Styles in no-par stock laws;

              Bulletin HASKINS & SELLS 93
Styles in No-Par Stock Laws
BY JOHN R. WILDMAN
of Haskins & Sells
STYLES in no-par stock laws bid fair
to become as distinctive as those of
women's dresses or of men's clothing.
Figuratively speaking, the Delaware style
is smart, chic, and daring; that of Wis­consin
is old-fashioned, high-necked, and
conservative.
Translated into appropriate language,
the Delaware law might be said to permit
anything which finance, high or low, may
see fit to undertake. The Wisconsin law,
with slight qualification, sanctions nothing
but practices approved by sound economic
doctrine.
It is axiomatic of economic theory that
dividends may not be paid out of capital.
This proscription has been written into the
statutes of many states. The principle
has served as a basis for judicial decisions
on various occasions. The principle has
been respected by Wisconsin. It has been
ignored by Delaware in framing its most
recent law governing the issuance by cor­porations
of shares without par value.
The Delaware law permits both preferred
and common shares to be issued without
par value. It permits the consideration
received for shares to be apportioned be­tween
capital and surplus. Dividends
may be paid out of any surplus, and sur­plus
is defined as the excess of assets over
liabilities and capital stock. Depletion,
under certain circumstances, need not be
taken into consideration in determining
net profits available for dividends. These
are the salient features of the law.
The contrast with the new Wisconsin
law (July, 1927) is marked. "Any cor­poration
. . . may issue shares of stock
(other than stock preferred as to dividends
or preferred as to its distributive share of
the assets of the corporation or subject to
redemption at a fixed price) without
any nominal or par value."
"The amount of all moneys and the
money value of any services or property
paid for shares without par value as fixed
at the time of the issuance of the shares
therefor by the organizers, the directors, or
the stockholders, whichever shall have
fixed the price for the issuance thereof,
shall constitute the capital applicable to
such shares, which capital may not be
diminished by the payment of dividends."
"No dividend shall be paid by any cor­poration
until at least fifty per cent. of the
authorized capital stock has been fully
paid in, and then only out of net profits
properly applicable thereto, and which
shall not in any way impair or diminish
the capital . . . But any corporation which
has invested net earnings or income in
permanent additions to its property, or
whose property shall have increased in
value, may declare a dividend either in
money or in stock to the extent of the net
earnings or income so invested or of the
said increase in the value of its property;
but the total amount of such dividend
shall not exceed the actual cash value of
the assets owned by the corporation in
excess of its total liabilities, including its
capital stock."
Careful reading of the quotations will
show them to be highly satisfactory from
the point of view of sound procedure, ex­cept
with respect to permitting the declara­tion
of cash dividends based on an increase
in the value of property. The two sections
relating to dividends conflict. First, it is
stated that dividends may be paid only
out of net profits. Then they are per­mitted
out of an increase in the value of
property, suggesting that the phraseology