h. 

.’ 

Honorable Claude Isbell 

Secretary of State 

Austin, Texas 

Attention: Mr. J. L. McGarity 

Dear Sir: Opinion No. O-6426 

Re: Authority of Secretary of State 

with reference to approving and 

filing of an amendment to a charter of a corporation proposing to 

increase its capital stock. 

We are in receipt of your communication of recent date requesting the opinion of this department on the above stated matter. We 

quote from your letter as follows: 

“On the 28th day of July, 1939. the charter of the 

above mentioned was approved and filed in this office. At 

this time the corporation had an authorized capital stock 

of $l,OOO.OO, represented by 10 shares of a par value of 

$100.00 each, all of which said stock’was subscribed and 

paid for in cash. 

“On the 18th day of September, 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 of stock 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 of which was 

transferred from surplus to capital. 

“On the 18th of January, 1944, the corporation offered to file the proposed amendment, a photostatic copy 

of which is hereto attached. This amendment proposed to 

increase the capital stock of the corporation from 35,000 

shares of stock without nominal or par value to 35,000 

shares of stock without nominal or par value and 3500 

shares of stock with a par value of ten dollars ($10.00) 

each. 

“The affidavit which was filed with the proposed 

amendment, a photostatic copy of which is hereto attached, 

reflects that all of the proposed increase in capital stock 

with a par value has been subscribed to and that one half 

of said increase has been paid ,for by the exchange of outstanding bonds of the corporation in return for its capital 
Honorable Claude Isbell, page 2 

stock except Four Thousand Eight Hundred Forty dollars 

($4,840.00) which represents a note of the corporation exchanged for its capital stock. 

“The corporations balance sheet filed with the proposed amendment, a photostatic copy of which is hereto attached, showing the financial condition of the company prior 

to and after the filing of the proposed amendment shows a 

surplus of Nineteen 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. If this said capital 

stock had been considered as a liability the liabilities of the 

corporation would have been Fifteen Thousand Seven Hundred 

Seventy Two dollars Eighty Two cents ($15~.772.82) more than 

its assets in the sum of Fifty Four Thousand Six Hundred Forty Five dollars Eighty Eight cents ($54,645.88). 

“QUESTIONS: 

“1. Can this office consider the solvency of a corporation in its determinating whether or not to approve and 

file and amendment to a charter of a corporation increasing 

its capital stock? 

“2. Should this amendment be approved and filed by 

this office 7 

“3. Would your answer to question 2 be different if 

the amounts paid in to the corporation had been paid in cash 

rather than by the cancellation of indebtedness 7 

“4, If ‘your answer to the two questions next above is 

“NO”, should ~the proposed amendment be approved and filed 

if all of the proposed increase in capital stock were to be 

paid in to the corporation in crash?* 

vides: 

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

“Any private corporation organized or incorporated 

for any purpose mentioned in this title, may amend or change 

its charter or act of incorporation by filing, authenticated in 

the same manner as the original charter, such amendments 

or changes with the Secretary of State. . . 9 e Such amendments or changes shall take effect and be in force from the 

date of the filing thereof. The certificate of the Secretary of 

State shall be evidence of such filing. No amendment or change 
Honorable Claude Isbell, page 3 

violative of the Constitution or laws of this State or any provision of this title or which so changes the original purpose 

of such corporation as to prevent the execution thereof, shall 

be of any force or effect.” 

Article 1330, V. A. C. S.., provides: 

“The Board of Directors or other managing officers 

of a corporation may increase its authorized capital stock, 

including the issuance of preferred stock, which stock shall 

have such rights, powers, privileges and preferences as are 

now authorized by law, when empowered to do so by a twothirds vote of all of its outstanding stock with voting privileges, at a special or regular meeting called for that purpose 

by complying with the provisions of Article 1308 and/or Article 1538-D. as the case may be. Par value stock. issued 

or unissued, may be converted into preferred stock in the 

same manner and subject to the same limitations as no par 

stock may be so converted under Article 1538-H, Revised 

Civil Statutes of 1925. 

“Upon such increase or conversion of stock being 

made in accordance with such provisions and certified to 

the Secretary of State by the Directors, and, if the 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 of such corporation. Such certificate shall 

be filed and recorded in the same manner as the charter. 

All preferred stock heretofore authorized to be 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 of Articles 1308 to 1311, inclusive, and 

Article 1338 of the Revised Civil Statutes, provided that no 

original charter nor any amendment to a charter which provides for stock having a nominal 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 of the unpaid portion of 
,- 

Honorable Claude Isbell, page 4 

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

Article 1308, V. A, C. S., provides: 

“Before the charter of a private corporation created 

for profit can be filed by the Secretary of State, the full amount 

of its 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 be worth to the c~ompany the actual value at which 

it was taken or at which the property was received. The affidavit of those who executed the charter shall be furnished to 

the Secretary of Stats, 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 of any property received, giving 

its description, location and from whom and the price at which 

it was received; 

“4. The amount,, character and value of labor done. 

from whom, and price at which it was received. (Acts 1901, 

p. 18; Acts 1897, p. 192; Acts 1907, p. 309; G. L. vol. 10. 

pa 246.)” 

