amount, if any, by which the book debts included in the sale exceed the normal amount, and (c) the value ascertained as hereinafter mentioned of any stock-in-trade included in the sale over and above the normal amount.

"For the purposes of this agreement the normal amount of book debts shall be taken to be one-twelfth of the average annual sales in the business, and the normal amount of stock-in-trade shall be such an amount as the said

to be required for the proper conduct of the business.

may determine

or as shall

"The yearly profits of the business shall be ascertained on the average of the 5 years ending on the day of the last balance sheet taken prior to the near thereto as may be practicable, unless for any special reason the said think that such average would not be fair to the vendors, in which latter case the profits may be ascertained or estimated on any other average or in any other manner which the said may think fair.

"In ascertaining profits for the purpose of this agreement all rents paid for works and all expenses of repairs and maintenance, and such other sums, if any, as (having regard to the amounts expended on repairs and maintenance) may properly be chargeable for depreciation, together with a fair allowance for management, shall be deducted from the gross profits; but no deduction shall be made for interest on capital employed in the business or on money borrowed from bankers or others, or for fees, salaries or commissions to partners or directors, and no interest or income arising from money lying to the credit of the vendors with their bankers or on loans or investments, nor any rents or profits arising from extra land, shall be included in the account of profits.

"The vendors shall make out, as on the day from which the sale is to take effect, lists of the stock-in-trade and book debts included in the sale, and shall guarantee the accuracy thereof, but the Association or any person or persons appointed by them for that purpose shall be at liberty to check the accuracy of the said lists in any way they or he may think fit, and if any error shall be found therein it shall be rectified. The vendors shall guarantee that the book debts sold shall, in the aggregate, produce the amount at which they are stated in the list thereof so made, and unless they shall within the period of 1 year from the day as from which the sale is to take effect produce that amount the vendors shall, if so required by the Association, pay to the Association a sum sufficient to make good the deficiency and shall thereupon be entitled to the uncollected book debts aforesaid.

"For the purposes of this agreement the value of stock-in-trade shall be such a sum as the said may fix to be the fair value thereof, and in fixing such value

work done on goods in process shall be taken at cost price.

"The said

may with regard to all or any of the matters which are by the terms of this agreement to be decided by or referred to him consult such experts and obtain such other assistance as he may think desirable.

"The amount of the purchase money payable hereunder according to the basis of purchase ultimately adopted, whichever it may be, shall be determined conclusively by the said who shall have full power to settle all incidental questions arising thereon, and whose decision on all points shall be final; and for the purpose of enabling the said to give a certificate and to determine the matters hereby referred to him the vendors shall produce to him all their books, vouchers, and other documents, and give him all other information which he may require; and if the accounts and balance sheets of the various vendor firms shall be found to have been taken and made out in the past on different bases, he may make any additions and deductions which he in his discretion shall think necessary or proper in order to make the accounts of the various vendor firms conform to one common principle: and where, in consequence of additions having been made to works during the period over which the average of profits is taken, or of any other special circumstances, the profits actually earned or made during that period do not, in the opinion of the said represent the fair average profits of the works as they stand on the day as from which the sale is to take effect, he may make any addition to or deduction from the profits actually earned or made, which under the circumstances of the particular case he may think fair, and any sum so added or deducted shall be brought into account in determining the average yearly profit for the purposes of this agree

ment.

"The vendors shall, before the 31st day of March, 1900, or within such extended period, if any, as the committee hereinafter mentioned may think fit to allow, give notice in writing to the said whether the vendors elect to sell on a profit basis or on a valuation basis, and in default of their doing so they shall be deemed to have elected to sell on a profit basis, and the sale shall be made on the basis which the vendors so elect or are to be deemed under this clause to have elected."

PLAN II.

"The vendors will sell and the Association will purchase as from the day of and at the price of £- the goodwill of the business carried on by the vendors under the style or firm of and all the lands, buildings, and hereditaments of which short particulars are given in the first schedule hereto, and all other, if any, the lands, buildings, water rights, hereditaments, fixed and loose plant and machinery, trade marks, stamps, patents, stock in trade, raw materials, stores, book debts, bills receivable, and other assets and credits of every description belonging to or employed by the vendors in connection with or in the said business at the close of that day other than and except the various items mentioned in the second schedule hereto.

