Corporation Finance; a Textbook for Colleges And Schools of Business Administration

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But when the main line is able, through the control of a majority of the stock of the subsidiary, to impose on the latter an agreement on interchanged traffic which returns 230 CORPORATION FINANCE [XIX to the subsidiary an unconscionably small percentage of the joint revenue, the earnings remaining to the subsidiary's own security-holders will be meager and unfairly small. If all the securities of a leased line are owned by a parent company, or at the other extreme if the larger company has lit...tle owner- ship in the subsidiary or cannot exercise any control over the traffic interchange contract, then there can be complete free- dom of contract between the two boards of directors and no unfairness of rental can be alleged. But in cases like those enumerated above, when there is a conflict of interest between a controlling majority and a helpless minority of security- holders, a question not only of the expediency but also the fairness of leased line rentals is inevitably raised. And this difficulty is increased when the rental is based on net rather than gross earnings.

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