Page:The Green Bag (1889–1914), Volume 18.pdf/644

 LAWYERS AND CORPORATE CAPITALIZATION any purpose except to facilitate operations of promoters and of bankers which serve no good purpose to the community? In brief, I propose a modification of our laws for the formation of corporations so as to abolish all nominal or arbitrary or re quired valuations or denominations in money of shares of stock. Otherwise than as may be required for taxation, I would have the law leave it to corporations, and those who administer them, to make any representa tion that they see fit, or, if they see fit, no representation at all as to the net valua tions of their enterprises, but with the understanding that they will be rigorously liable for misrepresentations. The law would not prevent the promoters of a cor poration from affixing, if they please, a money symbol or value to each of its shares. But if they chose to do that I should hold them to such a liability as would belong to a representation that there was such actual present money value in the shares at the very time of the representation. As a general rule, capitalization and net assets are to-day two different things. Often they are quite unrelated. It may be the public policy of the government which grants the charter to limit the amount of property which the corporation may hold; but such a limitation is a different thing from the corporate capitalization which I am now discussing. The charter may or may not contain such a limit without refer ence to capitalization. The corporation may, if you please, be required from time to time to disclose by suitably verified and detailed statements, the net amount of its property and to show that such amount does not exceed a prescribed limit. Such limitations upon the capital or wealth of corporations once represented the policy of the government to limit their money power or influence. But, although still common in the case of charitable corporations, they are not now favored in our country for business corporations. In the more impor tant states I think that they do not exist

605

at all. But whether or not the charter contain such a limitation upon the amount of property which the corporation may hold, I propose that the charter shall not pre scribe the amount of the capitalization, which, as I have said, is something very different from the amount of property held by the corporation. We know many —• alas too many — corporations whose total assets are not now and never were equal in value to the total par value of their issued shares. Every one of you has such illus trations in mind. So there are corpora tions whose actual net assets far exceed their capitalization. In organizing a trust com pany to-day it is common to require cash payment in of 150 per cent or 200 per cent of the par capitalization. The net book assets of the Chemical Bank of New York are about $8,000,000 as against $300,000, the amount of its capitalization. That is to say, its actual net assets are twenty-six times its capitalization. So in actual twen tieth century experience the net assets of a corporation and its capitalization are two matters, which, if not absolutely unrelated, as I am sorry to say they sometimes are, are very far from being one and the same thing. Now the law may, and, in my opinion, should, absolutely require a dis closure of the net assets of a corporation for purposes of taxation. But this is no good reason why the law should require the cor poration in its relation with its shareholders, or its shareholders in their relations among themselves, to prescribe any par value to a share or any total amount to the capitali zation. From the public standpoint, the capitalization may be a. convenient mode for a tax; but obviously a franchise or other tax can be far better imposed upon the basis of actual capital returned for purposes of taxation than upon a nominal and, perhaps, fictitious capitalization. The origin of the legal requirement that the articles or certificate of incorporation of a business company shall state its capitali zation seems to have been in the original,