Honorable 0. P. Lockhart, Page 4 (o-6370)
In Opinion No. 2,608, pages 231-238 of the Report and Opinions of
the Attorney General of Texas for 1924-1926, the following holding, which is
here adopted, was made:
“The term ‘capital stock’ has been defined as ‘the property
of the corporation contributed by its stockholders or otherwise
obtained by it to the extent required by its charter.’ Williams
vs. Western Union Telegraph Company, 93 N.Y., 162-188. It
has been said ‘that the capital stock of a corporation is like that
of a co-partnership or joint stock company, the amount which
the partners or associates put in as their stake tn the concern.’
Berry vs. Merchants Exchange Company, 1 Sandf. Ghan., N.Y.,
280, quoted with approval in Williams vs. Western Union Tele-
graph Company, supra. The Supreme Court of North Carolina
has defined it as ‘the fund forming the basis of a co,rporation’s
business transactions.’ Hobgood vs. Ehlen, 141 N.C. 344, 53
S.E. 857. Like definitions have been offered by the courts of
other States and by text-writers whose works are accepted as
authority. In Clark and Marshall on Law of Private Corpora-
ttons, Volume 2, 372, it is said:
u ‘The term “capital stock”, properly speaking, signifies
the amount subscribed and paid in or secured to be paid in by
the,ahareholders of a corporation
-Again the same writers say:
* ‘Capital stock of a corporation as we have just seen is
the amount subscribed and paid for by the shareholders or
secured to be paid in, and upon which it is to conduct its opera-
tioar *’
“The capital stock of a corporation is to be diatinguiehed
from ita capital, which conatituter the aggregate of itr lrreta
or proprrtlor. However much the capital of a corporation may
fncreare through accumulation of profits or eaheneement in
thr value of ttr proprrtiea, or however much it may bo reduced
by loraer or by a decreare in property values, the amount of
capital stock remetam the rame unlera it ir lncreered or reduced
by or under legtrlrtive authortty. The term ‘capital stock’ in-
dtcrter a rrlrtlon between the corporation and its rhare-holderr.
There must be a contract between the corporation end rubrcrlbarr
for stock in order that rhares of stock may be irrued. The word
‘capital’ aa applied to corporatlona doer not involve this impli-
cation.
,Honorable 0. P. Lockhart, Page 5 (o-6370)
* ‘Capital stock’ of’a corporation . . t is the, sum of money
fixed by the corporate charter as the amount paid in or to be
paid by the stockholders for the prosecution of the business of
the corparati.on, and for the benefit of the corporate creditors.
. . . The capital stock is to be distinguished from the amount
of property owned by the corporation. Generally, capital stock
does not vary, although the actual property of the corporatton
may fluctuate widely in value.“” Markel vs. Burgess, 95 N..E. 308.
“In the case of Turner vs. Cattleman’s Trust Company,
215 S.W. 832, the Commission of Appeals, Sec. ’ “B” ’ of this
State defines ‘capital’ as relating to corporations as follows:
“The term ‘capital’ is used to designate that portion of
the assets of a corporation regardl,ess of their source, which
is utilized for conducting the corporate business and for the
purpose of deriving therefrom their gains and profits. 7
R.C.L., 165; Wright vs. Gas R. & B. Co., 216 U.S. 420; 30
Supp. Cit. 242, 54 L.Ed. 544; Smi.th vs. Dana, 77 Corm. 543,
60 Atl. 117; 69 L.R.A. 76; 107 Am. St. Rep. 51; Tradesmen’s
Publishing Co. vs. Wheel Co., 95 Tenn. 634, 32 S.W. 1097,
31 L.R.A. 593, 49 Am, St. Rep. 943.”
In the case of Farrington vs. State of Tennessee, 24 Law Edition,
558, the Supreme Court of the United States, in dealing with a question as to
the amount of tax a bank should pay, laid down the followtng principle8 of law
applicable here :
*The capital. stock i.8 the money paid or authortzed or
required to be paid In aa the basis of the buetneee of the bank,
and the means of conducting its operations. It repraaentr
whatever it may be invested in. If a large aurplur be accumu-
lated and laid by, that does not become a part of tt. The amount
authortzod cannot be tncreared wtthout proper legal authortty.
If there be lorrer which Impair it, there can be no formal re-
ductton without the like sanction. No power to increare or
dtmtntrh it belonga inherently to the corporation. . . .*
14 C.J., Sections 499, in part, 501 and 502, pagea 379, 380, 381,
382, and 383, read as follows:
“(4 499) 2. Capital Stock and Capital - a. Definitton of
Capital Stock. The ‘Capital stock’ of a corporation, in the
atrtct and proper sense, is the sum total fixed by the charter
Honorable 0. P. Lockhart, Page 6 (o-6370)
or articles of Incorporation aa the amount paid in or to be
paid in aa the capital upon which the corporation ie to do
business; or the fund o,f money or other property fixed as
the basis for conducting the business of the corporation, as
dMinguiahed from the shares representing the separate
interest of the individual stockholders; or, in other words,
the money or its equivalent advanced by the corporators or
members as the capital, which is usually for convenience
divided into equal amounts called shares, for which each
member is entitled to a certificate, showing the number of
shares he has in the company.*
=(4 501)c. Distinction between Capital Stock end Property
or Assets. The fund provided as capital stock becomes the
property of the corporation, but the capital stock of a corpora-
tion is not the same thing as the property of the corporation.
