THEATTORNEY GENERAL 

OP TEXAS 

PRICE DANIEL 

AUHTIN 11. -~-EXAE 

.4TTOFlNEY GENERAL 

August 29, 1952 

Hon. Sack Ross 

Secretary of State 

Austin, Texas 

Dear Sir: 

Opinion No. V-1520 

Re: Issuance of stock dividends 

out of surplus. created by an 

appreciation in the value of 

corporate assets. 

tion: 

your office has requested an opinion on the follo+ng &es- 

“Can appreciation in the value of the assets 

of a corporation form the consideration for the 

issuance of additional capital stock by means of ‘, 

a stock dividend to its stockholders 7” 

According to the records and information furnished with 

your request, the fact situation out of which the above question 

arose is as follows: A corporation chartered in Texas in 1923 

with capital stock of $250,000 has made application to increase 

its capital stock to $500,000. The increase is to be made by 

means of a stock dividend aggregating $250,000, to be,distributed 

to present stockholders in the same proportion as their present 

stock ownership. The assets of the corporation have been recently appraised by an independent and reputable firm’ of appraisers, and based on present values the appraisal shows the corporation’s surplus to be in excess of the $250,000 which it proposes 

to convert into capital stock. You have stated that you are satisfied that the assets are presently worth the resppraiaediraluez.All 

of the stockholders of the corporation and all of the directors have 

authorized the proposed increase. 

It appears from the factual statement submitted by the corporatlon tbat a portion of tbe surplus has resulted from investment 

of earnings in plant expansions, We have not been furnislied with 

prior financial statement6 ff the corporation, and consequently we 

do not know to what extent the stated surplus has resulted from ap-, 

preciation in the value of amet since the date of tI+acquisftion. 

However, your question aecrssmdly spumes %hat a portion of the 

stated surplus repraents appreciation in the value of corporate 

assets. 

ArticJe XII. Section 6 d the Texas Comtitutlon provides: 
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Hon. Jack Ross; page 2 (V-1520) 

“No corporation shall issue stock or bonds 

except for money paid, labor done or property 

actually received, and all fictitious increase of 

stock or indebtedness shall be void.. 

Article 1353, V.C.S., reads: 

“No corporation shall issue any stock whatever, except for money paid, labor done, which is 

reasonably worth at least’the sum at which it was 

taken by the corporation, /or property actually received reasonably worth it least the sum at which 

it was taken by the corn Pi ny. Any corporation 

which violates any provision of this article shall, 

on proof thereof in any court of .competent jurisdiction, forfeit its charter, permit or license, as 

the case may be, and all rights and franchises 

which it holds under, from, or by virtue of the 

laws of this State.” 

There are no cases by the Supreme Court of Texas directly in point on the question of whether appreciation in the value 

of the corporate assets fulfills the constitutional and statutory requirements of money paid, labor done or property actually received is the consideration for the issuance of a stock dividead. 

In O’Bear-Nester Glass Co. v. Anti-Explo Co., 101 Tex. 

431,108 S.W. 9b7 m) the Supreme Court said with regard to 

gection 6 of Article XIII 

: : ,438 

The purpose of the convention in enacting ~t~p&vision of the Constitution was to secure creditors as.well as stockholders of corppratfons against the practice which was too common, 

of cdrporatiom @suing fic~titiom,,stock and. stock, 

upon an insufficient consideration, whereby the 

actual capital was much less than ~the amount reprisented by the shares issued and sold by the carporation. The terms in which this section of the 

Constitution is expreseod indicates the purpose 

that,the assets of the corporatfon should bo something substantial, and of such a character that they, .’ 

could be subjected to the payment of claims igainst 

the corporation as well as to secure the ahareholders in their rights in the capital dock.” ,’ 

in Cattlemen’s Trust Co. of ,Ft. Worth v. Turner, l&3 S.W. 

(Tea Civ. AAT reverse on 0 er groun s. urns3 v. 
Hon. Jack Ross, page 3 (V-1520) 

Cattleman’s Trust Co,, 215 S.W. 831 (Tex. Comm. App. 1919). the 

Court explained the purpose of these constitutional and etatutoiy 

provisions as follows: 

-By the common law of the land owners ,of 

stock in corporations are entitled to a’ ratable 

share in its assets, and,the evident purpose of 

the constitutional and statutory provisions under 

consideration was to protect the purchasing public in the acquisition of stock ,or bands of earporations that was not represented by an equiva-, 

lent’.in the way of assets belonging to the corporation issuing the stock, . . .” 

