April 29, 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 currently pending 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 

designated as Article 12a and to be codified as 

Article 342-312a~~~Vernon's Texas Civil Statutes; 

permitting state banks to authorize and provide 

authorized but unissued stock, with certain restrictions and limitations; a~nd declaring 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 designated as Article 12a which shall read 

as follows: 

'Article 12a. Authorized But Unissued Stock. 

Ia. Any state bank, with the approval of the 

Commissioner and by vote of stockholders owning 

two-thirds of the stock of the bank entitled to 

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Honorable Neal Solomon, page 2 (M-846) 

vote, may authorize an increase in the stock of 

the bank in the category of authorized but unissued stock, except that the approval of the 

Commissioner shall not be required where the 

resulting amount of stock in the category of 

authorized but unissued stock will satisfy either 

of the following criteria: 

'(1) Where the resulting total amount of 

authorized but unissued stock will be free of 

preemptive rights of shareholders, will not exceed 

five percent (5%) of the currently issued and outstanding stock, and is specifically designated as 

being reserved for-issuance in connection with an 

officer or employee stock option plan, provided 

that such plan has been approved by the Commissioner. 

'(2) Where the resulting total amount of 

authorized but unissued stock, exclusive of that 

amount specifically reserved fol,issuancein connection 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, 

authorized but unissued stock may be issued from time 

to time as stock dividends or for such other purposes 

and considerations as may be approved by the board 

of directors of the bank. 

'C. Authorized but 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 accordance with Article 12 of this Chapter, ,or in exchange for convertible capital notes 

or debentures previously approved by the Commissioner 

in accordance with the terms and provisions of such 

securities. 

'd. Nothing contained herein shall be construed 

as relieving any 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 for modernization and clarification of the Texas Banking Code of 1943, so that 

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Honorable Neal Solomon, page 3 (M-846) 

banks may better serve their communities, creates 

an emergency and an imperative public necessity 

that the Constitutional Rule requiring bills 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 Constitution of Texas reads 

in part as follows: 

"The Legislature shall by general laws, 

authorize the Incorporation of corporate bodies 

with banking and discounting privileges, and 

shall provide for a system of State supervision, 

'regulation and control of such bodies which will 

adequately protect and secure the depositors and 

creditors thereof. 

"No such corporate body shall be chartered 

until all of the authorized capital stock has been 

subscribed and 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 stock without requiring an increase in the capital 

assets, and without issuing such stock, but holding the same 

for issuance for certain purposes. 

It is clear that the intent and purpose of the emphasized 

section of the Constitution, quoted above, is to require that 

banking corporations be adequately financed and that their 

capital stock not be diluted in value. 

When a banking corporation amends 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. 

1410 would be to approve the possible dilution of a bank's 

capital stock, when such dilution was forbidden at the time 

of the Initial issuance of its charter, It is the opinion of 

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Honorable Neal Solomonj page 4 (M-846) 

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 

stock must 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 state bank to Increase 

its capital stock without issuing same, is unconstitutional and 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 truly yours, 

CRAWFROD C. MARTIN 

Attorney General of Texas 

By: 

F.irst Assistant Attorney 

General 

Prepared by John H. Banks 

Assistant Attorney 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 

Executive Assistant 

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