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