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HonorableM. 0. Flowrs Secretary of state Austin, Texas

Ibar Sir: Attention; bW. Will Mann Richardson
Opinion No. O-2644 Rer Admissibility of contract as property for payment of capital stock.

This will acknowledgereceipt of your letter of July 13, 1940, in which you seek an opinion of this departmentupon the question of whether
or not ycu should approve an amendment to the oharter of Texas Guarantors, Incorporated,whereby the capital stock of such aompany is being increased from #26,000.00 to 10,000 shares of no par value class "A" stook and 2,500 shares of class "B" stook of the par value of $10.00 per share. It appears that all the class "A" stock has been subscribedand that 6,000 shares thereofhave been paid for at the rate of $10.00 per share. All class "B" stockhas been previously subscribedand paid for.

The amendment reflects that the $50,000.00 paid for the 5,000 shares of class "A" stock is being paid for out of surplus. It further eppears that the assets of such company consist of $2,954.39 cash and an aesignmsnt of the proceeds of en opsratjng contract upon which a value of $250,000.00has been placed. The surplus, therefore, is representedby such assignment of the proceeds under the contract involved.

The specificquestion submitted for cur consideration is whether
or not the contract involved is of such characteras to be admissible for the purpose'forwhich it is proposed to be used.

As to the nature and character of the contracthere involved,ws quote from the affidavit of the Board of Directors of Texas Guarantors, Incorporated,as followsr

"The contract referred to in said financial statement is a contractwhereby Texas Guarantors. Incorporated,has guaranteedto Texas IndependenceLife InsuranceCompany the performanceby F. D. Glass, Jr. of his contractualobligations to said Texas IndependenceLife Insurance Company as its President and bonded officer. That in considerationfor such guarantee, said P. D. Glass, Jr. assigned and transferred to Texas Guarantors, Incorporated,all net profits, all net proceeds accruing to him as President of said Texas IndependenceLife InsuranceCompany. That under. ,

HonorableM. 0. Flowers, Page 2 O-2544

the law he, as such President,would be entitled to receive 4% of the gross premium income, and such income, less operating expenses, is what is assigned and transferred to Texas Guarantors. Incorporated, That for the last 8 months of 1939 this 40% amounted to $42,580.28,and for the first 6 months of 1940 it amounted to $37,661.60 or a total of @30,241.86 for the last 14months and from this amount there would be deductable only the operatingexpenses, Because this has been a period of expansionand aoquisiticn of other companies,the operatingexpenses have been somewhat abovewhat theywould normally be, and it is estimated that these operating expenses hereafterwill amount to approximately )2,300.1X permonth. Since this assignmentwas made in February, 1939, Texas IndependenceLife Insurance Companyhas expanded its business to a great extent by the purchase and merger of numerous othermutual life insurance ccmpanies, so that now its grossmonthly premium income is approximately $23.000.00.

"That the three affiants are familiarwith the manner of dealing with the purchase and sale ofmutual life insurance companies in Texas and know the prices paid for such companies,where the company is in a sound conditionas the Texas IndependenceLife InsuranceCompany is, and the fair and reasonablemarket value for such a company is from ten to twelve times its grossmonthly premium income, and sales frequently are made on that basis. That the abovementioned contract results in all net profits from the operat on of Texas IndependenceLife Insurance Companypassing to Texas Guarantors, Incorporated,for its own use and benefit, and therefore said contract itself has a value comparablewith what would be the value of the Texas IndependenceLife Insurance Company.and said contract not being canoellable,but running for the life of the Texas IndependenceLife Insurance Company,has a value of at least the amount of $26,000.00. (That, as a matter of fact, one of the companiespurchased and merged into the Texas IndependenceLife Insurance Company and having a grossmonthly premium income of approximately $7,300,00was purchasedat a price of $80,000,00)"

We quote from a letter frcm Mr, James P. Markham, Jr., the attorney for Texas Guarantors. Incorporatadr

