Moreover, Torsten was offering a compelling deal. International Match would pay a regular royalty from its match sales in Poland to the Polish state treasury, and the proceeds of the royalty would secure the loan to the government. The loan payments would be calculated so that the amount of the royalty payable to the government would cover the annual debt service and leave the government a profit margin of 25 to 50 percent. In the worst case the monopoly-for-loan deal would pay for itself. In the best case it would generate substantial profits. As Ivar described the proposal, “It may even be said that the loan itself is nothing but an advance of future royalty payments.”9 It was an offer Dr Glowacki couldn’t refuse. And fortunately for Torsten and Ivar, Dr Glowacki was the right man.
Once Dr Glowacki agreed to the deal, the specifics didn’t take long. International Match agreed to lend 6 million dollars to the Polish government at an interest rate of 7 percent. The extant Polish match factories were nationalized, combined, and leased to International Match for twenty years; ownership of the factories would revert to Poland after that. During the twenty-year monopoly period, the income would be shared among Swedish Match, International Match, and Poland. The Polish government would use its share of the proceeds to fund relief work following devastating floods in Upper Silesia, as well as to bolster the country’s finances more generally.10
Dr Glowacki signed the agreement and pushed the deal through the Polish government. Technically, International Match would not have its first functioning public monopoly for several months, until the law went into effect in October 1925. But that didn’t stop Ivar from broadcasting the deal to America right away.
Ivar began hinting to Lee Higginson and Ernst & Ernst that in addition to Torsten’s “public” deal with Poland, Ivar also was negotiating a “private” contract with Dr Glowacki, in which International Match would obtain additional rights to sell matches at even higher prices in Poland. No one was to mention this private agreement, which was preliminary and should be kept a secret - even from Torsten.
When Ivar received a copy of the signed documents, he did something rather unusual. Apparently, he thought it might be useful to be able to replicate Dr Glowacki’s signature in the future, so he took a signed copy of the contract to a stamp shop and ordered a rubber stamp that would produce a facsimile. Ivar had been skilled at forging signatures as a child, but now he decided he wasn’t good enough. From then on, he would obtain rubber stamps of official signatures for nearly all of his match deals.11 Dr Glowacki’s stamp was his first.
The public deal with Poland generated great excitement in the United States. Both Lee Higginson and International Match’s investors were pleased with Ivar’s quick progress, and Durant sensed a growing appetite as he pitched a new deal for International Match. Durant wrote to Ivar that “for the third time in about three years you have gone to the public and asked them to double overnight the amount of their investment in your Company, and each time this has met with success. We recall no other company with such a record.”12 Lee Higginson had introduced International Match to American investors in 1923 with a conservative gold debenture, and then converted that investment into a slightly riskier participating preferred stock deal in 1924. Now, investors were clamoring for more.
There were still a few outstanding gold debentures from International Match’s first deal - not all of them were redeemed in 1924 - and they were in high demand because they were convertible into shares. A.D. Berning excitedly wired Ivar that Lee Higginson had found a potential buyer for a large block of International Match debentures. There was one catch: the buyer wanted to know the amount of dividends Swedish Match had received from its subsidiaries during the previous six years.13 That was the kind of detailed question Ivar previously had refused to answer.
Ivar dodged it again, responding that “the working conditions during the years immediately after the war were so extraordinary and exchange conditions so confusing that our accountants consider it absolutely impossible to give out any figures regarding profits earlier than year 1921 which we have already given you.”14 Yet even after this brush off, the customer bought anyway. International Match debentures were quoted at $129, a high level for a security that would repay just $100 in eighteen years. The price was so high because of the conversion right. According to Berning “practically all debenture holders” had converted into common shares.15
Ivar’s next challenge was to decide how best to raise more money from optimistic American investors. He still objected to selling common shares of International Match, because common shares held a vote and he was wary of giving up any control. He felt the same way about selling direct investments in common shares of Swedish Match, International Match’s parent. Ivar claimed that Swedish law prohibited foreign interests from owning a stake in a company that owned real estate in Sweden, which Swedish Match did.16 In reality, Swedish law only prevented foreign investors from acquiring a controlling stake, not a minority stake. But the law was a good excuse to continue to sell securities without votes to Americans, and it was some protection against the threat of Americans acquiring control of International Match.
Ivar had faced a difficult question: How could he raise capital from investors who wanted a share of his company’s upside without giving them too much power over how the company was to be governed? Ivar didn’t want foreigners intruding on his Swedish companies, but he wanted their money. How could he get more cash from investors without giving them control?
Historically, companies had tried various responses to this quandary, with little success. During the late nineteenth century, many companies had been resigned to the fact that they would have to give votes to all of their investors. Even the preferred shares of major industrial trusts (Steel Corporation, the American Woolen Company, and the American Shipbuilding Company, for example) had voting rights.17 Nearly every corporation gave votes to all of its shareholders, including both common and preferred shares.