"The vendors guarantee (a) that the book debts and bills receivable included in the sale shall, in the aggregate, amount to at least £- and shall actually produce that sum at the least within the period of 1 year from the day as from which the sale is to take effect, and (b) that the value ascertained as hereinafter mentioned of the stock in trade, raw materials, stores, and other like goods included in the sale shall be at least £

"If within 1 year from the day as from which the sale is to take effect the book debts and bills receivable included therein shall not have produced the minimum amount which they are hereby guaranteed to produce, the vendors shall, if so required by the Association, pay to the Association a sum sufficient to make good the deficiency and shall thereupon be entitled to the uncollected book debts and bills aforesaid. "For the purposes of this agreement the value of stock in trade, raw materials, stores, and other like goods shall be such a sum as chartered account

ant, may fix to be the fair value thereof, and in fixing such value work done_on goods in process shall be taken at cost price. The said may, with regard to all or any of the matters which are by the terms of this or any other clause hereof to be decided by or referred to him, consult such experts and obtain such other assistance as he may think desirable.

"With a view to the preparation of the prospectus of the Association, the lands, buildings, water rights, and hereditaments, and fixed and loose plant and machinery included in the sale, shall be valued by Messrs. as a going concern, and as between a willing seller and a willing buyer, and the yearly profits of the business on the average of the 5 years ending on the day as from which the sale is to take effect, or such other period as the said may fix, shall be ascertained by the said and the vendors shall give all facilities for that

purpose.

"The lands and buildings of which short particulars are given in the first schedule hereto are sold for the estate and interest mentioned in that schedule, and the other lands and hereditaments, it any, included in the sale, are sold for such estate and interest as the vendors may have therein."

It should be noted that in both cases the person who has the final decision on questions of discretion is the accountant who is acting as the promoter. The independent valuation of properties, in distinction from book accounts, has been made regularly by another accounting and valuing firm selected by the promoter, but in both cases accountants and valuers are reputable firms well known throughout England, whose reputation for fairness they could not afford to sacrifice for any profits that might come from the formation of the organization.

It will be noted that a great deal is left to the discretion of the promoter; for example, in estimating the yearly profits of the business in the first form given, it is expected that these shall be ascertained on an average of the 5 years ending on the day of the last balance sheet taken prior to a fixed date, unless the said accountant shall think that such average would not be fair, in which case the profits may be ascertained on any other average or in any other manner which the said accountant may think fair. It is, of course, necessary always, in making such contracts, that some discretion be left in specific cases to some party or parties. It may well be that the methods of bookkeeping of the different establishments which are to enter into the combination may be somewhat different in different cases; for example, a particular amount for the depreciation of plants being written off, whereas in others the amount would be less, or in other cases some entirely exceptional circumstance, as a small fire or an accident, which has destroyed some of the plant and necessitated extra expense, might prevent entirely the profit for some one of the 5 years agreed upon for one plant, whereas no such contingency having arisen in the other establishments, their profits would show higher. Under such circumstances, of course, a proper adjustment should be made, and it is these exceptional conditions that the vendors had in mind when they gave so much discretion to the promoting accountant.

On the other hand, this leaves an opportunity for more or less fraud, provided the promoter or the accountant should not be a person worthy of the complete confidence of upright business men. One prominent lawyer who had been active in the formation of some of these combinations said that at times the terms of the sale were substantially agreed upon beforehand, and that thereafter the values were made to suit, really placing the method of promotion upon the same basis as that which has obtained in the United States in the instances where no specific valuations have been made. Of course it is not intended to say, under these circumstances, that the accountants have not done their duty honestly, but the accountant, under such circumstances, does not feel called upon to go back of the books. He simply certifies properly to what the book accounts show, it being, of course, possible for the vendors to arrange their books in a way that will bring about the proper results. In similar cases, where it is desirable that the values be kept entirely secret, as was intimated before, the contract of the new company with the promoter who had previously bought up all of the properties, after the manner of forming similar combinations in the United States, is, of course, put on file, and the amount paid him is accurately stated; but what he paid to the original vendors need not be, under the older law, definitely known, and at times is not known. For example, it is provided in the prospectus of the Associated Portland Cement Manufacturers, 1900, Limited, that the basis upon which the association is established should be that the association should acquire the properties, the price in the contract for sale being on the terms therein set forth subject to clause 4 of the memorandum of association. This clause 4 reads as follows:

"The agreement referred to in article 3 of the articles of association, when entered into by the company, shall be binding upon the company, and it shall be no objection to such an agreement that the directors of the company do not under the circumstances constitute an independent board or that they are interested in the formation of the company, or that no independent valuation of the properties or investigation of the accounts of the business referred to in the said agreement has been made on behalf of the company, nor shall the said agreement be objected to on any other ground, either in law or at equity, nor shall any director be liable to account for any profit made by him or them, respectively, by reason of such agreement, or be responsible on any ground, either at law or in equity, in respect to any matter dealt with thereby, and every member of the company, present and future, is to be deemed to approve and agree to be bound by the said agreement and to join the company on this basis."

