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Honorable Claude Isbell Secretary ofState Austin, Texas
Attention: Mr. J. L. McGarity
Dear Sir: Opinion No. O-6426
Re: Authority of Secretary ofState with reference to approving and filing ofan amendment to a charter ofa corporation proposing to increase its capital stock.
We are in receipt ofyour communication ofrecent date requesting the opinion ofthis department onthe above stated matter. We quote from your letter as follows:

“On the 28th day of July, 1939. the charter ofthe above mentioned was approved and filed inthis office. At this time the corporation had an authorized capital stock of $l,OOO.OO, represented by 10shares ofa par value of $100.00 each, all ofwhich said stock’was subscribed and paid for incash.

“On the 18th day ofSeptember, 1940, the corporation filed an amendment to its charter which among other things increased its capital stock, for that as above stated, to 35,000 shares ofstock without nominal or par value to be issued to the stockholders at that time and that the consideration which the corporation was to receive for its no par value stock was $35.000.00, $34,000.00 ofwhich was transferred from surplus to capital.

“On the 18th of January, 1944, the corporation offered to file the proposed amendment, a photostatic copy ofwhich is hereto attached. This amendment proposed to increase the capital stock ofthe corporation from 35,000 shares of stock without nominal or par value to 35,000 shares ofstock without nominal or par value and 3500 shares ofstock with a par value often dollars ($10.00) each.
“The affidavit which was filed with the proposed amendment, a photostatic copy ofwhich is hereto attached, reflects that all ofthe proposed increase in capital stock with a par value has been subscribed to and that one half ofsaid increase has been paid ,for by the exchange of outstanding bonds ofthe corporation in return for its capitalHonorable Claude Isbell, page 2

stock except Four Thousand Eight Hundred Forty dollars ($4,840.00) which represents a note ofthe corporation exchanged for its capital stock.

“The corporations balance sheet filed with the proposed amendment, a photostatic copy ofwhich is hereto attached, showing the financial condition ofthe company prior to and after the filing ofthe proposed amendment shows a surplus ofNineteen Thousand Two Hundred Twenty Seven dollars Eighteen cents ($19,227.18) but does not show the capital stock issued and outstanding without nominal or par value for which the corporation received Thirty Five Thousand dollars ($35,000.00) as a liability. Ifthis said capital stock had been considered as a liability the liabilities ofthe corporation would have been Fifteen Thousand Seven Hundred Seventy Two dollars Eighty Two cents ($15~.772.82) more than its assets inthe sum ofFifty Four Thousand Six Hundred FortyFive dollars Eighty Eight cents ($54,645.88).

“QUESTIONS:

“1. Can this office consider the solvency ofa corporation in its determinating whether or not to approve and file and amendment toa charter ofa corporation increasing its capital stock?

“2. Should this amendment be approved and filed by this office 7

“3. Would your answer to question 2be different if the amounts paid into the corporation hadbeen paid in cash rather than by the cancellation ofindebtedness 7

“4, If‘your answer to the two questions next above is “NO”, should ~theproposed amendment be approved and filed ifall ofthe proposed increase in capital stock were to be paid into the corporation incrash?*

vides: Article 1314, Vernon9s Annotated Civil Statutes, in part, pro-

“Any private corporation organized or incorporated for any purpose mentioned inthis title, may amend or change its charter or act ofincorporation by filing, authenticated in the same manner as the original charter, such amendments or changes with the Secretary ofState.

. . 9e Such amendments or changes shall take effect and be inforce from the date ofthe filing thereof. The certificate ofthe Secretary of State shall be evidence of such filing. No amendment or changeHonorable Claude Isbell, page 3

violative ofthe Constitution or laws ofthis State or any provision ofthis title orwhich so changes the original purpose ofsuch corporation as to prevent the execution thereof, shall be ofany force or effect.”

Article 1330, V. A. C. S.., provides:
“The Board of Directors or other managing officers ofa corporation may increase its authorized capital stock, including the issuance ofpreferred stock, which stock shall have such rights, powers, privileges and preferences as are now authorized by law, when empowered to do so by atwothirds vote ofall ofits outstanding stock with voting privileges, at a special or regular meeting called for that purpose by complying with the provisions ofArticle 1308 and/or Article 1538-D. as the case may be. Par value stock. issued or unissued, may be converted into preferred stock inthe same manner and subject tothe same limitations as no par stock may be so converted under Article 1538-H, Revised Civil Statutes of 1925.

