GERALD MANN Ausrcxw II, TBxra
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A-RN- aacxslaAT.
Honorable Wm. J. Lawson
sectetary of state
Austin, Texas
Dear Sir: Attention: Will Mann Richardson
Opinion No. 04097
Rc: The velidlty of self-executing
stock, retirement provfsfons fn
corporate charters.
This department has received~your requebt for our opinion. We
set out below the body of your letter.
*The original chartar was issued to ‘the Waples-Plattar Gro-
cery Company November 30,1891. with ah authorimed capital stock
of $RiO,O~O. Vartous tocreases of capttal stock ware accomplished
by charter amendment until on Juty 15, 1913, the suthoriead capital
stock, by amendment (iled that day, was increased to $1,500,000.00.
“At a meeting of the shareholders and directors at Denison,
Texao. on July 26, 1928, it was delided to amend the charter,
changing the name of the corporation to Waples-Platter Company
and increasing the capital stock to $2,000,000.00, ‘making the
additfonal $500,00U.OO’capital stock all preferred, without vottng
power, which preferred capital stock shall be of the par value of
$100.00, and shall bear interest at the rate of six per cent per
annum, with the option on the part of the corporation to retire
same at any dividend paying period.’
‘Oa July 30, 1928, the amendment authorized at the Director’s
meeting on July 26, 1928. was fried with the Secretary of State and
after providing for the change of the corporate name and for the
increase of the authorized capital stock, reserved ‘the right on the
part of the corporation to retire aaid preferred stock at par at any
‘dividend payhz data.’ The amendment containe,d the certificate
of the officers of the corporation to the effect that the authorized
hicrease had been subscribed and that all of same had bean frilly
paid in with lawful money..
“The iscords of the Secretary of State’s office reflect that the
Waples-Platter Company In its franchise .tax report; for the year
Honorable Wm. J. Lawson, Page 2, O-4097
ending December 31. 1928, raported an authorized capitalization
of Two Million Dollars and paid the tax thereon. Thereafter,
and on May 25, 1929, at a meeting of the shareholders and di-
rectors of the Waples-Platter Company, it was voted that the
provision for pr.eferred rtock contained in the charter amend-
ment of July 30, 1928. be eliminated, and ‘that the action of the
shar.eholders aad directors in time past in cancelling the sub-
scription to such preferred stock be ratified and confirmed.
The same resolution instructad the directors to change the
chartar of the corporation to conform to the terms of the reso-
lution, but no amendment was filed with the Secretary of State
at that time.
‘*At a meeting of the shereholders and directors on the
22nd of January, 1935. a resolution was passed in which it was
recited that the amerqiment bf Tuly. 1928, had authorized an
increase of the capita! stock of 5000 shares of preferred stock
but that the resolution of the shareholders and directors on
May 25, 1929. by mutual conseut of the subscribers, share-
holders and directors, had rescinded the subscription to asid
stock and cancelled same; that the charter had never been
amended conforming to the terms of the resolution that had
been passed; and directing the officers and directors to
certify to the Seczetary of Stats that the charter of the corpor-
ation be amended. On February 14, 1935, the officers certified
to the Secretary of State the amendment to the charter reciting
the various staps that had been taken and setting out that ‘after
A. F. Platter and L. H. McKee had paid in the snm of $250.000.00
each on their subscription, It was deemed to the best interest of
the corporation that all the stock be common stock and that the
preferred stock be eliminated and that by consent of all share-
holders, common and preferred, the subscriptions to said pre-
ferred stock were cancelled and the money restored to the sub-
scribers.’ It was then provided in the amendment that the reduc-
tion of the capital stock to $1,500,000.00 be reflected and that the
provfs.ion in the charter for the issuance of the preferred stock
be e Urninated.
‘After the action of the shareholders and directors on May
25, 1929, the franchise tax reportr filed by the corporation re-
flected an authorized capitalisation of ‘$1,5g0.000.00 only, and
tha franchise tax was computed on that basis. These sums were
Honorable Wm. J. Lawson, Page 3. O-4097
accepted by the Secretary uf State each year from 1929 to 1941.