This article 3 of the articles of association is one for requiring amalgamation, developing and working the businesses, properties, and undertakings mentioned in that agreement. It is stated still further in the prospectus of that company that a number of contracts and arrangements have been made from time to time in relation to the carrying on of the various businesses as going concerns, and that there are also various arrangements and agreements for the payment of the expenses of the formation of the Association and of the issue of the prospectus and of the Association's capital, to none of which the association is a party, but which may come within the provisions of section 38 of the company's act 1867, and it is added that applicants for shares will be taken to have notice of such contracts and arrangements and to agree with the Association as trustee for the directors and other persons liable to waive any claim against them for not more fully complying with the requirements of section 38 of the company's act 1867. It will be noted, however, that while the promoters of the Association are to a great extent asking the subscribers to go into a blind pool, they are given due notice of the fact that this is what they are doing. The same company in its prospectus includes a report by a company of chartered accountants; and in this report it is also said that in the statement of profits of the various companies which they have examined no depreciation has been charged. This is due, the accountants say, to the fact that some of the promoters have omitted to make any such provision on the ground that a large expenditure upon repairs and renewals rendered it unnecessary, while others had dealt with the item in various ways, and they add: "In this connection we have ascertained that during the period under review the expenditure upon repairs and renewals included in the working expenses has exceeded £480,000; but, notwithstanding this large outlay, we are of the opinion that provision for depreciation should be made by the Association."

This is another warning as to the fact that there might be overvaluation. Whether in that specific company there were such overvaluations or not of course does not appear from the prospectus, but certainly warning along that line does appear.

Under the new law passed during this last summer, it will be much more difficult to evade the intent of the law regarding the actual prices paid for the establishments entering the combination.

(b) Good will.-The question of good will is one that has ordinarily caused much trouble in the United States, the definition of good will being in effect, whatever it may

be in form, everything that the hopes of the vendors or promoters lead them to think may possibly be secured above the actual cash value of the properties concerned, such cash value being estimated on a cost of reproduction of the plants. It will be noted that in these English valuations that have been mentioned, there is often a definite rule for estimating the good will, as, for example, under (d) in the fourth paragraph of the first plan mentioned above, the sum of good will is to equal 8 times the balance of the yearly profits of the business after deducting therefrom interest at the rate of 4 per cent per annum on the amount of the valuation of the works and on the normal amount of book debts and on the value * * * of the normal amount of the stock in trade. Another rule taken from the contracts of sale of another company is as follows:

* * *

"For the purpose of fixing the sum to be added or deducted in respect of good will the average net yearly profit or loss at which the said business has been worked during the 5 years immediately preceding the day of the last balance sheet taken in the business where the business has been carried on so long, or from the commencement of the business up to the day of such last balance sheet where the business has not been carried on so long, shall be ascertained as follows, namely: The net profit or loss shall be arrived at by deducting from the gross profits (a) all working expenses, including chief or other rents payable in respect of works together with a fair allowance for depreciation and management, and (b) interest at the rate of 5 per cent per annum on the value of the works ascertained, as mentioned above. And the balance or deficiency of gross profits remaining after making such deductions shall represent for the purposes of this agreement the net profit or loss at which the business has been carried on. And the amount to be added or deducted in respect of good will shall be 5 times the amount of the average net yearly profit or loss as thus ascertained, the amount being added in the case of a profit and deducted in the case of a loss."

(c) Promoters' profits.-At times, if the promoter of an English company himself buys the various properties which are to be amalgamated and sells them again to the new company, as is sometimes done, of course, his profits may amount to whatever difference he is able to get in floating the new company. In the case, however, of the formation of the later companies, a specific provision is made for the pay of the promoter, which would seem to be under the circumstances, considering the difficulties of bringing the combinations together, by no means an unreasonable charge. For example, in the prospectus of the British Cotton and Wool Dyers' Association, Limited, we find this statement made: "The amalgamation has been negotiated by Jones, Crewdson & Youatt and Scott Lings, and the contracts provide that the various vendors on completion of the purchase shall pay Scott Lings a commission of 2 per cent on the purchase price (or, in the case of one vendor, a somewhat smaller commission), out of which Scott Lings pays the charges of Jones, Crewdson & Youatt, and of the preliminary expenses of the associat.on up to and including allotment, other than stamps and fees on registration, and other than costs of conveyance and investigation of titles." It will be noted here that out of the 2 per cent paid to the promoter it was necessary that very material deductions be made, so that it can hardly be said that the promoter received an undue commission.

In the prospectus of the Calico Printers' Association, Limited, the following provision on this subject is made:

"The vendors of the various businesses have provided a fund equivalent to 2 per cent on their purchase price, which is to be paid to Mr. Ernest Crewdson of 7, Norfolk street, Manchester (who has negotiated the amalgamation), and is to be applied by him in his entire discretion, and without liability to account, in discharging of the preliminary expenses of the association up to allotment other than costs on conveyances or examination of title, or stamps on conveyances, or agreements for sale, or on any statement of loan capital, or trust deed for securing debenture stock, but including the remuneration to be fixed by Mr. Crewdson to be paid to himself or his firm of Jones, Crewdson & Youatt."

