Corporations are not authorized, except under unusual circumstances, to sell shares of stock below par. There is, however, no legal objection - again with minor exceptions - to selling shares which may have a market value higher than par, at par or at any price above par. The law looks only to the formal, theoretical requirement that the nominal value of a share of stock shall correspond to the amount of cash or property received in payment therefor.

It follows that, whenever the stock of a corporation has a market value well above par, the corporation may issue shares below the market value and give a privilege, which is valuable to their previous shareholders, to purchase the new issues of stock at some arbitrary price well below their market value. The grant of a subscription privilege or "right," as it is customarily called, is one of the highly valued perquisites of stockholders in large and successful enterprises.

There are at least three possible objects that may be in the minds of the directors of a corporation when they decide to grant a subscription privilege to their shareholders:

1. It may be their chief object to raise additional capital by the sale of more stock in the easiest and least expensive way; in which case the subscription privilege will probably name a price not many points below the market price of the stock.

2. The directors may desire to give a special concession in the nature of a dividend to their stockholders at the same time that they raise some additional capital. In this case the subscription price will probably be fixed at a margin of several points below the market price.

3. The directors may wish to increase the outstanding stock of the corporation more rapidly than the earnings are increasing; in other words, they may desire to "water" the capitalization to a moderate extent, and at the same time to raise some additional capital. In this case the subscription price is likely to be far below the normal market price.

Of course, it is common to find these three motives mixed in varying proportions in the directors' minds. It is clear, however, that in either case one consideration is the belief that fresh capital can be advantageously used in the enterprise. For that reason, we will consider the subscription privilege in this chapter as if it were primarily a means of securing fresh capital. It will be referred to in its other aspects in later chapters.

In the remarks above, it has been assumed that the subscription privilege is given .exclusively to common shareholders and applies to additional issues of common shares, which is the ordinary situation. However, it is not at all the necessary situation. Under some exceptional conditions - depending on the terms of their contract with the company - the preferred shareholders may enjoy some subscription privileges. Furthermore, the privilege may be granted not only in connection with the purchase of new common shares, but in connection with the purchase of new preferred or of obligations.

Following is the form in which a "right" was granted some years ago to shareholders in the Union Pacific Railroad Company to subscribe at 90% for 4% convertible gold bonds of the company, the market price of which was somewhat above 90:

Warrant $.......... No..........

For Subscription to Twenty-Year 4% Convertible Gold Bonds.

Union Pacific Railroad Company Office of the Treasurer, 120 Broadway.

New York, N. Y., May 31, 1907.

This is to Certify that..........................., or assigns, is entitled to subscribe at 90% for...........

....................dollars, face value of the Twenty-Year 4% Convertible Gold Bonds of Union Pacific Railroad Company, to be issued in accordance with resolutions of the Board of Directors adopted May 9, 1907, upon surrender hereof, at this office, on or before July 10, 1907, and subject to the adoption of a proposed amendment of the articles of incorporation of the Company at a special meeting of the Stockholders called to convene June 15, 1907.

Payment of such subscription must be made as follows:

Per $1,000 bond

Per $500 bond

At the time of making subscription, on or before July 10, 1907............

$200.00

$100.00

On or before August 9, 1907..

200.00

100.00

On or before September 10, 1907 (which includes adjustment of accrued interest)...................

505.42

252.71

Subscriptions may be paid in full at the time of making subscriptions, on or before July 10, 1907, in which case the amount payable will be $901 per $1,000 bond, or $450.50 per $500 bond, including accrued interest.

This warrant must be returned to this office on or before July 10, 1907, accompanied by the payment of the first instalment; and if not so returned with such payment on or before said date will be void and of no value.

Failure to pay the second or third instalments when and as payable will operate as a forfeiture of all rights in respect of the subscription and the instalments previously paid.

On the back of this warrant are two forms: the first to be signed when subscription is made, and the second, which is an assignment requiring a witness, to be signed if the privilege is disposed of.

................................Treasurer.

The reverse side of the preceding form appeared as follows:

Subscription

........................1907.

Treasurer, Union Pacific Railroad Company,

The undersigned hereby subscribes for the amount of bonds covered by this warrant.

(Signature) ..................................

(Address) ................................

Assignment

...........................1907.

Treasurer, Union Pacific Railroad Company,

For value received, the right to make the within subscription is hereby assigned to.........................

whose address is.....................................

..................................................

(Stockholder) .......................................

(Address) ......................................

Witness:

(Signature) ...............................

(Address) .............................

Note: For estates or trust accounts this assignment must be executed by all the executors, administrators, or trustees.

These "rights" when given in large corporations, are always transferable. They are issued as formal documents which have the general appearance of a stock certificate and are passed from hand to hand by indorsement in blank on the back, in the same manner as a stock certificate; consequently, these "rights" are bought and sold with the same facility as other kinds of desirable property.