On January 17, 1941, this offike called upon the Wsples-Platter
Company for additional tax for all years after 1928 and until
the ,amendment of tbe charter warn filed in 1935, upon the theory
that the subscribed capital stock during that period was
$Z,gflO,OOO.OOand that the action of the corporation in calling in
and cancelling the preferred stock in May, 1929, did not affect a
reduction of the capital stock of the corporation insofar as the
franchise tax due the State was concerned.
*It is the poaition of the attorneys for. the Waples-Platter
Company that the provision in the charter amendment of July 30,
1928. for the retirement snd cancellation of the prcferred’stock
was and is a valid provision affording a legal method by which
to reduce the authorized capitaltnation of the corporation and
that the effect of the acts of the corporation hereinbefore set
forth was ta take advantage of the provisions of. its charter and
reduce the authorized capital of the corporation by cancelling
the 5000 shares of preferred stock.
‘It Is also their contention that in view of the provisions in
the 1928 amendment, reserving to the corporation the .power to
cancel and retire the preferred stock, it was unnecessary that
the charter of the corporation be thereafter amended to refl#t
the reduction. This view of the effect of the action of May 25,
1929. renders the amendment of 1935 unimportant except inso-’
far as it evidences the intention of the Board of Directors that
the preferred stock called in an~dcancelled should never again
be reissued. Said attorneys think this amendment was unneces-
sary because the preferred stock, once having been retired, with
the consequent reduction of authorized capital. the corporation
would have had no power thereafter to missue such preferred
stock.
*This department has always held that an amendment did
not become effective, to reduce the capital stock of a corpora-
tion, until the actual amendment drawn up in accordance with
the Statutes was filed. The department has never felt that a
provision in the charter allowing the corporation the right to
retire preferred stock would nullify the statutory requirements
for decreasing the capital stock of a corporation. If a corpora-
tion has the right to insert such provisions in its charter it could
change the requirement that two-thirds of the voting stock authorize
Honorable Wm. J. Lawson. Page 4. O-4097
the decrease. and in lika manner might provide for a dissolution
by less than four-fifths of the stockholders.’ Such provisions, how-
ever, are contrary to our Statuka and this Department does aot
feel that they should be given effect. The language in the particu-
lar case would allow the corporation to retire preferred stock but
this Dupertmellt feela that such stock upon retirement became
treasury stock and was taxable until the amendment was filed.
The mere act of retiring the stock (which in thls case was can-
celled rather than retired) would not decrease the authorized
capital according to the interpretation of this Department.
*The question presented is oua that has not heretofore been
passed upon by this Departmont or by the Attorney General. In
view of the fact that preferred stock retirement provisions sre
commonly used in drafting corporate charters and amendments
thereto, we feel that any question as to the valid.ity of such a
charter provision should be submitted to the Attorney General
for detarmination.
*The charter amendment of July 30, 1928, reserving ‘the
right on tba part of the corporation to retlre said preferred stock
at par at any dividend paying date,’ is attached hereto, as well as
the pertiaent reaolntions of the shareholders and directors of the
Waples-Plattar Company.
“WC believe that the following legal questions are presented
and must be answered by you in order to determine the franchise
tax liability of this corporation:
*First: Is the provision in the charter amendment of July 30.
1928, Gviag the right on the part o.f the corporation to retire
the authoriced preferred stock at any dividend paying date, a valid
provision?
“Secoad. Under the facts and circumstances related above,
was thcaction of May 25, 1929, effective to cancel and retire the
preferred stock, thereby de.creasing the capital stock for franchise
tax purposes ?
“In order to facilitate the answer,ing of these two legal ques-
tions, I am attaching hereto a brief prepared by the attorneys rep-
resenting Waples-Platter Company.”
Honorable Wm. 3. Lawson, Page 5, O-4097
Article 1304, Revised Civil.Statutes, provid~es what a corpora&
charter murt contain. Section 6 of that Article reads:
a***
‘6. The amount of its capftal stock, if any, and the num:
be? of sharea .into which it ts dtvidtd.”
