Court Opinion

ID: 4139281
Source: CourtListenerOpinion
Date Created: 2017-02-18 02:45:50.909745+00
Date Added: 2024-06-11T14:42:37.417622
License: Public Domain

OFFICE    OF THE      ATTORNEY     GENERAL   OF TEXAS
                                          AUSTIN

    Lonorable Claude Iabell
    Secretary of State
    Austin, Texas
    Uear Sir:                          Attention8 Mr. J. L. iW3arit.p
                                       opinion Rio,.
                                                   O-7033
                                       Ret Whether the peymen
                                             dividende   b

                We are   In reoelpt     or
                                                             the above stated

                                                         a letter re-
                                                         elow mentioned
                                                         Is-exp1mlatorg.

                                               s eorporatlon, after

                  “(2) Could euoh a domeetie oorporation we
                       euoh eurplus for the purpose of paying
                       a &oak dividend?
                  “(3) Could euoh e domeetio corporation uee
                       auoh aurplue for the purpose of retiring
                       preferred etook of tuoh domestic oorpora-
                       tlonl”

a
eon.   Claude   Isbell,   page 2

     we quote from the letter 800QapanyiW youl:mQueat              aa
rollovm

           “A Delaware corporation advisea UB that it is
       engaged in the purohatse,tranamlseipn, dletrlbutlon
       and aale of natural gae wholly within the State of
       Texea under duly authbriecadper&t to do bueinerrs
       in Texas, and deslrse to re-Incorporate under the
       laws or the State of Texas.
             “it further advines that a plan of ra-iaoorgora-
       tlon and the prooedure and atepm neeeasary ror the
       purpose of aooompll8hlng aenm will be eubmltteb to
       the shareholder8 for their approval1 that the Corpora-
       tion la a gao utility       oompa~,    al derined In the Publlo
       Utility rroldlngcompany Aot of 1935, and aooordlngly
       applioatlon will be made to the Seouritlea and ir;x-
       ohange Co&miorlon ror ltr approval of the various
       etepr and propo#ad tran8aotlonm          In oanneotion    with
       euoh re-inoorporatlon       under the laws of Texas; %&at,
       in addition to it8 Capital and Capital surplui             Ao-
       oounta, the Company him an Parned Surplus,            88’
       reflected   by it@ booka, or aubrtantially         mvre than
       ~1,000,000,00; that It 18 wholly rolvent and It8
       aooouuta and obligations        current1 that the tram-
       aotion ooateaplate~      aerely   Fe-lnooqwration of the
       cxuqan~~s   bualneen, properties an& operations           under
       a Texan oharter.on a ahare-for-8hare baain end without
       gain or loaei that aiaultaneourly with the Ir#tlaaoool
       the oapltal 8took or the Teua oorpomtl0n,              al1 or the
       Delaware oompaar*8 propertle8, bwlnes8 and asset&,
       tangible end intangible, pre@ent and reverslonarp, will
       be transferred to the Texar oorporatlon, and In the
       instrument of transfer the Tssalraorporation will
       aasuma the lawful llabllitiee of the Delaware oorpora-
       tion and ~111 forthwith exeaute a rupplemental             indan-
       ture of mortgage evldenolng the aerumption of the
       outmtanding bond61 that, upon the lssuanoe to the
       Delaware oorporatlon of the entire oapital etook of
       the Texas oorporattion,      suoh etook, purwant to the
       Plan, will be distributed to the shareholders of
       the D&aware oorporation oa a I&are-for-share basis
       ar P lipul.dati,ng   dividend and the Delaware oorporatioa
       wiu thereupon be dinsolved; that purf!Iuant           to the Plan
       the bueineas and operation& will be oontinued without
       interruptloxiby the Texas corporation, which will al80
Honorable Claude Iabell,   page 3

