempting a work of use to so wide a range of people, I have necessarily had to make some parts of it rather elementary for the more informed, and some parts somewhat difficult for those entirely unfamiliar with | securities. It omits many things that might properly come within its scope.

I am glad to express my appreciation of the kindness of Mr. John Tatlock, president of the Westchester Avenue Bank, in reading much of the manuscript. My partner in the practice of the law, Mr. William Lilly, helped especially with the discussion of Corporate Reorganizations. For the first volume Mr. Carl Owen, a member of the law firm of Hornblower, Miller & Potter, and Mr. Lawrence Chamberlain, of the banking house of Hemphill, White & Chamberlain, read a considerable part of the manuscript.

Hastines Lyon

37 Wat Street, New York City | August, 1916

PART I

Contents

I

Tue INSTRUMENTS OF CORPORATION FINANCE ...

How the corporate form of enterprise makes it possible to | meet the differing desires of capitalists — Corporate sec securities discussed from the standpoint-of-risk, income, e, and .

II

Capitalization in relation to earnings — Principles governing the borrowing of capital in business as applied to corporations — The common shareholder as proprietor — Borrowing limited by liability of net earnings to fluctuate — Variation of net earnings depends on the variation of gross income as related to the variation of the operating ratio — Preferred stock as a means of trading on the equity — Relative size of common and preferred stock issues as affecting the amount of control in the shares of each — How a minority of shares can control a corporation.

IIT

Capitalization in relation to assets — Common objections to stock-watering — As fraud on the buyer — As an excuse for making high charges for service — Proper purposes of stock-watering — Satisfying various interests — x CONTENTS

In carrying out underwriting operations — Why it may be more dangerous for the corporation to finance without watered stock than with it. a

IV HINANCING AN EXPANSION (2° 560000050) Ge

On common or preferred stock — Fashions in investing — Blanket mortgages — Open and closed mortgages — First and refunding mortgage bonds — Second mortgage bonds — Guaranteed bonds — Collateral bonds — Mergers — Combinations — Consolidations — Holding companies — Leases — Joint bonds.

V

AMORTIZATION 16/0050 oe eT eh

Amortization and refunding of corporate debts — Special circumstances calling for amortization — Methods of amortization — Tests of their relative merits — Serial maturity — Sinking-fund — Repurchase of the security — Burden of the debt — Best plan of amortization.

VI

Forna fogs nht igs Oe ae a8 ei ra ek tans eae een

Illustration of corporate securities — Stock certificates — Full paid — Transfer agent — Registrar of transfers — Coupon bond — Registered bond — Denomination — Interest rate — Term — Right to redeem — Interest dates — Registered vs. coupon form — Interchangeable — Taxation — Trust deed.