                                                                 h.


.’




     Honorable  Claude Isbell
     Secretary  of State
     Austin, Texas

     Attention:     Mr.   J. L. McGarity

     Dear    Sir:                             Opinion No. O-6426

                                              Re:   Authority of Secretary     of State
                                                    with reference    to approving and
                                                    filing of an amendment to a char-
                                                    ter of a corporation    proposing to
                                                    increase   its capital stock.

                 We are in receipt of your communication           of recent date re-
     questing the opinion of this department on the above        stated matter.   We
     quote from your letter as follows:

                     “On the 28th day of July, 1939. the charter of the
            above mentioned was approved and filed in this office. At
            this time the corporation   had an authorized capital stock
            of $l,OOO.OO, represented    by 10 shares of a par value of
            $100.00   each, all of which said stock’was  subscribed  and
            paid for in cash.

                      “On the 18th day of September,      1940, the corpora-
            tion filed an amendment to its charter which among other
            things increased    its capital stock, for that as above stated,
            to 35,000 shares of stock without nominal or par value to
            be issued to the stockholders     at that time and that the con-
            sideration which the corporation      was to receive for its no
            par value stock was $35.000.00,       $34,000.00    of which was
            transferred    from surplus to capital.

                    “On the 18th of January, 1944, the corporation    of-
            fered to file the proposed amendment,    a photostatic copy
            of which is hereto attached.  This amendment proposed to
            increase the capital stock of the corporation   from 35,000
            shares of stock without nominal or par value to 35,000
            shares of stock without nominal or par value and 3500
            shares of stock with a par value of ten dollars ($10.00)
            each.

                     “The affidavit which was filed with the proposed
            amendment,     a photostatic copy of which is hereto attached,
            reflects  that all of the proposed increase   in capital stock
            with a par value has been subscribed     to and that one half
            of said increase   has been paid ,for by the exchange of out-
            standing bonds of the corporation    in return for its capital
Honorable   Claude     Isbell,   page 2




     stock except Four Thousand Eight Hundred Forty dollars
     ($4,840.00) which represents   a note of the corporation ex-
     changed for its capital stock.

              “The corporations    balance sheet filed with the pro-
     posed amendment,      a photostatic copy of which is hereto at-
     tached, showing the financial condition of the company prior
     to and after the filing of the proposed amendment shows a
     surplus of Nineteen Thousand Two Hundred Twenty Seven
     dollars Eighteen cents ($19,227.18)       but does not show the
     capital stock issued and outstanding without nominal or par
     value for which the corporation      received   Thirty Five Thou-
     sand dollars ($35,000.00)     as a liability.  If this said capital
     stock had been considered as a liability the liabilities      of the
     corporation  would have been Fifteen Thousand Seven Hundred
     Seventy Two dollars Eighty Two cents ($15~.772.82)          more than
     its assets in the sum of Fifty Four Thousand Six Hundred For-
     ty Five dollars Eighty Eight cents ($54,645.88).

             “QUESTIONS:

              “1. Can this office consider the solvency of a cor-
     poration in its determinating  whether or not to approve and
     file and amendment to a charter of a corporation   increasing
     its capital stock?

              “2. Should this amendment         be approved      and filed by
     this office 7

             “3. Would your answer to question 2 be different if
     the amounts paid in to the corporation  had been paid in cash
     rather than by the cancellation of indebtedness 7

              “4, If ‘your answer to the two questions next above is
     “NO”, should ~the proposed amendment be approved and filed
     if all of the proposed increase   in capital stock were to be
     paid in to the corporation  in crash?*

             Article     1314,   Vernon9s   Annotated   Civil   Statutes,   in part, pro-
vides:

              “Any private corporation    organized or incorporated
     for any purpose mentioned in this title, may amend or change
     its charter or act of incorporation    by filing, authenticated   in
     the same manner as the original charter,         such amendments
     or changes with the Secretary     of State.   . . 9 e Such amend-
     ments or changes shall take effect and be in force from the
     date of the filing thereof. The certificate      of the Secretary  of
     State shall be evidence of such filing.     No amendment or change
Honorable   Claude    Isbell,    page 3




    violative of the Constitution or laws of this State or any pro-
    vision of this title or which so changes the original purpose
    of such corporation    as to prevent the execution thereof, shall
    be of any force or effect.”

            Article     1330,    V. A. C. S.., provides:

             “The Board of Directors     or other managing officers
    of a corporation   may increase   its authorized capital stock,
    including the issuance of preferred      stock, which stock shall
    have such rights, powers, privileges       and preferences   as are
    now authorized by law, when empowered          to do so by a two-
    thirds vote of all of its outstanding stock with voting privi-
    leges, at a special or regular meeting called for that purpose
    by complying with the provisions      of Article   1308 and/or Ar-
    ticle 1538-D.   as the case may be. Par value stock. issued
    or unissued, may be converted into preferred         stock in the
    same manner and subject to the same limitations          as no par
    stock may be so converted under Article         1538-H,  Revised
    Civil Statutes of 1925.