Properly speaking the term ‘capital stock’, as has already
been stated, means the sum fixed by the charter or articles of
incorporation as the amount paid in, or to be paid in, in money
or its equivalent, as the capital upon which the corporation is
to do business; and in this sense it is distinguishable from the
tangible property and assets generally of the corporation. The
property of a corporation fluctuates and may be greater or less
than the original capital invested according as the business has
resulted in a profit or a loss; but the capital stock remains
fixed and unaffected by the accidents of business.
* ‘Capital stock’ sometimes applied to property or assets.
The term ‘capital stock’ is often used, however, in a different
sense, particularly in statutes relating to taxation, and as in-
cluding all the property of theccporation, in which its capital
is invested and which is employed in carrying on M‘bustness,
in whatever form, and even as including the entire property or
assets of the corporation, tangible and intangible, including its
.I franchise or including its franchise or franchise,s, contract
privileges, and good will. So it is said that capital stock ‘exists
: ~.
only nominally’ and is the mere representative of the actual
property or assets of the corporation,”
‘(8 502)d. Capital or Capital Stock as Including Profits
and Surplus. Although it is said that the profits of a corpora-
tion are mere increment and augmentation of the stock until
separated therefrom by declaring a dividend, and although the
Honorable 0. P. Lockhart, Page 7 (O-6370)
term “capital’ OP “capital stock’, as used in a statute may in-
clude accumulated profits when this appears to have been the
intention of the Irgislature, the general rule is that undivided
profits or surplus form no part of the capital or capital stock
in the proper sense, although they do form part of the general
capital or assets of the corporation, But of course surplus may
become capital by means of a duly authorized declaration of a
stock dividend. a .m
Volume 2, Hil.debrand, on. Texas Corporations, Section 477, pages
355-356, lays down the following rules:
(a . . . When a corporation. has a surplus, whether a dividend
shall be declared, and if declared, how much tt shall be, and when
and where it shall be payable, rest largely in the discretion of
the directors. In the exercise of their discretion they are not
subject to control or interference by the courts unless they act
fraudulently, oppressively, or unreasonably,
‘The stockholdera of a corporation are not entitled, aa a
matter of absolute right, to the payment of a dividend whether
the earnings of the corporation in any year exceed ita ltabilitter.
Although there may be a large surplus, the board of directors
may* if, in their opinion, the interest of the corporation makea
it aeceasary or advisable, expend the same in Impravemontr,
or in 8 lawful sxtenaion of the buaineva of the corporation. Under
rome circumatancea, the board of directora may retain profita
of the buatnesr as a rurplus fund instead of dlvidlnp it among the
stockholders. Whether they do so is generally l quertion withtn
tldr dtrcration to determine . . 04
We think it 1.a char from the above authori#nr, tbet the aurplua
accumulated by a corporrtt.on is not a part of the capital rtock of raid cotpora-
tion, From the figuraa given by you in your requert, we concludr that the amount
of capital rtock, common and preferred, of the corporation iaquirod about ia the
total wm of $3,905,466.00, and that the balance of tlmlaaota of sold corporation
In the total rum of $4,71,2,797.00 constitutea the lurplua, crpttal and lnr no d, of
raid corporation. Therefore, since Article 4725 horeinrbave ret out, provider
that a llfr inauranco company organized under the lawr of thir Stats may Invert
la or loan upon,aocuritier therein named, and none other, one of the requirementa
of tha eorporrtioae offariag such securittLa being that such invertment #hall not
bo mrdo la the rtock of an oil. company or manufacturing company unlerr ruch
corporation har capttab stock of not less than $5,000,000.00, it ia our opinion
Honorable 0. P. Lockhart, Page 8 (o-6370)
that the company referred to by you does not qualify under said statute, for
the reason that it does not have the required amount of capital 6tock.
Trusting that this satisfactorily answers’your inquiry, we remain
Very truly yours,
ATTORNEYGENERALOF TEXAS
By /s/ Jas. W. Bassett
Jas. W. Bassett
JWB:rt:tiw
APPROVED JAN 23, 1945
/s/ Carlo8 C. Ashley
FIRST ASSI5TANT
ATTORNEYGENERAL
APPROVED
OPINION
COMMITTEE
By /s/BWB
Chairman