Arttcle 1330. Revised CLvil Statutes, as amended, Acts 1931,
4gnd Legtsiature, Page 78, Chapter 51, Section 1, stipulates how a corpor-
ation may incrc8se its capital stock thualy:
‘The Board of Directors or other managing officers of a
corporation may incrcaae its authorized capital stock, includ-
tug the issuance of,prefetred stock, which stock shall have
.&Ma, powers, privileges and preferences aa are now author-
ized by law. when empowered to do so by a two-thirds vote of
all of its outstanding stock with voting privileges, at a special
or regular meeting called for that purpose by complying with
the provisions of Article 1308, and/or Article 1538-D, as the
case may be. Par value stock, issued. or unissued, may be
converted Into preferred stock In the same ~tnanner and sub-
ject to the same limitations as no par stock Mayo be so con-
verted 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 D,frectors, and, lf the increase baa been made
In accordance with law, he shall file such certif,icate; and there-
upon, the same shall become a part of the capital stock of such
corporation. Such certificate shall be filed and rec,orded in the
aame manner as the charter. All preferred stock heretofore
authorized to be issued, or issued, or stock convertad into pre-
ferred shares, by vote of two-thirds of the outstanding stock-
holders, is hereby ratified. legalized and validated.”
For the sake of brevity, we shall not set out Article 1308 but wtll
simply say that it deals with the capital stock of a corporation, saying of
what it may consist and requiring the filing of an affidavit with the Secre-
tary of State relative the subs~crtbers thereto.
Honorable Wm. J. Lawson, Pagb.6, O-4097
Article 1332, Revised Ctvtl Statutes, sets out corporate capital
stock reduction procedure, as follows:
‘A corporation may decrease its capital stock by such
amount as its stockholders may decide, by a two-thirds vote
of all its outstanding stock, tn like mauner as 1s required for
an increase. No such decrease shall prejudice the .rights of
say creditor of such corporation in soy claim or cause of ac-
tion such creditor may have againat the company, or any
stockholder thereof. Such decrease ahall.uot become effec-
tive until full proof is made by sffidavi,t of the directors to
the Secretary of State of the financial condftion of such cor-
poration, giving therein all Its assets and liabilities, with
namaa and postoffice addresses of all creditors and amount
due each; and the Secretary of State may require, as a con-
dition precedent to the filing’ of ‘such certificate of decrease,
that the debts of such corporation be paid or reduced.”
In Fletcher’s Cyc. of Corporations, Section 167. it is said:
‘The right to be a corporation is not a natural or a civtl
right of any person, but it Is the general rule that the crea-
tion of corporations 1s dependent upon the consent of,the sov-
ereign power.
.** * *
“In the United States a prerequisite to the right to become
e corporation is the consent of the sovereign power, which is
exercised by the legislative department of the state or terri-
tory, or by congress, as the case may be.”
The right of regulation by the creating sovcre~ignty naturally
follows this power of creation,. Ar a condition of the act of creation,
the Legislature may impose upon the corporation any requirement,
regulation, or restriction. This power is limited only by the Federal
or State Constitution.
The terms of Article 1332, supra, expressly provide how the
capital stock of a corporation may be reduced in this State. By the
statute’s enactment. the ~Legislature impliedly denied to the corpors-
tion any other method of reduction. The Legislature plainly revealed
their intent.
Honorable Wm. J. Lewsoa, Page 7, O-4097
The capital stock is that amount of money, or its kind. which the
corporate shareholdera put up for the purposes of the corporation. It is
to be used to satisfy any obllgatlona the concern may assume during lta
corporate existence. But, the capital stock la not for the convenience of
the corporatora alone. Another purpose, and moat important it would
seem, is that it serves as a source of information and providds security
to the public at large. Section 6 of Attlcle 1304, aupra, requtes that the
charter of a corporation shall stats the amount of the capital stock. The
reason seems obvious. It represents a definite and fixed sum which can-
not be increased or diminished at whim. This can be accampllshed only
by the prescribed statutory mode. See 5 Thomp. Corp., Sections 3408.
3686 and 3688; Turner vs. Cattleman’s Trust (Corn. Ape.), 215 S. W. 831.
‘It is a general rule that where a statute gives a right and
prescribes a remedy, the statutory remedy must be strictly
pursued.; hence, it follows that as there can be a reduction of
the capital stock of a corporation only on express statutory au-
thority, the method prescribed by the statute must be followed.