              “Upon such increase or conversion       of stock being
    made in accordance      with such provisions    and certified  to
    the Secretary    of State by the Directors,   and, if the increase
    has been made in accordance       with law, he shall file such
    certificate;   and thereupon, the same shall bec,ome a part of
    the capital stock of such corporation.      Such certificate   shall
    be filed and recorded in the same manner as the charter.
    All preferred    stock heretofore  authorized    to be issued, or
    issued, or stock converted into preferred       shares, by vote
    or two-thirds    of the outstanding stockholders,     is hereby rat-
    ified, legalized and validated.    (As amended Acts 1931, 42nd
    Leg., p. 78. ch. 51, 5 1.)”

            Article     1538j,    V. A. C. S.,   provides:

             “Corporations   authorizing    the issuance of shares of
    its (their) stock without nominal       or par value are exempt
    from the provisions    of Articles    1308 to 1311, inclusive,   and
    Article   1338 of the Revised Civil Statutes, provided that no
    original charter nor any amendment to a charter which pro-
    vides for stock having a nominal or par value shall be filed
    or recorded by the Secretary       of State until the full amount of
    all such authorized capital stock having a par value shall have
    been subscribed,    and fifty per cent thereof paid, and proof
    thereof made in the manner provided in said Articles           1308 to
     1311. inclusive;  and provided further, that the provisions       of
    said Article   1338 as to the payment of the unpaid portion of
                                                               ,-




Honorable   Claude     Isbell,    page 4




     capital stock shall apply to the payment of the unpaid por-
     tion of any stock which has a nominal or par value.”

             Article      1308,   V. A, C. S., provides:

              “Before the charter of a private corporation      created
     for profit can be filed by the Secretary    of State, the full amount
     of its authorized capital stock must be in good faith subscribed
     by its stockholders    and fifty per cent thereof paid in cash, or
     its equivalent in other property or labor done, the prodtict of
     which shall be worth to the c~ompany the actual value at which
     it was taken or at which the property was received.        The affi-
     davit of those who executed the charter shall be furnished to
     the Secretary   of Stats, showing:

             “1. The name, residence and postoffice  address             of
     each subscriber to the capital stock of such company;

             “2. The amount          subscribed   by each,   and the amount
     paid by each;

              “3. The cash value of any property received, giving
     its description, location and from whom and the price at which
     it was received;

               “4. The amount,, character and value of labor done.
     from whom, and price at which it was received.      (Acts 1901,
     p. 18; Acts 1897, p. 192; Acts 1907, p. 309; G. L. vol. 10.
     pa 246.)”

             Article      1309,   V. A. C. S., provides:

              “If the Secretary of State is not satisfied. he may, at the
     expense of the incorporators,    require other satisfactory  evidence
     before he shall be required to receive,    file and record such char-
     ter. (Id.)”

             Article      1338,   V. A. C. S., provides:

               “The stockholders    of all corporations    chartered  under the
     provisions    of the preceding chapter shall. within two years f.rom
     the date of the filing of such charter,     pay in the unpaid portion of
     the capital stock of such company; proof of which shall, within
     said time, be made to the Secretary        of State, in the manner pro-
     vided in said articles,    for the filing of charters.    (Acts 1907,
     p. 309.)l

              Under the provisions    of Articles   1308 and 1330. supra. if the
board   of directors of a corporation    is authorized by a two thirds vote of
Honorable   Claude   Isbell,   page 5




all its outstanding stock with voting privileges.    said board of directors    of
the corporation   may increase    its authorized capital stock by filing with the
Secretary   of State an affidavit stating the names of the subscribers,     and
the consideration   for and the classes   of the additional stock to be issued,
(See Hildebrand.    Texas Corporations,    Vol. 1, Sec. 262, p- 563-564).    In
Texas Jurisprudence,     Vol. 10, Sec. 67, at page 677, we find the following
language:

              “The amendment must be executed,         it seems by at least
     a majority of the board of directors      and acknowledged by each
     of them before an officer duly authorized to take acknowledge-
     ments of written instruments.       The amendment should be accom-
     panied by a copy of the resolution adopted by the stockholders         au-
     thorizing the increase and by a copy of the resolution       of the board
     of directors  authorizing   the increase.    Furthermore.   the president
     and the secretary    should certif,y under the corporate   seal:   first,
     that the resolutions   are true and correct copies of the originals;
     and, second,    that the persons signing the amendment are direc-
     tors, and are, at least, a majority of the board of directors.”
     (Opinions of Attorney-General,      Biennial Report, 1906-1908,     p0
     670)

              It is provided in Article   1538j, that no charter or an amend-
ment to a charter providing for “‘stock having a nominal or par value shall
be filed or recorded by the Secretary      of State until the full amount of all
such authorized capital stock having a par value shall have been sub-
scribed,  and fifty per cent thereof paid, and proof thereof made in the
manner, provided in - - Articles      1308 to 1311, inclusivem; and that Article
1338 would be applicable with reference       to the payment of the unpaid por-
tion of any stock which hasa non&al        or par value.     Thus, it is apparent
that the requirements,     under the foregoing pr~ovisions, with reference      to
amending a charter authorizing additional capital stock with nominal or
par value are the same as those with reference         to the original charter of
a corporation    issuing stock with par or nominal value.       With reference    to
the function of the Secretary    of State, under the provisions     of Article 1309,
we quote from Hildebrand,      Texas Corporations,      Vol. 1, Set, 25, ppm 64-65,
as follows:

