Redeemable and Convertible. Other features met in some preferred stocks are redeemability and convertibility. Preferred stock may be issued under a contract to redeem it, after a certain length of time, at a named figure—frequently par plus one year’s dividend. Redemption may be either at the option of the holder or the company. Redemption may be serial, i.e., a certain amount called at stated intervals for redemption. Preferred stock is convertible when under the contract in the terms of its issue it may be converted into some other form of ownership or obligation. Thus, provision may be made that after a certain time has elapsed, preferred shares may be converted into common according to specified rates of conversion; or conversion into bonds of the company is sometimes provided for. Many nice adjustments may become necessary from an accounting viewpoint, when redemption or conversion take place at any ratio other than book values.
Guaranteed Stock
Stock which is issued under a guarantee to pay a specified dividend is said to be guaranteed stock. Inasmuch as dividends can be declared only out of profits, a company cannot guarantee its own stock—or rather a guarantee on the company’s own issue must always be dependent or contingent upon the earning of profits sufficient for that purpose. Stock issued by one company and guaranteed by another may with strict propriety be called guaranteed stock. Thus, a large company may enter into a contract of lease with a smaller concern whereby the compensation shall be, let us say, an 8% dividend guaranteed to all holders of the stock of the smaller concern. Such a guarantee is not contingent but becomes a lien or claim on the guarantor company, regardless of the amount of its earnings.
Founders’ Stock
In England there is issued what is known as “founders’” stock, a stock preferred as to its share of dividends. Thus, a comparatively small portion of the common stock authorized might be set aside as founders’ or promoters’ shares with the stipulation that these founders’ shares shall receive a dividend out of proportion to the ratio which they bear to the total common stock. The provision might be that these shares shall receive one-half or one-third—or any other specified share—more dividends than shall be given to the common owners. Instead of being preferred stock with specified dividend rate, it is preferred over the rest of the shares of the group from which it was originally set aside but its share of dividends is dependent upon the dividends given the rest of the shares. The par value of the founders’ shares might represent only one-twentieth of the value of the rest of the group, while their share of the dividends would be, say, one-fourth as much as that of the other shares. This preference as to amount of dividends may give founders’ shares a much higher market value than the other shares. Provision is sometimes made for their redemption, as usually there is such a marked difference between their amount ratio and their dividend ratio as compared with the other shares, that dissatisfaction among the owners results. Outstanding founders’ shares may then interfere seriously with the marketability of the other shares.
Debenture Stock
The term debenture stock is applied to a class of liabilities rather than to proprietorship items. In England debentures of various kinds are frequently used. A recent book[1] thus describes them: “In Great Britain the term ‘debenture stock’ is used to designate an unsecured loan issued in irregular amounts. If the amounts were fixed and equal, the issue would be called ‘debenture bonds’ or simply ‘debentures.’ Debenture stock is a debt of the corporation and does not resemble stock as used in this country.” Debenture stock has not proven popular in this country, although used to some extent in Canada. The Public Service Commission of the State of New York defines debenture stocks as “those issued under contract to pay absolutely thereon at specified intervals a specified return.” These stocks, while usually of limited life like bonds, are sometimes “perpetual and give the holders no right to demand the repayment of their capital, and the company no right to repay it.”[2] When issued as perpetual, they somewhat resemble capital stock, as the term stock is used in this country. Because of the fixed and absolute charge for interest—or dividends as it is sometimes called—which these stocks carry, they are much more of the nature of bonds than of a stock indicating proprietorship. Debenture stocks are therefore to be classed as liabilities.
Stock of No Par Value
A characteristic of most stock is that it bears a specified par value which must be uniform for all the shares within a class. The par value of the different classes may differ, however. In most states no regulation is made of the amount of par value. A par value of $100 is customary for industrial and commercial concerns, and of $1 for mining companies. Between those limits, and even beyond them, one finds stocks of almost any par value.
In the State of New York the issuance of stock of no par value is allowed. Both preferred and common classes may be issued without par value, but if the preferred shares have preference as to assets, the certificates for preferred shares shall state “the amount which the holders of each of such preferred shares shall be entitled to receive on account of principal from the surplus assets of the corporation in preference to the holders of other shares.” With this exception, none of the certificates may express any nominal or par value and this statement of the amount of preference is regarded as an expression of par value for this purpose. Each share is equal to every other share within its class.