154 BONUS SHARES

with a capital of three millions and reserve fund of
one million, if the reserve fund is turned into
Ordinary shares and the earning power of the
company remains the same there may obviously be
a temptation to the directors to modify the prudent
policy under which they had hitherto placed one
hundred thousand a year to reserve, because if they
continued it the shareholders would discover they
were really no better off and that they simply got a
lower rate of dividend on the larger amount of shares,
and that their actual receipts from the company were
exactly the same as before. And if the earning
power of the company remained the same and the
directors left off placing the one hundred thousand
a year to reserve, and paid away the whole of the
net profit in dividend, it is clear that the progressive
expansion of the company's business would be to
that extent checked. On the other hand, there is a
contrary argument that as long as the company has
a large reserve fund there is a possibility that dis-
satisfied shareholders may agitate for a realisation
of sufficient assets to enable that reserve fund to be
distributed, especially if it has been wholly acquired
out of past profits. In this case the capitalisation
of the reserve fund puts this temptation out of their
reach since, when once the reserve fund has been
capitalised, it can only be got at by greedy share-
holders through the process of liquidation. Since,
however, the shareholder in these times is not
quite so short-sighted as he used to be, there is
not perhaps really very much advantage in this
point.