    continue the aam uniform system or aooounta as aiow
    required bg the Ssourities and Xxohange Commlssl~
    and will set up Its books and capital atruoturs  ia
    the same manner as refleated by the books, balance
    sheets and aurplua atatementa of the DeL.awart$
    corporation, whloh latter will be duly aertifled by
    Lialn&: Company or other qualified independent auditora~
    that the atook of the Delaware corporation la listed on
    the New York Curb bxohange and it is Intended that the
    stook of the Texas corporation will likewise be so .:'
    llatedl that the Delaware oorporation Is on a dlvldend
    basis and It Is important that  auoh alvlaend polloy be
    oontlnued by the Texas oorporatlon to the extent oon-
    alstent with Texza lawa and amml bueineaa praotioea;
    however the Dlreotors are oonoarned about the question
    preaented below.
        "Seotlon 30 or the Texas Beourltles Act - Artiole
                    or Vernon’s
    6008, Title J.9.4           civil Statutes, Volume 2,
    and whloh we uaderatana is the MIPL,as Artlole 1083a
    of the PS581 Code, apparently prohibits the deolaratfon,
    lasuanae or paysant or sny orah dividend out 0s any runds
    other than the actual earnings of a oompany or from law-
    rui liquiaatio5 or its buslne68 dna makes a vloletlon
    thereof a felony punishable by fine and tiprisofaaent.
         Weotlon 36 of the Aot vests the adalniatratlon or It%
    provialons in the Seoretary of State and makes It the duty
    of the Searotary Or State and the Attorney General et0 see
    that Its provisions are at all tlaas obeyed and to take
    suah measures and to make suoh lnveatlgatlon as will pre-
    vent or deteat the violation of any provision thereor~.
    As we view it, the general purpose8 Of the Aot am to
    prevent rraudulent praotloes with respect to the iasu-
    enoe , sale, promotion, eta., of any aeourlty within the
    State an& llkewlae the proteotlon of seourity    holders
    rrom rraudulent oorporate praotiaes. In general, the
    peyment or 8 dividend out 0r profits or earned star-
    plus   is authorized under the Civil Lzwa of Texan. Then
    ract that the penal provision prohibiting the payment Or
    oaah alvidenda out or any run46 ‘other than the actual
    earnings' of a ooorpanyla made a part of the Seouritlea
    A0t  (the  Blue Sky Law or 3wm~) would inaioate that
    the intent105 waz to prevent the rraudulent pl’Wtloe
    or paytig divlaenao out of aapltal to the detriment
    of ehareholdera and oreditors   and was not alreatea  to
    the deolaration and payment Or aividenam, ln ordinary
    course of bualneaa by a aiuooe11aor oompang Out Of
    surplus earned by a predeoessor company from the 8-8
    HOL   Claude Iabell,   page 4

          bualneas and oparetions whare auoh predaaeasor eaai-
          pany waa, at the time, on a dividend basis and the
          auooeaaor aompany auooeeded to the property, buainaas
          rights anA llabllltlea Or auoh praAeoe%%or oompany
          through ahangs of oharter. In our opinion, this
          prinoiple was lndireatly reoognieed in the aase or
          ~urohiaon*a iiatateva. COnmiaafon, 76 Padaral (2nd)
          641, (Fifth Clroult).
              *On tha basis oi the f%Ot% as stated and assuming
          the iaauanoe of the Certifloate of Approval by the
          Seouritlea and Lxohanga Gammiaslon of the neaeaaary
          prooadure and tranaaotlons, as well as the approval or
          the Plan bg the ahareholdera of the Delawara oorporatlon,
          will you plea%% aaviaa us, with the advioe and opinion
          of the Attorney Qenelml, whether or not a oontiauanoe
          or tha Alvldend polloy bg the board or afreotors OS
          the T6xaa oorporatlon end the paytaantof part or all
          or suoh dlvldenda out or Uarned suxplua or th,epraclecessor
          DeEaware oorporatlon (provldod, of oourae, the Board
          determlnas that suoh Aeolaration and payment 18 oon-
          alstmt with good business prsotloes  at the tlau)
          would be in vlolatlon Of the Torn8 Saourltiaa Aot,
          and particularly Seotlon 30 of the Aot, or of
          Artlola 1083a Of the Penal COde.”
         Artlale 1083a, Vernon*a kmotatad   Penal   Code,   in part,
    provides:
                “kit dealer, agent 8aleaman, prlnolpaL,
          orrlaer or employee * L * who shall know~lY
          partloipate ln deolarlng, laaulng or paging
          any oash dividend by or ror aqv person or
          company   out of any fUnda othar #an the aatual
          earnings of auoh person or oonpany or froa tha
          lawrul llquldation Of the business tharaof,
          shall be deemed guilty of a reloay ena, upon
          oonvlctlon themof, shall be aentsnoed to.par
          a fine of not more than One Thousand DoUarn
          (~looo), or iqrisoaad la the p%nitentlarY for
          not more than two (2) pars, or by both auah
          fine and imyriaonmant.W

