April29,1971

Honorable Eeal Solomon, Chtirman Opinion No. M-846 Committee on Banks and Banking House of Representatives Re: Constitutionality State Capitol of House Bill No. Austin,Texas 1410, 62nd Leg., R.S., 1971, authorizing state banks to lncrease their capital stock without the Dear Mr. Solomon: issuance of same. You have requested our opinion concerning the constitutionality of'House Bill No. 1410 currentlypending in the 62nd Legislature,Regular Session, 1971,which reads as follows:
"A BILL TO BE ENTITLED AN ACT amending Chapter III of the Texas Banking Code of 1943, same being Chapter 97, Acts of the 48th Legislature,Regular Session, 1943,by adding a new article to be designatedas Article 12a and to be codified as Article 342-312a~~~Vernon's Texas Civil Statutes; permitting state banks to authorize and provide authorizedbut unissued stock,with certain restrictionsand limitations;a~nddeclaring an emergency. "BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: "Section 1. Chapter III of The Texas Banking Code of 1943, as amended, Is hereby amended by adding a new article immediately following Article 12 to be designatedas Article 12a which shall read as follows: 'Article12a. Authorized But Unissued Stock. Ia. Any state bank, with the approval of the Commissionerand by vote of stockholders owning two-thirds of the stock of the bank entitled to

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vote, may authorize an increase in the stock of the bank in the categoryof authorizedbut unissued stock, except that the approval of the Commissioner shallnot be requiredwhere the resultingamount of stock in the category of authorizedbut unissued stockwill satisfy either of the following criteria: '(1) Where theresulting total amount of authorizedbut unissued stockwill be free of preemptive rights of shareholders,will not exceed five percent (5%) of the currently issued and outstanding stock, and is specificallydesignatedas being reserved for-issuance in connectionwith an officer or employee stock optionplan, provided that such plan has been approvedby the Commissioner. '(2) Where the resulting total amount of authorized but unissued stock, exclusive of that amount specificallyreserved fol,issuanceinconnection with an approved officer or employee plan, will be subject to preemptive rights of shareholders and will not exceed fifty,percent (5C$) of the currently issued and outstanding stock. 'b. With the written approval of the Commissioner, authorizedbut unissued stockmay be issued from time to time as stock dividends or for such other purposes and considerationsas may be approved by the board of directors of the bank.

'C. Authorizedbut unissued stock may also be issued from time to time to officers or employees of the bank pursuant to an approved stock option plan adopted in accordancewith Article 12 of this Chapter, ,orin exchange for convertible capitalnotes or debenturespreviously approved by the Commissioner in accordancewith the terms and provisions of such securities. 'd. Nothing containedherein shall be construed as relievingany bank of the obligation to file with the Commissioner,pursuant to Article 12 of this Chapter, a copy of every amendment to the Articles of Association adopted by the shareholders.' "Section 2. The need formodernization and clarification of theTexas Banking Code of 1943, so that -4103-Honorable Neal Solomon, page 

### 3 (M-846)

banks may better serve their communities, creates an emergencyand an imperativepublic necessity that the ConstitutionalRule requiringbills to be read on three several days in each House be suspended,and said Rule is hereby suspended; and that this Act shall take effect and be in force from and after its passage, and it is so enacted." Article XVI, Section 16 of the Constitutionof Texas reads in part as follows:

"The Legislature shall by general laws, authorize the Incorporationof corporatebodies with banking and discountingprivileges, and shall provide for a system of State supervision, 'regulationand control of such bodies which will adequatelyprotect and secure the depositorsand creditors thereof. "No such corporatebody shall be chartered until all of the authorized capital stockhas been subscribedand paid for in full in cash." (Emphasis added)

II II

. . . It appears from a reading of House Bill No. 1410, supra, that this bill would authorize a state bank to increase its capital stockwithout requiring an increase in the capital assets, and without issuing such stock,but holding the same for issuance for certainpurposes. It is clear that the intent and purpose of the emphasized section of the Constitution,quoted above, is to require that banking corporationsbe adequately financed and that their capital stocknot be diluted in value. When a banking corporationamends its charter to increase its capital stock then such charter as amended becomes the bank's charter. In accord, 172, (Tex.Comm.App.

### 1926,mod. Chapman 

### 286 S.W. 

### 171 seeo%hi; grounds 

### 287 S.W. 

### 4961. It is our view that to permit the enactment of House Bill No. 1410would be to approve the possible dilution of a bank's capital stock,when such dilutionwas forbidden at the time of the Initial issuance of its charter, It is the opinion of

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this office that the Legislature does not, have the power to authorize such a dilution.
In view of Article XVI, Section 

### 16 of the Constitution of Texas, which provides that all of the authorized capital stockmust be subscribed and paid for in full in cash, we are of the opinion that House Bill No. 1410 is unconstitutional. SUMMARY House Bill No. 1410, 62nd Legislature,Regular Session, 1971, authorizing a statebank to Increase its capital stockwithout issuing same, is unconstitutionaland in violation of Article XVI, Section 16,of the Constitution of Texas, which requires all authorized capital stock to be subscribed and fully paid for in cash.Very trulyyours, CRAWFROD C. MARTIN Attorney General of Texas

By: F.irst

AssistantAttorney General Prepared by John H. Banks AssistantAttorney General APPROVED: OFTNION COMMITTEE Kerns Taylor, Chairman W. E. Allen, Co-Chairman Malcolm Quick S. J. Aronson Jack Sparks Fisher Tyler MEADE F. GRIFFIN Staff Legal Assistant ALFRED WALKER ExecutiveAssistant
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