lm: 

Eon. zollie steakley opinion No. wu-124 

Secretary of State 

Capitol Station Be: W. A. Green Compeny - Payment, 

Austin, Texas of subscription to increased 

capital stock of a corporation by oancellaticm of an 

indebteddess of corporation 

Dear Sir: to subrrcriber. 

Your letter ofMsrch27,1957, requested our oplnionasto 

whether the Secretary of State should.approve and file sn amen&nsnt 

to a charter whiuh purports to increase the capital stock and p1y for 

such Increased stock by the cancellation of an indebtedness owed by 

the corporation and to issue such stock for such consideration. 

You set out the specific situation of W. A. Oreen Company 

making applioatitm to increase its capital stock of $200,000.00, represented by 2,000 shares with a psr value of $100.00 each, to $1,000,ooO.00, 

represented by 10,000 shares of a per value of $100.00 each. 'Ke adaiticnal 8,000 shares vith a par value of $800,000.00 is to be paid for 

by the cancellation of long-term indebtedness in the amxmt of $800,000.00 

owed by the corporation to tha subscriber for the increased shares and 

that such indebtedness represents money actually loaned to the corporation an8 used by it in a building expansion and improvemeat program. 

It is our understanding that the subscriber who holds the long-term 

indebtedness of the corporation is also the owner of the present capital stock of $200,000.00 We further understand that all capital stock 

is of the same class. 

In the absence of a statute to the contrary, the satisfaction or release of a valid debt currently due by the corporation is 

a lawful mnsideration for the issuance of stock of the corporation 

even when paymnt is required. by constitution or statute to ba in 

maney . It would be an unnecessary formality for the stock to be paid 

for In cash and in turn the debt be imediately paid with that cash. 

18 C.J.S. 682 (Corporations, Section 2431, 11 Fletcher Cyclopedia 

of Corporations (Permsnent Edition) 462, Sectian 5197. This is not 

violative of Article XII, Section 6, of our Coustitution which provides: 

"No oorporatian shall issue stock or bonds except for 

nmney pai8, labor done or property actually received, and 

all fictitious increase of stock or indebtedness shall be 

void." 
Eon. ZolUe Steak&y, plge 2 (WW-124) 

The rules as to the consideration for which stock may lawfully be issued apply to an increase of stock as well as to original 

stock. 18 C.J.S. 752 (Corporations, Secticol 275). 

The transaction must be free from fraud of any interest 

of other creditors and other stockholders. The corporation would 

have to be solvent for the indebtedness to be worth its face value. 

If the Indebtedness of the corporation is not currently due, it should 

be examined to &termine if it is such an indebtedness that the prepaymeat of it vould usually and normally entitle the debtor to a discount of its iudebtedness, such as a non-interest bearing debt. In 

other words, the indebtedness, just as any other "property" used in 

pyment of the subscription for capital stock, mast ba reasonably worth 

its face value, or It mast be valued at its fair market value. 

If your examination of the affairs of W. A. Green Company 

show that the corporaticnr is solvent, that the indebtedness to be 

cancelled is a bona fide debt and reasonably worth its face value 

or valued at its fair nmrket value, and that the transaction 011 its 

face is free from fraud of any Interest of other creditors or other 

st4xkholder6, then the proposed amendment should be approved and filed. 

The cancellation of a valid indebtedness 

currently owed by a solvent oorgoration 

is a lawful consideration for the issuance of capital stook if the indebtedness 

is reasonably worth its face value or is 

valued at its fair market wlue and the 

transaction is free from fraud of any interest of other creditor8 or other stockholders. 

AFTROVED: 

0PIRIoR c-t 

H. Grady Chandler, Chairnan 

ElbertM.Morrow 

Marietta X. Payne 

E&rinP.Eorner 

Biley EugeneFletcher 

Very truly yours, 

WILL WIIz.0~ 

Attorney General of Texas 

Bs 2+ 

Lawrence Jone 

Assistant 

F@XtB%DFORTEEATTO~GE3ERAL 

By: 

Geo. k. Blackburn