                          April29, 1971

Honorable Eeal Solomon, Chtirman      Opinion No. M-846
Committee on Banks and Banking
House of Representatives              Re:   Constitutionality
State Capitol                               of House Bill No.
Austin, Texas                               1410, 62nd Leg., R.S.,
                                            1971, authorizing
                                            state banks to ln-
                                            crease their capital
                                            stock without the
Dear Mr. Solomon:                           issuance of same.
      You have requested our opinion concerning the constitu-
tionality of'House Bill No. 1410 currently pending in the
62nd Legislature, Regular Session, 1971, which reads as follows:
      "A BILL TO BE ENTITLED AN ACT amending Chapter
      III of the Texas Banking Code of 1943, same being
      Chapter 97, Acts of the 48th Legislature, Regular
      Session, 1943, by adding a new article to be
      designated as Article 12a and to be codified as
                                Texas Civil Statutes;
      Article 342-312a~~~Vernon's
      permitting state banks to authorize and provide
      authorized but unissued stock, with certain re-
      strictions and limitations; a~nddeclaring an
      emergency.
     "BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF
     TEXAS:
      "Section 1. Chapter III of The Texas Banking Code
      of 1943, as amended, Is hereby amended by adding
      a new article immediately following Article 12
      to be designated as Article 12a which shall read
      as follows:
      'Article 12a.   Authorized But Unissued Stock.
         Ia. Any state bank, with the approval of the
      Commissioner and by vote of stockholders owning
      two-thirds of the stock of the bank entitled to

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     vote, may authorize an increase in the stock of
     the bank in the category of authorized but un-
     issued stock, except that the approval of the
     Commissioner shall not be required where the
     resulting amount of stock in the category of
     authorized but unissued stock will satisfy either
     of the following criteria:
            '(1) Where the resulting total amount of
      authorized but unissued stock will be free of
      preemptive rights of shareholders, will not exceed
      five percent (5%) of the currently issued and out-
      standing stock, and is specifically designated as
      being reserved for-issuance inconnection with an
     officer or employee stock option plan, provided
      that such plan has been approved by the Commissioner.
           '(2) Where the resulting total amount of
     authorized but unissued stock, exclusive of that
     amount specifically reserved fol,issuancein con-
     nection with an approved officer or employee plan,
     will be subject to preemptive rights of shareholders
     and will not exceed fifty,percent (5C$) of the
     currently issued and outstanding stock.
        'b. With the written approval of the Commissioner,
     authorized but unissued stock may be issued from time
     to time as stock dividends or for such other purposes
     and considerations as may be approved by the board
     of directors of the bank.
        'C.   Authorized but unissued stock may also be
     issued from time to time to officers or employees of
     the bank pursuant to an approved stock option plan
     adopted in accordance with Article 12 of this Chap-
     ter, ,or in exchange for convertible capital notes
     or debentures previously approved by the Commissioner
     in accordance with the terms and provisions of such
     securities.
        'd. Nothing contained herein shall be construed
     as relieving any bank of the obligation to file
     with the Commissioner, pursuant to Article 12 of
     this Chapter, a copy of every amendment to the
     Articles of Association adopted by the shareholders.'
     "Section 2. The need for modernization and clarifi-
     cation of the Texas Banking Code of 1943, so that
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Honorable Neal Solomon, page 3     (M-846)


      banks may better serve their communities, creates
      an emergency and an imperative public necessity
      that the Constitutional Rule requiring bills to
      be read on three several days in each House be
      suspended, and said Rule is hereby suspended; and
      that this Act shall take effect and be in force
      from and after its passage, and it is so enacted."
      Article XVI, Section 16 of the Constitution of Texas reads
in part as follows:
         "The Legislature shall by general laws,
      authorize the Incorporation of corporate bodies
      with banking and discounting privileges, and
      shall provide for a system of State supervision,
     'regulation and control of such bodies which will
      adequately protect and secure the depositors and
      creditors thereof.
         "No such corporate body shall be chartered
      until all of the authorized capital stock has been
      subscribed and paid for in full in cash." (Em-
      phasis added)
         II               II
              .   .   .



      It appears from a reading of House Bill No. 1410, supra,
that this bill would authorize a state bank to increase its
capital stock without requiring an increase in the capital
assets, and without issuing such stock, but holding the same
for issuance for certain purposes.
      It is clear that the intent and purpose of the emphasized
section of the Constitution, quoted above, is to require that
banking corporations be adequately financed and that their
capital stock not be diluted in value.
      When a banking corporation amends its charter to increase
its capital stock then such charter as amended becomes the
bank's charter. In accord,              Chapman 286 S.W. 171
172, (Tex.Comm.App. 1926, mod.
                            seeo%hi;    grounds 287 S.W. 4961.
It is our view that to permit the enactment of House Bill No.
1410 would be to approve the possible dilution of a bank's
capital stock, when such dilution was forbidden at the time
of the Initial issuance of its charter, It is the opinion of



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Honorable Neal Solomonj page 4    (M-846)


this office that the Legislature does not,have the power to
authorize such a dilution.
      In view of Article XVI, Section 16 of the Constitution
of Texas, which provides that all of the authorized capital
stock must be subscribed and paid for in full in cash, we are
of the opinion that House Bill No. 1410 is unconstitutional.
                        SUMMARY
         House Bill No. 1410, 62nd Legislature, Regular
      Session, 1971, authorizing a state bank to Increase
      its capital stock without issuing same, is uncon-
      stitutional and in violation of Article XVI, Section
      16,of the Constitution of Texas, which requires
      all authorized capital stock to be subscribed and
      fully paid for in cash.
                              Very truly yours,
                              CRAWFROD C. MARTIN
                              Attorney General of Texas


                              By:
                                    F.irstAssistant Attorney
                                      General
Prepared by John H. Banks
Assistant Attorney General
APPROVED:
OFTNION COMMITTEE
Kerns Taylor, Chairman
W. E. Allen, Co-Chairman
Malcolm Quick
S. J. Aronson
Jack Sparks
Fisher Tyler
MEADE F. GRIFFIN
Staff Legal Assistant
ALFRED WALKER
Executive Assistant

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