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.It was also quite rare for stockholders who purchased their stock frompromoters to sue, for, as one authority noted, their position was “hopeless.”Based on an exhaustive review of judicial methods of valuation in the caselaw, David Dodd concluded that it “has not been possible to subject thetruth or falsity of the.charges against stock watering to quantitative dem-onstration.” 56In contrast to the goals of theoretical economists, the purpose of valua-tion in the courts was the very practical one of deciding whether a corpora-tion’s paid-in capital was worth the amount it represented itself to be.Whilethe “average businessman” believed that capitalizing earnings was the most• 85 •The Speculation Economyappropriate method of valuing corporate stock, courts were more hesitant toadopt that method.In fact, New Jersey’s famous “Seven Sisters Act” of 1913expressly prohibited valuation using capitalized earnings.The problem was that the property corporations bought with their stocktypically was unique and hard to value, and this was even more true for entirecorporations than for a patent or a copper mine.Often courts paid lip serviceto capitalizing prospective earnings, leaving going-concern value as the theo-retical standard, but they did not explain how to determine it.Perhaps oneof the most important factors, according to Dodd, was the cost of the assetto the promoters, which served as a proxy for value.But if the question wasovercapitalization, that is, the overvaluation of assets, the cost to promotershad limited utility.Ultimately it did not matter much because courts rarely engaged in ap-praisal.A more common legal technique they used when confronted withovercapitalization was to put the burden of proof on the promoters to estab-lish value.If the promoters failed to prove their fi rm’s value, they lost thecase.This approach allowed the court to react to evidence rather than toengage in the valuation process itself.The New Jersey cases of See and Donald show that the courts allowed for the theoretical possibility of valuing goodwill or prospective earnings(sometimes, as in See, using the terms interchangeably).At the same time, they were reluctant to attribute goodwill value to new combinations.Thepredominant judicial approach to valuation was precisely that found byCommons over the course of the history of Anglo-American jurisprudence.Courts would accept the directors’ valuations of corporate assets as long asthey were reasonable.57Legislative Approaches to ValueWe are back to precisely the concept of valuation with which we began.Thework of legislative bodies did not contribute much to an understanding ofvaluation, but it is worth spending a few moments on the views of two pub-lic bodies that mattered, the United States Industrial Commission and theUnited States Congress, because it is from them that policy emanated.TheIndustrial Commission was appointed by an unambiguously pro-business ad-ministration.Congress, while also dominated by Republicans, had to answerto broader constituencies and was more progressive in its outlook.But theCommission and Congress arrived at the same basic conclusions.The Industrial Commission produced nineteen volumes of testimonyand reports covering a wide range of issues over a period of fi ve years.Manyof those testifying were forthright and, indeed, proud of what they had ac-• 86 •Transcendental Valuecomplished, so their words have the ring of credibility.Moreover, the Com-mission’s staff performed thorough surveys of the relevant literature, includ-ing cases.So the Commission’s understanding of actual practice gives usanother perspective on the issue.Although its most extensive commentaryon capitalization was focused on railroads, the Commission observed thatthe problem of overcapitalization was also widespread in industrial combina-tions, and that the same issues existed in both.The Commission recognized that “the popular theory” of valuation wasthe cash value of assets approach, which included capitalized earnings.Itnoted that this approach seemed to be fair at fi rst blush.But sometimes thismethod would either overstate or understate capitalization.Capitalizationwould be too high when a corporation was characterized by ineffi ciency andwaste, and too low in cases of unusually effi cient management [ Pobierz całość w formacie PDF ]