If the only purpose of the constitutional and statutory pr,ovisions is to protect present and prospective creditors and stockholders against a fictitious increase in values, as these two cases 

indicate, it is difficult to see how the proposed stookdfvfdend in 

the present case would be illegal. ,In order to ascertain if there 

will be a possibility of harm,, to stockholders or creditors, it is 

ne.eessary to understand the nature of a stock dividend. In a recent opinion (Letter Opinion to Hon. John Ben Shepperd dated 

April 11, 1951). this office approved the following deftnition of a 

stock ,divfdend as stated in 13 Am.Jiir.. Corporations, 8 648: 

“In its ordinarily accepted meaning a stock 

dividend is a dividend payable in stock instead 

of cash, the declaration of which involves the 

creation or issuing of new stock to be distributed 

pro rate to the shareholders as evidence of the 

contemporaneous transfer of an equivalent amount 

of the surplus earnings or profits to the capital 

fnnd of the corporation. A cash dividend differ@ 

matrrklly from a stock,divfdend in that a cash 

dividend, being declared on the then existing capital dock, subtracts so much from the trea-sury~, 

of the corporation and transfers’it to the pocket 

of the stockholder, while a stock dividend takes 

nothing from the property of the corporation and 

adds nothin% to the interests of the rtockbolders. 

A hxk~dividmd implies a continuance of the cork 

porath *itb the Bama asmets and the lame Ul+iities, The title ta all corporate property remins 

in the corporaUoia a8 bofwe, bt+cOrpora~ pQfi* 

or surplus ir prunaently l pproprkbd to fixed 

capital, the shareholders receiving merely symbols 

or evidences of such appropriation. Where a atack 

dividend issues, Uw t%nterprise rem&s the same; 

the increase Pn capital dock simply dilutes tha 

shares as they aatMOd’-Lur-’ 
Hon. Jack Ross, Rage 4 (V-1520). 

You state that you are satisfied that the assets of the eorporation are worth the reappraised value, In the light of the above 

explanation of the nature of a stock dividend, we fail to see a likelihood of injury from the proposed increase in capitalization. 

Neither the O’Bear-Nester case nor the Turner case mentions increase in capitalization or issuance of stockd on an 

enhancement in the value of the corporate assets. Two opinions by 

Courts of Civil Appeals have said that increased value of the assets 

could not support a stock issue. 

In Houston Cemetery Co. v. Drew, 36 S.W. 802 (Tex. c,iv. 

App. 1896, error dism.), the question decided by the Court of’Civi1 

Appeals was whether the district court had actad’properly in aI;- 

pointing a receiver for the corporation Rending a hearing on the 

merits. One ,of the grounds upon which the appointment was sought 

was that the corporation had issued watered stock. On this point 

the court said by way of dictum: 

. 

. . . The capital stock was afterwards increased 

to $100,000, upon the estimated increase in value of 

the land bought for the purposes of the cemetery; and 

the certificates of stock were issued to the shareholders 

at the ratio of 16 of ‘the new shares for 1 of the old. This 

was apparently within the inhibition of the constitution 

(article 12, 8 6) against the issuance of stock except for 

money Raid, labor done, or property actually received.” 

In Cole v. Adams, 49 SW. 1052 (Tex. Civ. ARp. 1898). tbe 

receiver of an insolvent corporation brought suit to compel payment 

by the stockholders of the balances alleged to be due upon the stock 

issued to them. The corporation had been chartered on September 

27, 1889, and after organization the defendants conveyed certain 

real estate, for which they had paid $14,000, and certain contract 

rights to the corporation. On May 22, 1890, it wae estimated that 

the actual value of the property, rights, and franchisee,tiien owned 

by the corporation,,,inqluding .enhan~ementin value of .the .real property ‘air@ tts con&+% to $he...&ovbofat.fon, over and above’ite~ ini , 

debtednessi was $28,000: Basti on that+aluation, the corporation 

issued 40 shares having a par value ,,of $100 to each of the seven defendants, Between that date and September 1, 1890, six of the defendanta: had contributed $500 each to the corporation, and that together with $10,000 out of earnings of the corporation had been invested in further plant expansions. On September 1, by agreement 

of the stockholders, the corporation issued 10 additional shares : 

.to each nf, six of the defendants. Tbe receiver sued each of the defendants for 50, per cent of the par value of the shares issued to him, 

upon thetheory~that the defendants were not entitled to credit for “estimated enhanced value of the properties of the corporation,contracts, 
Hon. Jack Ross, page 5 (V-1520) 

proceeds, extensions made, and earnings from operation of the 

plant between the dates of the charter and the issuance of the 

stock.” The Court of Civil Appeals sustained the receiver’s 

right to recover for amounts based on enhanced value: 

“The appellants, under their first and second 

assignments of error, submit these, two propositions: (1) The corporators who were not subscribers for capital stock were entitled to shares of Raidup capital stock to the full value of the property and 

effects owned and held, by the corporation over and 

above its indebtedness at the time the stock was issued. (2) The corporators and stockholders of a 

corporation are the real and beneficial owners of 

all the property and effects held by the corporation, 

and they are entitled to full paid up shares of stock 

for the value of the property and effects of the corporation over and above the liabilities of the corporation. We cannot assent to either of these propositions. 