              I . * e 0 The Secretary of State may require additional
     information    or evidence ,as the fulfilment of the statutory pro-
     visions as to subscription      and payment of capital stock, other
     than the affidavits   of those executing the charter,  if he deems
     such action necessary.      ~ e Dw

However. we note that when a corporation        proposes to decrease      its capi-
tal stock, the Secretary   of State is authorized to require proof as to the
solvency of the corporation     proposing to decrease     its capital stock, for
the purpose of protecting the creditors,    while in the case of a proposed
increase   in the capital stock, the Secretary    of State is to satisfy himself
                                                            ,-




Honorable     Claude   Isbell,   page 6



that the proposed increase    in capital stock is actually paid in as required
by law.   Under the provisions    of Article   1332, before there can be a re-
duction of the capital stock, proof must be made to the Secretary         of State
of the financial condition of the corporation,     and if all of the debts are not
paid, or at least reduced prior to the filing of the certificate     of decrease,
to such an extent that the rights of creditors     will not be jeopardized.    (See
Hildebrand,   Tex. Corp.., Vol. 1, Sec. 264, p. 576).     The capital stock of a
corporation   is a fund set apart for the payment of debts of the corporation,
and our statutes have provided for special scrutiny of this fund (capital
stock) for the~benifit of creditors,   when it,is proposed that said capital
stock is to be reduced.    With reference    to the nature and purpose of the
capital stock of a corporation,   the following cogent language is quoted in
10 Texas Jurisprudence,     Sec. 70, pp. 680-681:

                 “The capital stock of an incorporated       company is a
       fund set apart for the payment of debts.        It is a substitute
       for the personal liability which exists in private copartner-
       ships.   When debts are incurred a contract arises with the
       creditors    that it shall not be withdrawn or applied otherwise
       than upon their demands until such demands are satisfied.
       D . . . It is publicly pledged to those who deal with the cor-
       poration for their security.      . ~ . . * (National Bank of Jef-
       ferson v. Texas Investment Co., 74 Tex. 421, 437, 12 S.W.
       101, quoting from Sanger v. Upton, 91 U.S. 56. 60, 23 L. Ed.
       220)

              Generally,   when capital stock in increased   rather than de-
creased,  and the cash or the equivalent of cash is actually paid in, such
increase  in said capital should not jeopardize    the rights of the creditors
of said corporation,    and we find no authority for the Secretary    of State to
refuse to approve and file an amendment to a corporation’s         charter, when
the required affidavits,    information and data have been furnished,      and when
the Secretary   of State finds that the cash or its equivalent has been actu-
ally paid in or received in the manner required by law.

              In view of the foregoing,    and under the facts   submitted,   we an-
swer    your questions as follows:

              1. With reference     to an amendment to the charter proposing
to increase the capital of the corporation,       it is our opinion that the func-
tion of the Secretary    of State is to ascertain    that the required affidavits,
information   and data have been submitted, and to satisfy himself that the
statutory provisions    as to subscription    and payment of capital stock are
fulfilled.  He may require additional information         or evidence as to the
fulfillment  of the statutory provisions    as to subscription     and payment of
capital stock, other than the affidavits of those executing the charter,         if
he deems such action necessary.         To the extent that it is necessary    in his
determination    of the actual cash value of the property (bonds) received in
exchange for the new shares of stock, the Secretary           of State may consider
Honorable       Claude    Isbell,     page 7




the solvency      of the corporation.

              2. As to whether the proposed amendment should be approved
and filed by the Secretary    of State, it is our opinion that such amendment
should be approved and filed, provided that the required affidavits,       data
and information have been submitted by the corporation,        and provided that
the Secretary   of State is satisfied that the total amount of the capital stock
has been subscribed,    and that fifty per cent of same is paid in cash, or its
equivalent in other property.      The actual cash value of the bonds to be ex-
changed for the proposed new shares of stock involves a fact determination.
We are not herein deter,mining any matters with reference         to the actualcash
value of said bonds.

               3. and 4. As to whether          said amendment should be approved
 if all of the proposed increase   in the       capital stock had been paid in cash,
 it is our opinion that said amendment           should be approved and filed, pro-
 vided that the required affidavits and          other data and information have
 been furnished as provided by law.

               Trusting       that the foregoing    satisfactorily        answers   your in-
 quiries,   we remain

 APPROVED          Mar.    21.      1945       Yours      very   truly,

/s/   Grover    Sellers                        ATTORNEY           GENERAL       OF TEXAS

 Attorney      General    of Texas

                                               By   /s/     J. A. Ellis
                                                            J. A. Ellis
                                                            Assistant

  JAE:ddt/cm




                                                                           APPROVED
                                                                           Opinion
                                                                           Committee

                                                                            By/s/  BWB
                                                                              Chairman
