Prorata Distributions of Capital the Fairest Arrangement

The basic questions are:

• whether any substantial amount of capital is redundant, and,
• whether the stockholders would benefit if such capital were returned to them.

If these were true, it becomes the duty of the directors to treat all stockholders fairly in the process.

A return of capital by a prorata distribution, would be the most direct and equitable way of accomplishing this.

However, valid tax considerations often dictate the alternative process of buying in shares.

It still remains the duty of the management to deal equitably with all the holders and to equalize as nearly as possible the position of those who sell and those who keep their shares.

Outside stockholders should insist on a policy of fairness, regardless of whether they would sell or not.

They are much more likely to benefit in the long run by having the principle of equitable treatment of all stockholders established, than by taking temporary advantage of the necessities or bad judgment of those who are willing to dispose of their holdings at a totally inadequate price.

Ref: Security Analysis by Graham and Dodd