"Texas IndependenceLife InsuranceCompany is operatingas a statewide mutual life insurance company and is subject to Article 4859-f, On February 10, 1939 Texas Guarantors, Incorporatedentered into an agreement with Texas IndependenceLife InsuranceCcmpanyby which agreement the former company guaranteed to the latter ccmpany that the President of the latter companywould faithfullyand truly perform all his obligations to Texas IndependenceLife Insurance Company. This agreementwas in the following language:

"'State of Texas; County of Harris: KnowAll Men 9y These Presents3

"That the undersigned Texas Guarantors, Incorporated,acting herein by and through its duly authorized officers, and for a good and valuableHonorableM. 0. Flowers, Page 3 o-2544

considerationthis day received by it from F. D. Glass, Jr., and from Texas IndependenceLife InsuranceCompany, receipt of which oonsiderations is hereby acknowledgedand confessed,does hereby guarantee to said Texas IndependenceLife InsuranceCompany that F. D. Glass, Jr.,will faithfully and truly perform all his obligations to the said Texas IndependenceLife Insurance Companyarising out of his contractwith said oompany in his position as its President,and said Texas Guarantors, Incorporated,shall be fully accountable to said Texas IndependenceLife Insurance Company for any omission or breach by said F. D. Glass, Jr. of any of his said obligations to said Texas IndependenceLife Insurenoe Company.

"'One of the considerationsfor this guarantee is a transfer by the said F. D. Glass, Jr. unto said Texas Guarantors, Incorporatedof all his right, title and interest in and to any and all net profits,net rsv**BXlUfZS,** or net proceeds accruing or resulting to said F. D. Glass, Jr., by reason of his office as President of Texas IndependenceLife Insurance Companyand any rights or emolumentsaccruing tc him as such officer.

"IIt is expresslyunderstood that this contract of guarantee,as well as the transfer of the abovementioned net profits, net revenues and net proceeds,and any other emoluments, shall endure for the entire life of Texas IndependenceLife Insurance Company, and shall inure to the benefit of and be enforceable against the heirs or suocessors in interest of said F. D. Glass, Jr. and Texas Guarantors, Inoorporated,respectively, during the entire life of the Texas IndependenceLife Insuranoe Company.

"1 WIT?ZXSS

the corporate seal and signature of Texas Guarantors, Inoorporated,at Houston, Texas, on this the 10th day of February.1939.'"

The contractbetween F. D. Glass, Jr. and the Texas Independence Life InsuranceCompanywas made and entered into by virtue of tha aooeptanae by the said Glass of the presidency of such aompany and under the applicable portion of Artiole 2.6 of the company'sby-laws. Such Article reads:

"ARTICLZXXVI: DUTIES **Ji-** .WYLCh'RS

Section 1. PRUIDSW: - The President shall preside at all meetings of the Company,the Board of Directors,and the Executive Committee. He shall sign ail membership certicicatesor polioies, eontracts,and otherwritten undertakings entered into by the Company. He shall see that all lam and regulationsof the Company are faithfullyand impartiallyexecuted. The President shall own all office furniture, fixtures, supplies,and the general agency contract of the Company,and in event of his death or removal from office for cause,his interest shall revert to his estate. He shall recejve and disburse all funds accumulating to the Expense Fund and it shall be his duty to record accurately in the books of the Association all receipts and disbursements of every chars&w of the Expense Fund the same as the Mortuary Fund. After all expenses have been paid, any excess in the Expense Fund shallbelong to the Presidentand oan be used by him as personal funds. The President shall be elaoted by the Board of Directors for an unlimited time and shall oontinue in office until he is removed forHonorableM. 0. Flowers, Page 4 O-2544

c*use* He can be removed from office only for wilful negleat of duty, misappropriationof funds ormalfeasance of office. In case of his rsmoval from office, he shall be compensatedfor the goodwill and the assets built up by him; the amount of said compensation to be determinedby the Board of Directorsand/or Executive Committee."

