Every certificate of such stock must bear plainly on its face the number of shares which it represents and the number of shares the corporation is authorized to issue. Regardless of the price paid for a share of such stock, all shares issued by the corporation shall be “deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or its creditors in respect thereof.”
To the heedless a named value on a certificate of stock is sometimes misleading as to the real value of the stock. The no-par-value stock overcomes this in that a prospective purchaser is at once put on his guard to find out the worth of the stock. Another advantageous feature is that the questionable practices sometimes indulged in of booking stocks sold at a discount have no place here because the stocks, having no par value, cannot be sold at a discount and the record of their sale will carry therefore the price at which they were sold. Some points in connection with booking this stock will be discussed later.
Watered Stock
So-called watered stock is stock which has a higher nominal value than the true value of the properties for which it has been issued. Thus, if $1,000,000 worth—par value—of stock is issued for the purchase of property which has a marketable value of only $750,000, the stock is said to be watered to the extent of $250,000. The bookkeeping equation requires that an equality be shown between the properties purchased and the par value of the stock, and this is usually done by inflating the value of the properties when they are brought onto the books.
Treasury Stock
Treasury stock, when the term is used properly, is stock which has been once issued as fully paid and which through purchase or gift comes back into possession of the issuing company. Stock which has never been issued should not be called treasury stock. The distinction between the two lies in the liability (or freedom from it) to further contribution, in case of need to meet the claims of creditors, on the part of stockholders who have bought their shares at less than par value.
In some states the sale of stock at less than par is forbidden. In those states where the practice is allowed, the purchaser of a previously unissued share at less than par is liable to the creditors (if the assets are insufficient to satisfy their claims) for a further contribution equal to the difference between par value and the price paid for the stock. If, though he pays less than par, the stock is issued to him by the corporation as fully paid and non-assessable, he is not liable to the corporation for any further payment to entitle him to all the rights and privileges of a shareholder; but he may be liable in case of need to outside creditors who have a right to expect always that assets of equal value to the stock issued therefor have come into possession of the corporation. As mentioned above, this trouble is obviated in the case of no-par-value stock. However, after stock has once been paid for in full, all future purchasers may hold it without liability for further contribution regardless of the price they pay for it. Because of its freedom from this liability, treasury stock has a readier marketability than unissued stock.
In some enterprises, particularly those of a speculative character where it is extremely difficult if not impossible to place a true valuation on the property to be used or exploited, the practice is very prevalent of issuing the entire authorized capital stock in payment for the properties to be acquired. The stock so issued thus becomes fully paid and its owners liable to no further contribution. To provide working capital, some portion of the stock is usually donated to the company for resale. This is sometimes called donated stock and is, of course, true treasury stock. In states where a corporation is permitted to buy its own stock, treasury stock may be acquired by purchase. Theoretically, stock which has been issued under a contract providing for redemption becomes treasury stock when redeemed and may be reissued until it has been canceled through charter provision to reduce the capital authorized. (See also pages 15, 16.)
Forfeited Stock
Stock is said to be forfeited through failure to make the agreed purchase payments on it. The laws of the different states vary with regard to the conditions under which stock may be declared forfeited. In some states the instalments paid on the stock—or all but a small amount to cover the cost of handling the transaction, or a specified portion of the amount paid in—must be returned to the purchaser. In others, the entire amount paid in may be declared forfeited. In the State of New York the provision in the law is as follows: “If default shall be made in the payment of any instalment ... the board may declare the stock and all previous payments thereon forfeited for the use of the corporation, after the expiration of sixty days from the service on the defaulting stockholder, personally or by mail directed to him at his last-known post-office address, of a written notice requiring him to make payment within sixty days from the service of the notice at a place specified therein, and stating that, in case of failure to do so, his stock and all previous payments thereon will be forfeited for the use of the corporation. Such stock, if forfeited, may be reissued or subscriptions therefor may be received as in the case of stock not issued or subscribed for. If not sold for its par value or subscribed for within six months after such forfeiture, it shall be canceled and deducted from the amount of the capital stock.” The provisions are very specific and must be carefully followed. The method of accounting is given on page 19.