Years earlier, Coca-Cola had devised one awkward solution. It was a publicly listed and widely owned corporation, but 251,000 of its 500,000 shares were held by the Coca-Cola International Company, which was owned by a knot of insiders who held control.18 A few companies had followed Coca-Cola’s two-company approach: Associated Gas and Electric Securities Corporation held a controlling stake in Associated Gas and Electric Company; Armour and Company of Delaware was controlled by Armour and Company of Illinois.19 But that structure was clumsy and raised legal uncertainties about the relationships between parent and subsidiary.
Ivar devised a more elegant solution to this problem. It was an ingenious piece of financial engineering that would survive the test of time.
Ivar decided to introduce a new type of security, which he called a “B Share.” Ivar began with Swedish Match. He divided its common shares into two classes. Each class would have the same claim to dividends and profits, but the B Share would carry only 1/1000 of a vote, compared to one vote for each A Share. It was a simple, but profound, insight. B Shares could be sold to investors without affecting control.20 Ivar could double the size of his capital, while diluting his control by just a fraction of a percent.
Would investors be willing to buy shares that didn’t carry a vote? Ivar was sure the answer was yes. In 1924, Ivar and Lee Higginson arranged for the sale of 900,000 Swedish Match B Shares, mostly on the British market. The B Share issue raised 90 million kronor, doubling the share capital of Swedish Match.21 Some Americans bought into the deal, through British intermediaries. Ivar’s bankers praised his financial brilliance.
After Ivar’s initial issue, B Shares blossomed as numerous other companies followed Swedish Match’s lead. Investors in large public companies already had realized that their relatively small voting stakes didn’t matter much. That was true even if they bought A Shares. Few investors held enough shares to justify attending corporate annual meetings, or bothering to vote. Even a 1 percent vote, a huge stake for one person, wouldn’t matter. It made economic sense not to care
about votes. Not voting was rational apathy.
Soon companies as diverse as the Dodge Brothers, Inc., Industrial Rayon Corporation, Universal Chain Theaters Corporation, and Southern Gas and Power Corporation had B Shares.22 Then, the natural extension of B Shares with 1/1000 of a vote was B Shares with no vote at all. Such non-voting shares also became common during the mid-1920s. The practice spread so widely that Harvard Professor William Z. Ripley dubbed 1924 the “Year of the Vanishing Stockholder.”23
The elimination of shareholder voting rights led to a minor backlash, but not enough to change state or federal law. Not even the New York Stock Exchange required that listed companies give every shareholder an equal vote. A protest poem, entitled “On Waiting in Vain for the New Masses to Denounce Nonvoting Stocks,” was published in the New York World. It is not a very good poem, but there are so few poems on corporate law issues that it is worth reprinting here in its entirety:Then you who drive the fractious nail,
And you who lay the heavy rail,
And all who bear the dinner pail
And daily punch the clock -
Shall it be said your hearts are stone?
They are your brethren and they groan!
Oh, drop a tear for those who own
Nonvoting corporate stock.24
After the B Share deal, Ivar asked Lee Higginson to begin soliciting investors in another participating preferred issue of International Match. The previous preferred issue, which carried no votes but participated in dividends along with common stock, had sold for 35 dollars per share in late 1924. Donald Durant saw that those shares already had increased substantially in value, and thought they might raise as much as 40 dollars per share with a new issue.
An initial question was whether the new preferred shares would be listed on the Curb Market or the New York Stock Exchange. International Match’s previous issues had been listed on the less prestigious Curb Market, which had lower standards and didn’t require the same degree of care with respect to financial statements and auditing. Lee Higginson had a good reputation to preserve at the New York Stock Exchange, and the firm wanted to have greater confidence in International Match before it would apply for a listing there.25
The directors of International Match, including Durant and Frederic Allen of Lee Higginson, had some questions about the company’s financial statements. They were scheduled to meet to declare a dividend in early 1925, but decided to postpone the meeting when it became clear that Ivar and his accountants would not be able to prepare a balance sheet and income statement in time.26 Lee Higginson pressed Ernst & Ernst with questions. Why the delay? How confident was A.D. Berning about the numbers?
By this time, Ivar and Berning had developed a much cozier relationship. Ivar had given up on getting Berning’s first name right, but at least he addressed letters with an honorific now, as in “My dear Mr Berning.”27 Berning had gotten over the scrubbed trip to Japan, and instead was focused on an upcoming trip to Europe with his wife, at Ivar’s expense. He wrote that “Mrs Berning and I are looking forward with a great deal of anticipation to our visit to Sweden.”28
A.D. Berning’s responses to detailed inquiries from Durant ranged from murky to non-responsive. What, Durant wanted to know, did International Match’s income statement entry of $4,318,827.84 for “income from other sources” represent? Berning cryptically answered that the “other sources” entry “represents all the income of the corporation other than from sales. It includes dividends and interest received on investments, interest received on advances, accounts receivable, etc., profit on exchange and other miscellaneous items.”29 Whatever that meant, it could not have inspired much confidence.
Durant also asked about “investments” listed on the 1924 balance sheet, which also were calculated to the penny. Given the vagueness of the terms, how could these numbers be calculated with such precision? Did “investments” actually include all of International Match’s investments?