Referencehas been made to our Opinion No. O-1625 previouslyaritten to you in which we dealt with a somewhat similar situation. In stroh opinionwe consideredthe effect of Article 5064 of the Revised CivilStatutes upon the situation there presented, We think that suah opinionwould unquestionablecontrol the present situationunless it oan be said that Article 4859f, Section 19, of the Revised Civil Statutes relieves the present company form the terms and provisions of Article 5064.

The Texas IndependenceLife Insurance Company is operating as a mutual insuranae companyunder the provisions of Chapter 8a, Title ,78,of the Revised Civil Statutes.,Article 4859f, Section 19 thereof, reads in partr

n

. . . Except as herein expressly provided, no insurance law of this state shall apply to any corporationoperating under this act, and no law hereafter enacted shall apply to them unless they be expressly designated therein."

Your request does not oall on us to pass upon the question of whether or not Artiale 5064, supra, is violated in the instant case and for that reasonme do not undertake to decide such question.

Vieare here concernedwith the sole question of whether or not the property involved is propertywithin the purview of the pertinent oonstitutional provisions so as to be admissible for the payment of capital stock.
Section 6 of Article 12 of the Texas Constitutionreads9

"No corporation shall issue stock or bonds except for money paid, labor done or property actually reoeived, and all fictitious inorease of stock or indebtedness shall be void."

We think the correct test for the determinationof whether or not property is of such characteras to be oapable of being accepted by a oorporation in payment of capital stookwas set forth by Judge Phillips of the Supreme Court in the case of Washer vs. Smyer, 211 S. PI.985, 4 A.L,R. 1320. The question involved in such casewas whether or not a note was propertywithin the purview of the above quoted aonstitutionalprovision. The court saidr

"Undeniably, in the broad sense a note is property in the hands of the payee* So, in a literal sense, is everythingpropertywhich is capable of ownership. All forms of chows in a&ion are property in the ssme senseHonorableM. 0. i"lcwers, Fage 5 O-2544

--the right to racover a debt, the right to recoverdamages for breach of
a contract,unsatisfied judgments,and other similarkinds of actionable demands. But the framers of the Constitutionnever intended that property of that nature should constitute the capital of a corporation. The term 'property'was used in this section of the Constitutionin no such sense. Itmeans property readily capable of being applied to the debts of the corporation. As a rule, it shouldbe property of the kind adapted to the charteruses of the corporationand which itmay legally acquire. There
ara some classes of propertywhich are so staple in characterand so easily convertible intomoney as to be in actual commerce the ready equivalent of money, and it is possible that a corporation in its formative period would be authorized to receive such property in payment for stock though not, in a strict sense, adapted to its purposes. The different forms of valuable property and the different purposes for which corporationsmay be created,make it impossibleto lay down other than general rules upon the subject.

"The integrity of a corporationand the interests of the public demand, however, that the assets of a corporation consist of somethingmore than its stockholders'debts. Its capital cannot be thus constituted,and therefore it cannot accept a stock subscriber'snote in payment for his stock. There is authority opposed to this holding, as there is authority which support8 if. But it seems to us no authority is needed to establish it."

Viewing the contract involved in the light of the foregoingwell establishedprinciples of law, we do not believe it constitutesproperty tithin the purview of the Constitutionand consequentlythe charter amendment does not warrant your approval.

There are other seriousquestions involved in connectionwith the contractbetween Texas IndependenoeLife Insuranoe Companyand F. D. Glass, Jr,, one of whioh is the right of the Board of Directors of such company to bind the corporationby contract for the personal services of Glass for a period of time longer than the term for which such directors
are elected, Such, however, are questionsnot necessary for us to deoide.

The proposed amendment and supplementalaffidavits are returned herewith.
Very truly yours

ATTORREY GEbERAi OF TEXAS

By s/LloydArmstrong

LloydArmstrong LA:jm/wc Assistant Encl. APPROVED Opinion Ccmmittee By s/R.W.F. Chairman ;i;,';;;d

Aug. 12, 1940 S/Grover Sellers FirstAssistant Attorney