Are Stock Rights Obsolete?

Abstract

G ENERAL MOTORS, SOCONY MOBIL, National Gypsum, IBM, Babcock & Wilcox, Anaconda and Armco have recently issued stock rights to raise additional equity capital. Standard Oil of New Jersey and Royal Dutch Shell announced they will use this method in the near future. Adoption of any device by so many notable corporations might lead to the conclusion that this must be the best method. Surprisingly, there is at least some evidence that it is not. Advocates of and apologists for stock rights indicate (1) that in all fairness each stockholder must be given the privilege of maintaining his proportionate interest in the business, (2) that many company charters require equity offerings be made first to the stockholders, (3) that present stockholders constitute the most ready reservoir of new share capital available to the company and that large equity issues of $50 million and more are probably saleable only through the rights device, (4) that if rights were not offered to shareholders many of them would not be aware of the stock offering, (5) that most shareholders like rights and that it is a matter of good stockholder relations to give them what they want. This case on face may appear to some established, and perhaps it is, Yet, according to Plato, every coin front has its back; each good its bad. So investigation of both sides of the stock-rights problem should be made before reaching a conclusion. The author has made a limited telephone survey of underwriters, investment counsel, investment trusts, bank trust officers, stock exchange firm partners, insurance and pension fund executives. An overwhelming number of these persons expressed in no uncertain terms their opposition to stock rights. Perhaps a wider survey would have shown different results, but the fact that any survey of financial professionals could reveal almost a unanimity of disillusionment about stock rights seems significant.