Berning advised that the “investments” entry “consists almost entirely of investments in companies engaged in the match manufacturing and related industries, but in which the holdings of the International Match Corporation are not of an amount or character to warrant their assets and liabilities being consolidated.”30 Apparently, Ivar was using the same rationale he had used several years earlier to keep the liabilities of his earlier Swedish bank syndicate “off balance sheet.”
If a company did not own a majority of a subsidiary’s shares, it didn’t make sense to “consolidate” that subsidiary by reporting all of its assets and liabilities. Berning treated International Match’s minority stakes in other companies as investments in special purpose entities, which could be excluded from International Match’s financial statements. Why would International Match consolidate the debts of a minority investment? If it bought some shares of RCA, would it need to include RCA’s debts as well? No, Berning said. Such debts were deemed to be off the balance sheet.
Durant was conflicted about the new preferred issue they were planning. Ivar’s financial statements were sloppy and incomplete. Yet investors nevertheless clamored to buy securities of International Match. The story about Poland was widely publicized. Although details in International Match’s financial statements were vague, even dubious, the Poland deal was real. The Polish government would be granting International Match a match monopoly in exchange for a 6 million dollar loan - that was an easily verified fact. Moreover, this monopoly seemed likely to be the first of many. Even if the financial statements had holes, sharp investors wanted to get in early. They didn’t care what was off or on the balance sheet.
As Durant explored the Poland deal, though, he realized that its terms were uncertain as well. It wasn’t even clear how Ivar would get the money to Poland, or even whether it already was there. Had Ivar personally loaned Poland 6 million dollars? Would the money come from Swedish Match? Or perhaps another of Ivar’s rapidly multiplying subsidiaries? Durant didn’t yet know about Continental Investment Corporation, the secret company Ivar and Ernst August Hoffman had set up in Liechtenstein to shelter International Match’s income. Durant wondered whether some of Ivar’s various unnamed subsidiaries - the ones whose balance sheets were hidden from view - might play an important role in Poland. No one knew the answers to these questions, and Ivar said he wouldn’t divulge details until a second, secret deal with Poland was closed.
Ivar made it clear, though, that the money from the new participating preferred share issue would be used in some way to cover the loan to Poland. Ivar also said he was making good progress on the second Polish agreement, which would require more capital than he or his other companies could afford. It was apparent to Durant that, without new money from American investors, International Match wouldn’t be able to cover any payments that would be owed from that secret deal.
Although the terms of the second arrangement with Poland emerged only slowly, it appeared that the contract would give Ivar and his companies a monopoly to sell and distribute matches in Poland at a much higher price than the current market price, in exchange for a cash payment of $25 million.31
(Torsten’s agreement had covered only match production, not sale and distribution.) Ivar and Dr Marjam Glowacki, the finance ministry official, negotiated the terms during the summer of 1925, while at the same time Durant solicited new investors in International Match.
According to Ivar, he and Dr Glowacki reached a final agreement on July 2, 1925, just days before the new participating preferred shares were to be sold. Ivar’s assistant, Karin Bökman, said she witnessed the signatures to the secret deal; she certified the translation of the original contract, as did a Polish notary. Dr Glowacki signed on behalf of the “Treasury of the Polish State,” and Ivar signed on behalf of International Match Corporation.32 Ivar apparently didn’t need to use the stamp he had prepared with a facsimile of Dr Glowacki’s signature.
Like the B Shares, this contract was a marvel of financial innovation. First, the agreement provided
for the creation of a new Dutch company called N.V. Maatschappij Garanta, or Garanta for short. Garanta would be incorporated in Amsterdam, and its shares would be owned by Polish citizens nominated by Dr Glowacki. Garanta would take over the entire match industry in Poland, from production to sale.
Garanta also would assume “certain exchange losses which have been sustained by International Match Corporation in connection with financial transactions in Poland. This item is to be carried as an asset on the books of Garanta.”33 Apparently, Ivar had continued gambling on foreign exchange rates during 1925. This time, though, he had used International Match’s money, and this time he had lost. The secret agreement shifted those losses from International Match to Garanta. Durant and Berning were unaware of these losses, or their transfer.
The contract provided that International Match would lend 25 million dollars to Garanta in exchange for staggeringly high annual interest payments. Ivar promised to pay Poland 24 percent, a rate that was almost as high as Kreuger & Toll’s dividends. The first 17 million dollars would be due on October 1, 1925; another 8 million dollars would be due the following July.
There was one major problem with this provision. International Match did not have 17 million dollars. Indeed, International Match did not have any money.
Remember that Ivar previously had moved all of the cash International Match had raised from the gold debentures to Continental, the Liechtenstein subsidiary. Then, he had used the cash from the participating preferred shares to repay the gold debentures. That meant all the money was gone. In order to comply with the secret Poland contract, International Match would need to raise another 17 million dollars right away. In other words, Ivar had signed a promise to give Poland 17 million dollars he didn’t have.
The Match King Page 11