More non-par-stock trouble;

              Bulletin HASKINS & SELLS 21
THE futility of tinkering with laws
affecting accounting without recog­nizing
and following certain generally
accepted accounting concepts is manifest
in the last amendments to the New York
Stock Corporation law in the act which
became effective May 24, 1923.
The term capital as it applies to cor­porations
is well understood. There is no
misunderstanding as to the meaning of
cash dividends. It is a principle of sound
business policy and a matter of general
statutory mandate that cash dividends
may not be paid out of capital. Yet in the
State of New York, as the law now stands,
it appears that under certain conditions
and in corporations chartered since May
24, 1923, violation of the principle is pos­sible
without violation of the law.
As the New York law stood prior to the
last amendment, dividends might not be
made except out of surplus profits arising
from the business of a corporation, nor
could a corporation divide, withdraw, or in
any way pay to any of its stockholders any
part of the capital of such corporation.
This should have been sufficiently clear
for anyone of average intelligence. Appar­ently,
however, some of the problems
created by the ill-advised New York law
authorizing capital stock without par value
in both preferred and common classes
made revision of the section covering divi­dends
seem desirable. At any rate the sec­tion
of the New York law relating to divi­dends
has been changed to read as follows:
"No stock corporation shall declare or
pay any dividend which shall impair its
capital or capital stock, nor while its capital
or capital stock is impaired, nor shall any
such corporation declare or pay any dividend
or make any distribution of assets to any of
its stockholders, whether upon a reduction
of the number of its shares or of its capital
or capital stock, unless the value of its
assets remaining after the payment of
such dividend, or after such distribution of
assets, as the case may be, shall be at least
equal to the aggregate amount of its debts
and liabilities including capital or capital
stock as the case may be. . . ."
Taken by itself and stripped of its legal
verbiage the substance of this section is
that dividends shall not be paid out of
capital, or as long as the capital is impaired.
But by the terms of the same law as
amended May 24, 1923, capital in the
case of corporations having shares without
par value may be determined in one of two
ways. One way is sufficiently sound and
tight, so to speak, to preclude any question
with regard to dividends. The other way
leaves a loophole through which it appears
to be possible to pay dividends out of
actual paid-in capital so long as a part of
such capital is technically and legally
designated as surplus.
The present law, after amendment on
May 24, 1923, relating to corporations
having shares without par value, which
shares, incidentally, may be both preferred
and common, provides that the certificate
of incorporation shall include either of the
following statements:
More Non-par-stock Trouble