For obvious reasons the law would not tolerate any secret or
clandestine reduction of the stock; it must be done openly, and
the public must have the same opportunity to know of such reduc-
tlon aa of knowing the origlnal amount of the capital stock. Thus,
the statutes in the several jurisdictions usually provide that any
change in the amount of the capital stock of a corporation shall
be made at a stockholders’ meeting ,callad for that purpoae upon
a notice specifying the object of the meeting and the proposed
change. It has been suggested that the publicity required in such
proceeding wsa for the purpose,, in part, at least. of advising the
public dealing with the corporation of the proposed change. Any
secret contrivance or arrangement to produce a change in the
capital stock is contrary to the usual statutory requirements,
(a) that the certificate of incorporation shall state the amount of
tha capital stock, and (b) that any change in such capital stock
shall only be made after extended public notice.” 5 Thomp. Corp.,
Section 3688, Page 518 and 519, and cases cited.
It is not our intention to imply that the stock reduction in the sitUa-
tion before us was accomplished Ln a *secret or clandestine” manner; but,
we believe the above quotation ably states the purpose or the motive behind
our statutory requirements relative to the reduction of corporate capital
stock.
Honorable Wm. 3. Lawson. Page 8, .O-4097
It fOuOWS from that which foregoes, that this depsrtment is of the
opinion that the action of the Board of Directors on May 25, 1929,.did not
legally reduce the capital stock of the Waples-Platter Company. Their
purpose was not accomplished until the provisions of Article 1332, supra,
were met and complied with, allegedly ou February 14, 1935.
It is the contention of counsel for the company “that the provision
.iu the charter amendment of July 30. 1928, authorizing the increase of the
capital stock by the issuance of Five Hundred Thousand ($5OQ,OOO.O0)Dol-
hrs of preferred stock and reserving the right ou the part of the corpora-
tion to retire the preferred stock at par at any dividend paying date, was
and is a valid charter provision. Further, that under the terms of the
corpcuate charter itself, a method of reducing the capital stock of the
corporation was provided, rendering unnecessary any further amendment
of the charter,to reflect tha raductioal” To this, we shall say that no
corporations can dispense with statutory prescriptions by charter provi-
sion. International Travelers’ Ass’n. KS. FranciP, 23 S. W. (2d) 282, 119
.Tex. I.
“The rule is well settled that when a corporation is organ-
feed under a general law the law itself limits the powers of the
corporation and the nature and extent of the cOrporate,privlleges;
and the powers, privileges and immunities specified in the legis-
lative act authorizing its organiestion cannot be added to or en-
larged by the chartsr or other instruments. In ali cases where
there is conflict between the charter or articles of incorporation
and the general law, the latter,governs. But the mere fact that
the powers enumerated -- in the regulations of the assoctation,
for example -- are in excess of those conferred by the general
law, will not entirely invalidate the’charter; the charter is valid
as to the legitimate powers of the corporation and the enumera-
tion of unauthorized powers is treated as surplusage.” 1 Thomp.
Corp., Section 190.
Counsel for the Company submits for our attention a Virginia case,
.Supetior Steel Corp. vs. Commonwealth 136 S. E. 666. In that case, the
Supreme Court held that a corporate charter provi6ion reserving to the
corporation the right to redeem its preferred stock placed the franchise
tax collection agency upon notice of a possible reduction in the taxable
corpo,rate capital stock; consequently, the commission was charged with
the duty to make such investigation as might be necessary to ascertain
with certainty ‘the’authorized maximum capital stock which the corpora-
tion baa the authority to issue at the time of the assessment.’
Honorable Wm. 1. Law8on. Page 9, g-4097
The Virginia case does not control the situdtion whtch confronts us.
The applicable.statute in this State is quite different from that which rules
the Virgini instance. Article 1332. supra, specifically states that a reduc-
tion or decrease in the cap.ital stock of a corporation ‘shall not become ef-
fective* until the required proof is presented to the Secretary of State through
the medium of an affidavit. (Underscoring ours)
We shall now answer your questions, numerically, as presented,
First: The provision in the charter is not invalid in the strict
sense ofthaord. Rather, it is of no force or effect, unless, accompanied
by proper corporate act8 constituting a compliance with the statutes of this
Sbb.
.Second: On the facts before us, our answer is in the negative.
We believe that this fully answers your inquiry.
Yours very truly
ATTORNEY GENERAL OF TEXAS
BY
FIRST ASSISTANT
ATTORNEY GENERAL
APPROVED
OPINION
COMMITTEE
BY BWB
Chairman