It will be noticed that this pay of 2 per cent includes the pay of the promoter as such, and the work of examination of accounts, and presumably also the payment for the valuations of the different properties made by a different firm; also the costs of advertising, brokerage, legal expenses, etc. In some of the cases where the promoter has had provided such a percentage for his pay, this percentage has included also his services for extra advice for a period of some months after the organization is formed, without additional charges. In other cases it has been provided that the promoter should fix his fee, and after the payment of all expenses, including his

1 Rarely some rule is found in the combinations in the United States, for example, in the Rubber Goods Manufacturing Company, where the common stock representing "good will" was put up at a 7 per cent basis on the previous earnings. See vol. 13, p. 37.

own fee, should return to the company any balance that might be left in his hands, it being understood of course, under those circumstances, that for special services rendered thereafter there should be extra charges. Although as compared with the sums that have been received by some of the American promoters these charges for the negotiations among the separate firms, and the carrying through of the legal work of the promoter seem small, nevertheless when one considers the large capitalization, they yield very substantial fees to the promoters, who can well afford to give the time necessary for carrying through to success such an organization, always provided, of course, that the organization proves a success.

(d) Allotment. Under the English law, whenever a company is organized and appeals to the public for subscriptions, it is provided that the directors and promoters can not in the first instance subscribe for more than one-third of the stock, but that two-thirds must be offered to the public. As is natural, the organizers of the corporation and often the real vendors of the property concerned, wish to secure a considerably larger proportion of the stock than one-third. Subscriptions of course are open to the public in accordance with terms laid down in the prospectus, but the allotment of the shares is in the hands absolutely of the directors of the corporation, or in substance, of the promoter. It is the usual custom for the promoter, acting in accordance with the wishes of the parties most interested, to have all subscribers put into various classes: in the first, the directors or those chiefly in interest; second, their immediate relatives or friends, whose shares would come substantially under their control; third, other parties whose interest it is desirable to secure, as, for example, in many cases prominent customers who would be interested in the success of the corporation, or those whose favor it might be well to secure for other purposes; and so on, leaving to the general public, which is entirely disinterested except for a good investment regardless of the nature of the business concerned, what balance, if any, may remain. In this way, it frequently happens, of course, that the directors or other persons chiefly in interest will secure a controlling share of stock and be able to direct the affairs of the corporation with comparatively little reference to the wishes of the minority, substantially as well as if the law did not make this specific provision for the offering of so large a share to the general public. This custom, which of course has been found in all corporations, is naturally applied in the combinations to bring about the amalgamation of competing companies.

(e) Underwriting. The stock of these large combinations has in many cases been underwritten by the vendors themselves of the different establishments which have come into the combination, in order to insure in the first place the success of the combination itself and the certainty that there would be enough shares subscribed to carry out the plan of organization, and in the second place, to insure also the active participation in the business of the men whose knowledge and pecuniary interest has been so long directed in that line.

The provision is made in this way, that, if all shares offered for public subscription shall not be fully subscribed for by the public on the terms of the prospectus, the vendors shall be bound, if required to do so, to accept an allotment of shares on the terms agreed upon as to price and otherwise, to an amount not exceeding in the aggregate the amount of cash payable to them for their properties. Naturally, the provision is further made that the promoter or some other person who has the confidence of all shall see that these shares, which are to be taken in lieu of cash by the vendors for their properties, shall be distributed ratably among them, so that none shall be favored at the expense of the others. Any dispute among the different vendors regarding the proportion that each is to accept in this way is regularly referred without recourse to the promoter or other person so selected.

In case it should be found that the amount of the purchase consideration thus payable to the different vendors in fully paid shares and debenture stock of any class should be more than the legally required one-third limit of the association's first issue of such shares and debenture stock, to the extent that is necessary for the purpose of reducing the amount to such one-third, payment may be made in cash instead of in shares and in stock; but in this case, as in the other, the necessary readjustment to secure an equitable division among the different vendors is referred without recourse to the promoter or other chosen referee.

(f) Stock watering.-So far as one can learn, most of the newer combinations that have been formed in England have not issued, as compared with the American companies, any very large amount of so-called watered stock. It is true that the English promoters and lawyers in speaking of these combinations do mention the large amount of water in the stock. When, however, definite statements with reference to a fair cash valuation of the property itself as compared with the amount of stock issued are made, it seems to be usually the case that the amount of stock issued for good will is not much above 20 per cent of the entire amount. This seems to have

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