The relation of the corporators to the corporation in 

respect to its capital stock is not different from that 

of subscribers for the stock. Stock can be issued to 

neither, except for money paid, property conveyed or 

sold to the corporation, or labor done for it. The 

stock, it is well settled, which is unsold, is to be held 

a$ a security for the creditors of the corporation; and 

an enhancement of the value of the properties of the 

corporation will not authorize an additional issue of 

the etook to either corporators or subscribers for the 

stock. 

I) 

. , . ‘From what we have said, it follows that 

we thfnk the court did not err in refusing to consider 

the alleged enhancemsnt in the value of the franchises 

and properties of the corporation between the datas of 

the acquisition if [sic] its properties and that of the 

issuance of 8toFr me corporators, as any part of 

the cqneideration for which the stock was sold. . . .” 

In an earlier opinion involving the same fact situation, 

Cole v. Adams, 92 Teat, 171, 46 S.W. 790 (1898), the Supreme Court 

in answering certified questions bad made’ statements which, taken 

alone, we would be fnelined to construe as holding that enhancement 

in value between the time the property was transferred to the corporation and m time the stock was issued could constitute the consideration for the issuance of stock. But the Court of Civil Appeals 

evidently did hot so construe tbe Supreme Court’s answers to its 

questions, and we do uot feel at liberty to substitute our interpretation of the holding for that nnde by the Court of Civil Appeals. 
Hon. Jack Ross, pnge 6 (V-l520), 

The recent case’of Adams v. Farmers Gin Co., 114 S.W.,, 

i2d ~583 (Tex. Civ. App. 1938), indirectly supports tbe ho ir rgin : 

,~ Gole v, madams. Tn that case the corptirath had issued apprtiimatelyres of stock at;a par value of $25 per share. or 

an aggregate value, of about $3,ObO. Subeequently~ the gin &ieh 

the corporation owned and operated bad burned, and the corporation bad’received $&O,OOO in insurance. This sum, together with’ 

the land on whjch the gin stood, constituted the corporationfd assets at the time a stockholders’ meeting was held to decide whetber the cor’poration should dissolve or should rebuild and contfnue 

in operation. At that meeting, it was agreed that the stockholders 

would “loan” to the corporation the amount which they would have 

received~upon dissolution (about $125 pars ebare) and that the cbrporation would build another gin and repay the “loana” out of future profits. Certain ,of the stockholders sued to recover the 10- 

Raid portion of the so-called y108ns.e and in the alternative they, 

contended that.the agreement amounted to the declaration of a 

stock dividend. The Court of Civil Appeals rejected this conhntion in the following language: 

-Article 12, section 6, of the Constitution of 

Texas, quoted abwe, is. we~think, a completeanswer to plaintiffs’ proposition No. 1, that is, their 

contention tbat a stock dividend was declared. A 

finding that a stock dividend was declared would not 

have ,found clupport in either the pleadings or evi-~ 

dence. The charter fixed the amount and par value 

of the stock. No action for the creation of preferred 

stock was taken. No amendment of the charter and 

the approval and filing of same by the Secretary of 

State, as required by article 1314, is shown. Plaintiffs paid no money and performed no labor and the 

corporation received no property from ,them as a ,. 

legal basis for the issuance of stock. No net profits 

are shown to have been earned and unpaid on May 1. 

1926. As heretofore stated, the corporatiop then 

held and owned the insurance money and all other aesets. There was no transfer or conveyance of prop 

erty, either actually, or in legal e~ffect,,‘from the ’ 

etockholdore to the corpordion as a lawfulbaeir for 

a debt or for, stock of the corporation. An agreement 

to pay tho stockhdders cannot be enforced as a declared dividend or otherwise6 except upon dissolution 

of the corporation, Dividends may be paid oat of 

profits but not out of thw capital aeswtu of tlae cot-, 

poration.g . 
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Hon. Jack Rotis, page 7 (V-UZO) 

In the three cwer lart cited, thwcourt &I each inetance 

unmistakably indicated that an iacreare in tbe value of the corporate ascleta would not support UIe dochratbn of a dock dividend. Ar against the gonerel rtabmenta in the O’Bear-Neater 

and Turner casen, we mwt accept #here exprereiona as being 

more-y decisive of tlw #cope of the prohibition contained 

in Saction 6 of Article XII of tbe ConaWuUon. Consequently, 

it is our opinion that thin sectia, of the Constitution forbid6 the 

issuance of additional capital l twk ia the form d a stock divi-’ 

dend baaed on the appreciated valw of corperati awets. 

SUMMARY 

Art. XII, Sec. 6 of the T-8 Coastitutlon prohibits a corporation from iomdag aphl dock 

based on the appreckted tilw of the corporate 

assets. 

APPROVED: 

‘E. Jacobrat 

Reviewing Asclirtant 

Chnrles D. Mathewe 

Fir& Ad&ant 

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Youm very truly, 

PRECE DANIEL 

Attorney General 

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