Duhaime's Law Dictionary


Watered Stock Definition:

Shares in a corporation which is stated to be, or issued as fully paid but which in fact, has not been paid for.

Related Terms: Stock, Par Value Shares

Shares in a company that purport to be paid in full but which in fact have not been fully paid for.

Cook wrote:

"Watered stock or fictitiously paid-up stock is stock which is issued as fully paid-up stock, when in fact the whole amount of the par value thereof has not been paid in....

"Watered stock is, accordingly, stock which purports to represent, but does not represent, in good faith, money paid into the treasury of the company."

In Bing Crosby Minute Maid v. Eaton, Justice Shenk of the Supreme Court of California used these words:

"... watered stock ... is stock issued in return for properties or services worth less than its par value.... Holders of watered stock are generally held liable to the corporation's creditors for the difference between the par value of the stock and the amount paid in."

In the Idaho Law Review, Mueleman wrote:

"Watered stock is stock issued by a corporation as fully paid-up when in fact the whole amount of par value has not been paid; this includes stock issued without consideration as well as stock issued for labor, services, or property, valuing less than par value.

"It is alleged that two major evils exist in the practice of stock watering. One, on which courts and legislatures have seemed to concentrate, is that corporate creditors may be misled as to the financial condition of a corporation which issues watered stock. It is thought that creditors rely upon the aggregate par value of issued stock as an accurate representation of corporate capital assets. Where full par value is not paid-in because of stock watering, it is argued that the corporation misrepresents its financial status.

"The second alleged evil is that stock watering is also a misrepresentation to potential corporate investors, in the same manner as creditors are misled, thereby inducing investment upon deceptive financial information."

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