r
                                                                     .’
                                                                          2.42

j   iion.   Slaude isball,   page   5

          In ThW Of the plain an& UUaabi@.ZOUS langUs& of the ebov.
    quoted provlsi~n, it is our opinion that the te+m Qotual        earn-
    fag*" Of the ~Ompeny, a8 Used thsretn end applied to the faotr
    ltatod, r8rerclto the aotual earninga ot the new oorporritim
    rellultingfrom the businere Of mid oorporation        ikLbSequ8ntto
    itlllOr88tiOn, rather than to easeta in the form ofnearned aur-
    plUS* Of a pr8d8o8asor OOrpOretiOn aoyulred by said new oorpora-
    tion et the time of its oreation. It ii3our further opin3.011       that
    at the tiIQ8Of the inCOrpOretiOn Oi the new TexE3SOOrpOretiOIl,
    there could be no actual sarnin~a   0: eoid corporation withFn the
    OOnt8Ii¶pletiOn Of tmVe      quoted prOViaiOn8,     md thtitunder the
    fsots atat8d, the "Barfed surplutr n Or the p2YkdeO8SBOrDelaware
    OorporatiOIiwould WIMititute "fuuds Other than the aotual earn-
    ing&I"Oilthe new Texas OOrpOratiUt, It ia th8ZYifOr4J      our Opinion
    that urder the faots &yell, the payment       of dividend8 out of th.
    *earned su.rplurw of the p&%3deo8saC?r oorporetion would be in
    ViOhttiO5  Of the prOVfaiOne Of Art. 1083a Of fh8 Texas ia8Q61
    Code.

          With =fereno8 t0 YOU' qU88tiOll a8 t0 Whether "a TeXM#
    oorporation, after aapulring  the arset8   or the foreign crorporation
    in the manner rotated"oould pay oaah dividends out of the earned
    surplus of th4 rorsign oorporetion, It ia our opinloa     that ouoh
    amets so aoqulred would aon8titute 8 fund "other then from the
    6QtUt3~ earnings" fl'oia
                           the operetion of the buslteer    of mid Tera8
    corporation.   Xt la therefore our opinion that under euoh olroum-
    stenoea the paymant of oarh divldondo fram    euoh %errmd mrplura
    Ol a foreign QO~lX4tiCh whose amate      had been aQqUired by a
    Texas oorporetlon would be in vioLetlon 0r the provleionr of
    Art. 1083a, F. C.
          It is our further opinion that th8 prohibition aeainrt
    wdeolarlng,    iesulng or paying any oeuh dividend* oontained In
    Art. 10&3a, aupra, would not be epnable       to chhepayment of
    6 ook dlridrnds or th8 retirement of prefrrred etook of a
    + OIWklt'iQ oorporatlon acquiring the eeret8 of a foreign   oorpora-
    tion under the oiroam&H,moer set forth in your requeot. It is
    to be Imd8ratOOd, however, that we er8 herein paeefng only ,UpOn
     the applioebfiity Of the provirrionrof Art.   10838,   P. C., to
     the rituatione inquired about.
                                                 Yours   very   truly,

L