lm:
Eon. zollie steakley opinionNo. wu-124
Secretaryof State
CapitolStation Be: W. A. Green Compeny - Payment,
Austin,Texas of subscriptionto increased
capitalstock of a corpora-
tion by oancellaticmof an
indebteddessof corporation
Dear Sir: to subrrcriber.
Your letterofMsrch27,1957, requestedour oplnionasto
whether the Secretary of State should.approve
and file sn amen&nsnt
to a charterwhiuh purports to increasethe capitalstock and p1y for
such Increased stock by the cancellationof an indebtednessowed by
the corporationand to issue such stock for such consideration.
You set out the specificsituationof W. A. Oreen Company
making applioatitmto increaseits capitalstock of $200,000.00,rep-
resentedby 2,000 shareswith a psr value of $100.00each, to $1,000,ooO.00,
representedby 10,000sharesof a per value of $100.00each. 'Ke adai-
ticnal 8,000 shares vith a par value of $800,000.00is to be paid for
by the cancellationof long-termindebtednessin the amxmt of $800,000.00
owed by the corporationto tha subscriberfor the increasedsharesand
that such indebtednessrepresentsmoney actuallyloaned to the corpora-
tion an8 used by it in a buildingexpansionand improvemeatprogram.
It is our understanding that the subscriberwho holds the long-term
indebtednessof the corporationis also the owner of the presentcapi-
tal stock of $200,000.00 We furtherunderstandthat all capitalstock
is of the same class.
In the absenceof a statuteto the contrary,the satisfac-
tion or releaseof a valid debt currentlydue by the corporationis
a lawful mnsideration for the issuanceof stock of the corporation
even when paymnt is required. by constitutionor statuteto ba in
maney. It would be an unnecessaryformalityfor the stock to be paid
for In cash and in turn the debt be imediately paid with that cash.
18 C.J.S. 682 (Corporations, Section2431, 11 FletcherCyclopedia
of Corporations(PermsnentEdition)462, Sectian5197. This is not
violativeof ArticleXII, Section6, of our Coustitutionwhich provides:
"No oorporatianshall issue stock or bonds except for
nmney pai8, labor done or propertyactuallyreceived,and
all fictitiousincreaseof stock or indebtednessshall be
void."
Eon. ZolUe Steak&y, plge 2 (WW-124)
The rules as to the consideration
for which stock may law-
fully be issuedapply to an increaseof stock as well as to original
stock. 18 C.J.S. 752 (Corporations, Secticol
275).
The transactionmust be free from fraud of any interest
of other creditorsand other stockholders.The corporation would
have to be solventfor the indebtednessto be worth its face value.
If the Indebtednessof the corporationis not currentlydue, it should
be examinedto &termine if it is such an indebtednessthat the pre-
paymeatof it vould usuallyand normallyentitlethe debtor to a dis-
count of its iudebtedness, such as a non-interestbearingdebt. In
other words, the indebtedness, just as any other "property"used in
pyment of the subscriptionfor capitalstock,mast ba reasonablyworth
its face value, or It mast be valued at its fair market value.
If your examinationof the affairsof W. A. Green Company
show that the corporaticnris solvent,that the indebtednessto be
cancelledis a bona fide debt and reasonablyworth its face value
or valued at its fair nmrket value, and that the transaction011its
face is free from fraud of any Interestof other creditorsor other
st4xkholder6,then the proposedamendmentshouldbe approvedand filed.
The cancellationof a valid indebtedness
currentlyowed by a solventoorgoration
is a lawful consideration for the issu-
ance of capitalstook if the indebtedness
is reasonablyworth its face value or is
valued at its fair market wlue and the
transactionis free from fraud of any in-
terestof other creditor8or other stock-
holders.
AFTROVED: Very truly yours,
0PIRIoRc-t WILL WIIz.0~
AttorneyGeneralof Texas
H. Grady Chandler,Chairnan
ElbertM.Morrow Bs 2+
MariettaX. Payne LawrenceJone
E&rinP.Eorner Assistant
Biley EugeneFletcher
F@XtB%DFORTEEATTO~GE3ERAL
By:
Geo. k. Blackburn
Untitled Texas Attorney General Opinion
Combined Opinion