This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
There are many peculiar varieties of capital shares which do not come definitely within the two main classes, common and preferred, or which have notable features. In Great Britain it is a common practice to compensate the organizer of a corporation by giving him a final claim on earnings which is valid only after all the claims of those who have furnished capital have been fully met. The shares which represent this claim are variously known as "founders'" shares, "management" shares, and "deferred" shares. Although this practice is frequently condemned, it seems at least as defensible as the custom in the United States in accordance with which the promoter of a corporation retains by way of compensation, as much as he can of the common stock. Deferred, management, or founders' shares in England are usually of very small par value - most commonly, one shilling per share. In case the corporation succeeds in fulfilling the expectations of its organizer, the founders' shares may come to receive large dividends and to possess a high market value altogether out of proportion to their nominal value. Indeed, there are instances in which separate companies have been formed in order to hold the founders' shares and distribute interest in them in a more convenient manner. A slightly different plan was followed by the holders of the founders' shares in the original Suez Canal Company. There were 100 of these shares which were of no par value but which were entitled to 10% of the surplus profits. These 100 shares were divided into 100,000 and were sold on the open market. The customary arrangement is that founders', management, or deferred shares shall take one-half the profits remaining after the ordinary shares have received a given rate of dividend.
Sometimes voting shares are subjected to peculiar restrictions for the sake of forestalling any danger of losing control or of bringing into the management people who are not desired. The Imperial Tobacco Company, Ltd., which is a combination of the chief British manufacturers of tobacco, has but three or four hundred holders of its voting shares and is controlled by a much smaller number. In order to maintain its character as a "close" corporation, it has stipulated in the articles of incorporation that no shareholder may dispose of his shares except by offering them, through the company, to other shareholders at a price to be fixed by the shareholders from time to time. An exception is made with respect to the transfer of shares to members of the immediate family of a shareholder. The price fixed for transfers has always been considerably less than the probable market value. In 1912, for instance, when 3% dividends were being paid, the price fixed was £2. In 1913, when 35% dividends were being paid, the price fixed for these transfers was increased only to £2 5s.
In the United States small, close corporations sometimes attempt to accomplish the same result by means of by-laws prohibiting the sale of stock to anyone not already a stockholder, or prohibiting the sale of stock without the consent of the directors, or unless it has first been offered to the directors at a price not greater than that at which it is subsequently to be offered or sold to outsiders. These provisions, however, are illegal and unenforcible. Nevertheless they are sometimes adopted, and printed on the face of stock certificates to give notice that outside purchasers are not welcome, and that whatever rights they may obtain they will be able to enforce only through legal process. Sometimes stockholders agree among themselves to withhold their stock from outsiders. Such a contract would be legal as between the stockholders, but would not affect the rights of any outsider who might without notice and in good faith purchase some of the stock. On the whole, it may be said that restrictions of this nature have not proved effective in this country.
The Montana Power Company has two classes of common stock. About $27,000,000 is receiving 2% dividends, while dividends on $22,500,000 are "deferred" until certain new plants are completed, and are then payable only gradually over a series of years. Inasmuch as the New Jersey laws, under which the company is incorporated, do not authorize the payment of dividends on part of an issue unless they are paid on the whole issue, this arrangement seems at first glance illegal. In response to an inquiry, however, the treasurer of the company advises that:
The stockholders owning $22,500,000 of the stock of this Company have agreed that, as to their stock, dividends may be deferred until a certain time, and that stock has been conveyed to certain trustees, who hold the same for the purpose of securing the provisions of the agreement with regard to deferred dividends. As any part of the stock becomes entitled to dividends, it will be released from the provisions of the trust agreement and will be distributed to those who are entitled to receive it.
It appears, therefore, that this issue of "deferred" stock - the term was previously almost unknown in the United States - is made possible solely by voluntary agreement among certain stockholders.
Another issue which is unusual is the "assenting" stock of the Westinghouse Electric and Manufacturing Company. This is an outgrowth of the reorganization of the company, in 1891, at which time the common stockholders were asked to surrender 40% of their holdings and retain 60%. This 60% was to be called "assenting" stock, and was to receive 7% preferential dividends before the other common stock, no part of which was surrendered. In other words, the "assenting" stock became practically a second preferred and might have been so designated.