“Upon such increase or conversion ofstock being made inaccordance with such provisions and certified to the Secretary of State by the Directors, and, ifthe increase has been made in accordance with law, he shall file such certificate; and thereupon, the same shall bec,ome a part of the capital stock ofsuch corporation. Such certificate shall be filed and recorded inthe same manner as the charter. All preferred stock heretofore authorized tobe issued, or issued, or stock converted into preferred shares, by vote or two-thirds of the outstanding stockholders, is hereby ratified, legalized and validated. (As amended Acts 1931, 42nd Leg., p. 78. ch. 51, 5 1.)”

Article 1538j, V. A. C. S., provides: “Corporations authorizing the issuance of shares of its (their) stock without nominal or par value are exempt from the provisions ofArticles 1308 to 1311, inclusive, and Article 1338 ofthe Revised Civil Statutes, provided that no original charter nor any amendment toa charter which provides for stock having anominal or par value shall be filed or recorded by the Secretary of State until the full amount of all such authorized capital stock having a par value shall have been subscribed, and fifty per cent thereof paid, and proof thereof made in the manner provided in said Articles 1308 to 1311. inclusive; and provided further, that the provisions of said Article 1338 as to the payment oftheunpaid portion of,-

Honorable Claude Isbell, page 4

capital stock shall apply to the payment ofthe unpaid portion ofany stock which has a nominal or par value.”

Article 1308, V. A, C. S., provides:
“Before the charter ofa private corporation created for profit can be filed by the Secretary ofState, the full amount ofits authorized capital stock must be in good faith subscribed by its stockholders and fifty per cent thereof paid in cash, or its equivalent in other property or labor done, the prodtict of which shall beworth to the c~ompanythe actual value at which itwas taken or atwhich the property was received. The affidavit of those who executed the charter shall be furnished to the Secretary ofStats, showing:

“1. The name, residence and postoffice address of each subscriber to the capital stock of such company;

“2. The amount subscribed by each, and the amount paid by each;

“3. The cash value ofany property received, giving its description, location and from whom and the price atwhich itwas received;

“4. The amount,, character andvalue oflabor done. from whom, and price atwhich itwas received. (Acts 1901, p. 18; Acts 1897, p. 192; Acts 1907, p. 309; G. L. vol. 10. pa246.)”Article 1309, V. A. C. S., provides:

“If the Secretary of State is not satisfied. he may, at the expense ofthe incorporators, require other satisfactory evidence before he shall be required to receive, file and record such charter. (Id.)”

Article 1338, V. A. C. S., provides:
“The stockholders ofall corporations chartered under the provisions ofthe preceding chapter shall. within two years f.rom the date ofthe filing ofsuch charter, pay inthe unpaid portion of the capital stock of such company; proof ofwhich shall, within said time, be made to the Secretary of State, in the manner provided in said articles, for the filing of charters. (Acts 1907, p. 309.)lUnder the provisions ofArticles 1308 and 1330. supra. ifthe board of directors ofa corporation is authorized by atwo thirds vote ofHonorable Claude Isbell, page 5

all its outstanding stock with voting privileges. said board ofdirectors of the corporation may increase its authorized capital stock by filing with the Secretary of State an affidavit stating the names ofthe subscribers, and the consideration for and the classes ofthe additional stock tobe issued, (See Hildebrand. Texas Corporations, Vol. 1, Sec. 262, p- 563-564). In Texas Jurisprudence, Vol. 10, Sec. 67, at page 677, we find the following language:
“The amendment must be executed, it seems by at least a majority oftheboard ofdirectors and acknowledged by each ofthem before an officer duly authorized to take acknowledgements ofwritten instruments. The amendment should be accompanied by a copy ofthe resolution adopted by the stockholders authorizing the increase andby a copy of the resolution ofthe board ofdirectors authorizing the increase. Furthermore. the president and the secretary should certif,y under the corporate seal: first, that the resolutions are true and correct copies ofthe originals; and, second, that the persons signing the amendment are directors, and are, at least, a majority oftheboard ofdirectors.” (Opinions ofAttorney-General, Biennial Report, 1906-1908, p0 670)
Itis provided inArticle 1538j, that no charter or an amendment toa charter providing for “‘stock having a nominal or par value shall be filed or recorded by the Secretary ofState until the full amount ofall such authorized capital stock having a par value shall have been subscribed, and fifty per cent thereof paid, and proof thereof made inthe manner, provided in - - Articles 1308 to 1311, inclusivem; and that Article 1338 would be applicable with reference to the payment ofthe unpaid portion ofany stock which hasa non&al or par value. Thus, it is apparent that the requirements, under the foregoing pr~ovisions, with reference to amending a charter authorizing additional capital stock with nominal or par value are the same as those with reference to the original charter of a corporation issuing stock with par or nominal value. With reference to the function ofthe Secretary of State, under the provisions ofArticle 1309, we quote from Hildebrand, Texas Corporations, Vol. 1, Set, 25, ppm64-65, as follows: I

