Honorable 0. P. Lockhart, Page 4 (o-6370)

InOpinion No. 2,608, pages 231-238 ofthe 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 ofthe corporation contributed by its stockholders or otherwise obtained by it tothe extent required by its charter.’ Williams vs. Western Union Telegraph Company, 93N.Y., 162-188. It has been said ‘that the capital stock ofa corporation is like that of a co-partnership or joint stock company, the amount which the partners or associates put in as their stake tnthe concern.’ Berry vs. Merchants Exchange Company, 1Sandf. 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 ofa 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 bytext-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 inby the,ahareholders ofa 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 ofa corporation is tobe diatinguiehed from ita capital, which conatituter the aggregate of itr l rreta or proprrtlor. However much the capital ofa corporation may fncreare through accumulation ofprofits 

### or eaheneement 

### in thr value of ttr proprrtiea, or however much it may bo reduced by loraer or by a decreare inproperty 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

. . tis the,sum of money fixed by the corporate charter as the amount paid in or to be paid by the stockholders for the prosecution ofthe 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 ofthe corporatton may fluctuate widely in value.“” Markel vs. Burgess, 95N..E. 308.

“In the case of Turner vs. Cattleman’s Trust Company, 215 S.W. 832, the Commission ofAppeals, Sec. ’ “B” ’ ofthis State defines ‘capital’ as relating to corporations as follows:

“The term ‘capital’ is used to designate that portion of the assets ofa corporation regardl,ess oftheir 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, 54L.Ed. 544; Smi.th vs. Dana, 77Corm. 543, 60Atl. 117; 69 L.R.A. 76; 107Am. St. Rep. 51; Tradesmen’s Publishing Co. vs. Wheel Co., 95 Tenn. 634, 32S.W. 1097, 31 L.R.A. 593, 49Am, St. Rep. 943.”
Inthe case of Farrington vs. State of Tennessee, 24 Law Edition, 558, the Supreme Court ofthe United States, in dealing with a question as to the amount of tax abank should pay, laid down the followtng principle8 of law applicable here :

*The capital. stock i.8the money paid or authortzed or required to be paid Inaa the basis of the buetneee of the bank, and the means ofconducting its operations. It repraaentr whatever it may be invested in. Ifa 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. Ifthere be lorrer which Impair it, there can be noformal reductton without the like sanction. No power to increare or dtmtntrh it belonga inherently tothe corporation.

. . .*
14C.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 charterHonorable 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,fmoney or other property fixed as the basis for conducting the business ofthe corporation, as dMinguiahed from the shares representing the separate interest ofthe 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 inthe company.* =(4 501)c. Distinction between Capital Stock end Property or Assets. The fund provided as capital stock becomes the property ofthe 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 tobe paid in, inmoney or its equivalent, as the capital upon which the corporation is to do business; and inthis sense it is distinguishable from the tangible property and assets generally ofthe 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 aloss; but the capital stock remains fixed and unaffected by the accidents ofbusiness.
* ‘Capital stock’ sometimes applied to property or assets. The term ‘capital stock’ is often used, however, in a different sense, particularly in statutes relating totaxation, and as including all the property of theccporation, inwhich its capital is invested and which is employed in carrying on M‘bustness, inwhatever form, and even as including the entire property or assets ofthe 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 ofthe actual

property or assets ofthe 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 ofthe stock until separated therefrom by declaring a dividend, and although theHonorable 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 

### ofthe 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 inthe discretion of the directors. Inthe exercise oftheir discretion they are not subject to control or interference by the courts unless they act fraudulently, oppressively, or unreasonably,

‘The stockholdera of acorporation are not entitled, aa a matter of absolute right, tothe payment of a dividend whether the 

### earnings ofthe 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 ofthe corporation makea it aeceasary or advisable, expend the same 

### inImpravemontr, or 

### in 8lawful sxtenaion of the buaineva ofthe corporation. Under rome circumatancea, the board of directora may retain profita 

### ofthe buatnesr as a rurplus fund instead of dlvidlnp 

### it among the stockholders. Whether they do so is generally lquertion withtn tldr dtrcration 

### to determine

. . 04
We think it 1.achar from the above authori#nr, tbet the aurplua accumulated by a corporrtt.on is not apart 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, andthatthe balance of

### tlm l aaota of sold corporation Inthe total rum of $4,71,2,797.00 constitutea the 

### l urplua, crpttal and 

### l

nrnod, of raid corporation. Therefore, since Article 4725 horeinrbave ret out, provider that a llfr inauranco company organized under the lawr ofthir Stats may Invert la or loan upon,aocuritier therein named, and none other, one ofthe requirementa oftha 

### 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 opinionHonorable 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