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Eon. zollie steakley opinionNo. wu-124 Secretaryof State CapitolStation Be: W. A. Green Compeny - Payment, Austin,Texas of subscriptionto increased capitalstock of a corpora- tion by oancellaticmof an indebteddessof corporation Dear Sir: to subrrcriber.
Your letterofMsrch27,1957, requestedour oplnionasto whether the Secretary of State should.approve and file sn amen&nsnt to a charterwhiuh purports to increasethe capitalstock and p1y for such Increased stock by the cancellationof an indebtednessowed by the corporationand to issue such stock for such consideration.
You set out the specificsituationof W. A. Oreen Company making applioatitmto increaseits capitalstock of $200,000.00,rep- resentedby 2,000 shareswith a psr value of $100.00each, to $1,000,ooO.00, representedby 10,000sharesof a per value of $100.00each. 'Ke adai- ticnal 8,000 shares vith a par value of $800,000.00is to be paid for by the cancellationof long-termindebtednessin the amxmt of $800,000.00 owed by the corporationto tha subscriberfor the increasedsharesand that such indebtednessrepresentsmoney actuallyloaned to the corpora- tion an8 used by it in a buildingexpansionand improvemeatprogram. It is our understanding that the subscriberwho holds the long-term indebtednessof the corporationis also the owner of the presentcapi- tal stock of $200,000.00 We furtherunderstandthat all capitalstock is of the same class.
In the absenceof a statuteto the contrary,the satisfac- tion or releaseof a valid debt currentlydue by the corporationis a lawful mnsideration for the issuanceof stock of the corporation even when paymnt is required. by constitutionor statuteto ba in maney. It would be an unnecessaryformalityfor 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, Section2431, 11 FletcherCyclopedia of Corporations(PermsnentEdition)462, Sectian5197. This is not violativeof ArticleXII, Section6, of our Coustitutionwhich provides:
"No oorporatianshall issue stock or bonds except for nmney pai8, labor done or propertyactuallyreceived,and all fictitiousincreaseof stock or indebtednessshall be void." Eon. ZolUe Steak&y, plge 2 (WW-124)
The rules as to the consideration for which stock may law- fully be issuedapply to an increaseof stock as well as to original stock. 18 C.J.S. 752 (Corporations, Secticol 275).
The transactionmust be free from fraud of any interest of other creditorsand other stockholders.The corporation would have to be solventfor the indebtednessto be worth its face value. If the Indebtednessof the corporationis not currentlydue, it should be examinedto &termine if it is such an indebtednessthat the pre- paymeatof it vould usuallyand normallyentitlethe debtor to a dis- count of its iudebtedness, such as a non-interestbearingdebt. In other words, the indebtedness, just as any other "property"used in pyment of the subscriptionfor capitalstock,mast ba reasonablyworth its face value, or It mast be valued at its fair market value.
If your examinationof the affairsof W. A. Green Company show that the corporaticnris solvent,that the indebtednessto be cancelledis a bona fide debt and reasonablyworth its face value or valued at its fair nmrket value, and that the transaction011its face is free from fraud of any Interestof other creditorsor other st4xkholder6,then the proposedamendmentshouldbe approvedand filed.
The cancellationof a valid indebtedness currentlyowed by a solventoorgoration is a lawful consideration for the issu- ance of capitalstook if the indebtedness is reasonablyworth