. *e0 The Secretary ofState may require additional information or evidence ,as the fulfilment ofthe statutory provisions as to subscription and payment ofcapital stock, other than the affidavits ofthose executing the charter, ifhe deems such action necessary. ~eDw However. we note that when a corporation proposes to decrease its capital stock, the Secretary of State is authorized to require proof as to the solvency ofthe corporation proposing to decrease its capital stock, for the purpose ofprotecting the creditors, while inthe case ofa proposed increase inthe capital stock, the Secretary ofState is to satisfy himself,-

Honorable Claude Isbell, page 6

that the proposed increase in capital stock is actually paid inas required by law. Under the provisions ofArticle 1332, before there can be a reduction ofthe capital stock, proof must be made to the Secretary ofState ofthe financial condition ofthe corporation, and ifall ofthe debts are not paid, or at least reduced prior tothe filing ofthe certificate ofdecrease, to such an extent that the rights ofcreditors will not bejeopardized. (See Hildebrand, Tex. Corp.., Vol. 1, Sec. 264, p. 576). The capital stock ofa corporation is afund set apart for the payment ofdebts ofthe corporation, and our statutes have provided for special scrutiny ofthis fund (capital stock) for the~benifit of creditors, when it,is proposed that said capital stock is tobe reduced. With reference to the nature and purpose ofthe capital stock ofa corporation, the following cogent language is quoted in 10 Texas Jurisprudence, Sec. 70, pp. 680-681:

“The capital stock ofan incorporated company is a fund set apart for the payment ofdebts. Itis a substitute for the personal liability which exists in private copartnerships. When debts are incurred a contract arises with the creditors that it shall not be withdrawn or applied otherwise than upon their demands until such demands are satisfied. D

. . . Itis publicly pledged to those who deal with the corporation for their security.

. ~. . * (National Bank of Jefferson v. Texas Investment Co., 74 Tex. 421, 437, 12S.W. 101, quoting from Sanger v. Upton, 91 U.S. 56. 60, 23 L. Ed. 220) Generally, when capital stock inincreased rather than decreased, and the cash or the equivalent ofcash is actually paid in, such increase in said capital should notjeopardize the rights ofthe creditors ofsaid corporation, and we find no authority for the Secretary of State to refuse to approve and file an amendment toa corporation’s charter, when the required affidavits, information and data have been furnished, andwhen the Secretary of State finds that the cash or its equivalent has been actually paid in or received inthe manner required by law.

Inview ofthe foregoing, and under the facts submitted, we answer your questions as follows:

1. With reference to an amendment tothe charter proposing to increase the capital ofthe corporation, it is our opinion that the function ofthe Secretary ofState is toascertain that the required affidavits, information and data have been submitted, and to satisfy himself that the statutory provisions as to subscription and payment ofcapital stock are fulfilled. He may require additional information or evidence as to the fulfillment ofthe statutory provisions as to subscription and payment of capital stock, other than the affidavits ofthose executing the charter, if he deems such action necessary. To the extent that it is necessary in his determination ofthe actual cash value ofthe property (bonds) received in exchange for the new shares ofstock, the Secretary ofState may considerHonorable Claude Isbell, page 7

the solvency ofthe corporation.

2. As towhether the proposed amendment should be approved and filed by the Secretary of State, it is our opinion that such amendment should be approved and filed, provided that the required affidavits, data and information have been submitted by the corporation, and provided that the Secretary of State is satisfied that the total **amount** ofthe capital stock has been subscribed, and that fifty per cent ofsame is paid in cash, or its equivalent in other property. The actual cash value ofthe bonds tobe exchanged for the proposed new shares of stock involves afact determination. We are not herein deter,mining any matters with reference tothe actualcash value ofsaid bonds.

3. and 4. As towhether said amendment should be approved ifall ofthe proposed increase inthe capital stock hadbeen paid in cash, it is our opinion that said amendment should be approved and filed, provided that the required affidavits and other data and information have been furnished as provided by law.

Trusting that the foregoing satisfactorily answers your inquiries, we remain
APPROVED Mar. 21. 1945 Yours very truly,
/s/ Grover Sellers ATTORNEY GENERAL OF TEXAS Attorney General of Texas By /s/ J.A. Ellis J.A. Ellis Assistant
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APPROVED Opinion Committee By/s/ BWB Chairman