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 Telegraph 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 Corporattons, 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 operatioar * ’ 

“The capital stock of a corporation is to be diatinguiehed 

from ita capital, which conatituter the aggregate of itr l rreta 

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’ indtcrter 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 implication. 
,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 accumulated 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 reductton 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 corporation 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 including 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 corporation 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 include 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 cotporation, 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 tlm l aaota of sold corporation 

In the total rum of $4,71,2,797.00 constitutea the l urplua, crpttal and l nr 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