Journal Article The Distribution of Efficiency Savings Get access J. Murray Carroll J. Murray Carroll Bates College Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 55, Issue 3, May 1941, Pages 517–520, https://doi.org/10.2307/1885643 Published: 01 May 1941
Introduction: the problem, the Commission, provincial attitudes, 584. — Historical and constitutional background, 588. — Depression and provincial grievances, 593. — The recommendations: reallocation of functions, 596; reallocation of revenues and debt, 600; subsidies, 603. — Conclusions, 609.
Time and again the prosperity malpractices of corporate management were the subjects of erudite discussions. Moreover, the courts have always had a tendency toward setting up rules of law which they felt would protect the small absentee owner. Perhaps this depression philosophy may be said to be accountable for the desire to limit the capital raising activities of those large corporate entities in future prosperity periods, who had demonstrated themselves to be given to faulty procedures during the prosperity era of the twenties. But it must be emphasized that there was a trend toward such financial regulations even during the preceding prosperity period. Furthermore, during this period there were evidences indicating that the accountants responsibility would likewise expand and increase under this financial control philosophy. Perhaps the first forecast of accountants' increasing responsibility was the Ultra Mares case which began early in 1924. After 1922, however, corporate management turned to selling securities in order to secure the capital needed.
In March of 1940 a stop order was issued by the U.S. Securities and Exchange Commission, suspending the registration statement filed by The Republic Co., an investment trust. The circumstances leading to the issuance of the stop order are of sufficient general interest to warrant an examination of the case. The registrant incorporated on June 21, 1926, in Colorado, under the name of "Protected Bond and Investment Company," with an authorized capital stock of 50,000 no-par assessable shares. It was organized for the purposes of purchasing, improving and dealing in real estate, and functioning as an investment trust. Between 1927 and 1931 the articles of incorporation were amended several times. As a result, the capital structure became much more complicated, and the name of "Republic Company" was adopted. An amendment of September 30, 1931, authorized the issuance of preferred stock at lower dividend rates. The objectives of the new offerings, to reduce the potential cash drain from surrender of savings certificates, and to reduce the dividend rate on preferred stock, were thereby attained.
The article discusses a case of International Salt Co. related to dividends out of subsidiary surplus at date of acquisition. An examination of the financial statements of the International Salt Co. from 1934 to date discloses two major points of interest, namely, a long-drawn-out controversy with the U.S. Securities and Exchange Commission as to the treatment of dividends received from subsidiaries, and a changing concept of the amortization of bond discount or premium. The International Salt Co. was incorporated in New Jersey on August 22, 1901, with a perpetual charter, and in 1934 was a holding company with six subsidiaries. While the correspondence files of the Securities and Exchange Commission may contain a plausible defense of the company's earlier position in refusing to classify these dividends as reductions in investments rather than as additions to income, on the basis of the disclosed information the demand of the Commission would appear to be entirely legitimate and in accordance with common accounting practice. Turning now to the second issue, the treatment of bond discount and premium by the International Salt Co. has undergone an interesting evolution. The treatment scarcely accords with generally accepted accounting practice.
The article focuses on a court case involving Metropolitan Edison Co. related to restriction on dividends on common stock. A recent release of the U.S. Securities and Exchange Commission under the Holding Company Act raises several significant issues with respect to the reclassification of surplus and the legality and financial advisability of dividends on common stock. The Metropolitan Edison Co. is a Pennsylvania corporation and a public utility operating company doing business in eastern Pennsylvania. It is a direct subsidiary of NY PA NJ Utilities Co., which is controlled by the Associated Gas and Electric Corp., which in turn is controlled by the Associated Gas and Electric Co. A series of resolutions adopted by the board of directors of the Metropolitan Edison Company resulted in the transfer of $6,111,333.00 from earned surplus to stated value of common stock between 1925 and 1931. The Securities and Exchange Commission on December 1, 1939, issued an order to the Metropolitan Edison Co. to show cause why an order should not be entered to prevent the declaration and payment of dividends on its capital stock.