Article 1309, V. A. C. S., provides: 

“If the Secretary of State is not satisfied. he may, at the 

expense of the 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 of all corporations chartered under the 

provisions of the preceding chapter shall. within two years f.rom 

the date of the filing of such charter, pay in the unpaid portion of 

the capital stock of such company; proof of which 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.)l 

Under the provisions of Articles 1308 and 1330. supra. if the 

board of directors of a corporation is authorized by a two thirds vote of 
Honorable Claude Isbell, page 5 

all its outstanding stock with voting privileges. said board of directors of 

the corporation may increase its authorized capital stock by filing with the 

Secretary of State an affidavit stating the names of the subscribers, and 

the consideration for and the classes of the additional stock to be 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 of the board of directors and acknowledged by each 

of them before an officer duly authorized to take acknowledgements of written instruments. The amendment should be accompanied by a copy of the resolution adopted by the stockholders authorizing the increase and by a copy of the resolution of the board 

of directors 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 of the originals; 

and, second, that the persons signing the amendment are directors, and are, at least, a majority of the board of directors.” 

(Opinions of Attorney-General, Biennial Report, 1906-1908, p0 

670) 

It is provided in Article 1538j, that no charter or an amendment to a charter providing for “‘stock having a nominal 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 - - Articles 1308 to 1311, inclusivem; and that Article 

1338 would be applicable with reference to the payment of the unpaid portion of any 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 of the Secretary of State, under the provisions of Article 1309, 

we quote from Hildebrand, Texas Corporations, Vol. 1, Set, 25, ppm 64-65, 

as follows: 

I 

. * e 0 The Secretary of State may require additional 

information or evidence ,as the fulfilment of the statutory provisions as to subscription and payment of capital stock, other 

than the affidavits of those executing the charter, if he deems 

such action necessary. ~ e D w 

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 of the corporation proposing to decrease its capital stock, for 

the purpose of protecting the creditors, while in the case of a proposed 

increase in the capital stock, the Secretary of State is to satisfy himself 
,- 

Honorable Claude Isbell, page 6 

that the proposed increase in capital stock is actually paid in as required 

by law. Under the provisions of Article 1332, before there can be a reduction of the capital stock, proof must be made to the Secretary of State 

of the financial condition of the corporation, and if all of the debts are not 

paid, or at least reduced prior to the filing of the certificate of decrease, 

to such an extent that the rights of creditors will not be jeopardized. (See 

Hildebrand, Tex. Corp.., Vol. 1, Sec. 264, p. 576). The capital stock of a 

corporation is a fund set apart for the payment of debts of the corporation, 

and our statutes have provided for special scrutiny of this fund (capital 

stock) for the~benifit of creditors, when it,is proposed that said capital 

stock is to be reduced. With reference to the nature and purpose of the 

capital stock of a corporation, the following cogent language is quoted in 

10 Texas Jurisprudence, Sec. 70, pp. 680-681: 

“The capital stock of an incorporated company is a 

fund set apart for the payment of debts. It is 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 . . . It is publicly pledged to those who deal with the corporation for their security. . ~ . . * (National Bank of Jefferson v. Texas Investment Co., 74 Tex. 421, 437, 12 S.W. 

101, quoting from Sanger v. Upton, 91 U.S. 56. 60, 23 L. Ed. 

220) 

Generally, when capital stock in increased rather than decreased, and the cash or the equivalent of cash is actually paid in, such 

increase in said capital should not jeopardize the rights of the creditors 

of said corporation, and we find no authority for the Secretary of State to 

refuse to approve and file an amendment to a corporation’s charter, when 

the required affidavits, information and data have been furnished, and when 

the Secretary of State finds that the cash or its equivalent has been actually paid in or received in the manner required by law. 

In view of the foregoing, and under the facts submitted, we answer your questions as follows: 

1. With reference to an amendment to the charter proposing 

to increase the capital of the corporation, it is our opinion that the function of the Secretary of State is to ascertain that the required affidavits, 

information and data have been submitted, and to satisfy himself that the 

statutory provisions as to subscription and payment of capital stock are 

fulfilled. He may require additional information or evidence as to the 

fulfillment of the statutory provisions as to subscription and payment of 

capital stock, other than the affidavits of those executing the charter, if 

he deems such action necessary. To the extent that it is necessary in his 

determination of the actual cash value of the property (bonds) received in 

exchange for the new shares of stock, the Secretary of State may consider 
Honorable Claude Isbell, page 7 

the solvency of the corporation. 

2. As to whether 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 of the capital stock 

has been subscribed, and that fifty per cent of same is paid in cash, or its 

equivalent in other property. The actual cash value of the bonds to be exchanged for the proposed new shares of stock involves a fact determination. 

We are not herein deter,mining any matters with reference to the actualcash 

value of said bonds. 

3. and 4. As to whether said amendment should be approved 

if all of the proposed increase in the capital stock had been 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 

JAE:ddt/cm 

APPROVED 

Opinion 

Committee 

By/s/ BWB 

Chairman