Court Opinion

ID: 4139943
Source: CourtListenerOpinion
Date Created: 2017-02-18 02:53:21.485402+00
Date Added: 2024-06-11T14:45:44.654007
License: Public Domain

Honorable   0. P. Lockhart,     Page 4 (o-6370)

            In Opinion No. 2,608, pages 231-238 of the Report and Opinions of
the Attorney General of Texas for 1924-1926,   the following holding, which is
here adopted, was made:

             “The term ‘capital stock’ has been defined as ‘the property
       of the corporation   contributed   by its stockholders  or otherwise
       obtained by it to the extent required by its charter.’     Williams
       vs. Western Union Telegraph       Company, 93 N.Y., 162-188.      It
       has been said ‘that the capital stock of a corporation     is like that
       of a co-partnership    or joint stock company, the amount which
       the partners or associates     put in as their stake tn the concern.’
       Berry vs. Merchants      Exchange Company, 1 Sandf. Ghan., N.Y.,
       280, quoted with approval in Williams       vs. Western Union Tele-
       graph Company, supra.        The Supreme Court of North Carolina
       has defined it as ‘the fund forming the basis of a co,rporation’s
       business transactions.’     Hobgood vs. Ehlen, 141 N.C. 344, 53
S.E. 857. Like definitions have been offered by the courts of
       other States and by text-writers     whose works are accepted as
       authority.   In Clark and Marshall on Law of Private Corpora-
       ttons, Volume 2, 372, it is said:

             u ‘The term “capital stock”, properly speaking, signifies
       the amount subscribed    and paid in or secured to be paid in by
       the,ahareholders  of a corporation

            -Again   the same    writers   say:

             * ‘Capital stock of a corporation  as we have just seen is
       the amount subscribed     and paid for by the shareholders  or
       secured to be paid in, and upon which it is to conduct its opera-
       tioar *’

              “The capital stock of a corporation     is to be diatinguiehed
       from ita capital, which conatituter     the aggregate of itr lrreta
       or proprrtlor.     However   much the capital of a corporation      may
       fncreare through accumulation       of profits or eaheneement in
       thr value of ttr proprrtiea,   or however much it may bo reduced
       by loraer or by a decreare     in property values, the amount of
       capital stock remetam the rame unlera it ir lncreered          or reduced
       by or under legtrlrtive    authortty.   The term ‘capital stock’ in-
       dtcrter a rrlrtlon between the corporation        and its rhare-holderr.
       There must be a contract between the corporation           end rubrcrlbarr
       for stock in order that rhares of stock may be irrued.           The word
        ‘capital’ aa applied to corporatlona    doer not involve this impli-
       cation.
,Honorable   0. P. Lockhart,   Page 5 (o-6370)

             * ‘Capital stock’ of’a corporation   . . t is the, sum of money
       fixed by the corporate   charter as the amount paid in or to be
       paid by the stockholders    for the prosecution     of the business of
       the corparati.on,  and for the benefit of the corporate      creditors.
       . . . The capital stock is to be distinguished     from the amount
       of property owned by the corporation.       Generally,    capital stock
       does not vary, although the actual property of the corporatton
       may fluctuate widely in value.“” Markel vs. Burgess,           95 N..E. 308.

            “In the case of Turner vs. Cattleman’s     Trust Company,
       215 S.W. 832, the Commission      of Appeals, Sec. ’ “B” ’ of this
       State defines ‘capital’ as relating to corporations   as follows:

             “The term ‘capital’ is used to designate that portion of
       the assets of a corporation   regardl,ess  of their source, which
       is utilized for conducting the corporate    business and for the
       purpose of deriving therefrom     their gains and profits.   7
       R.C.L.,    165; Wright vs. Gas R. & B. Co., 216 U.S. 420; 30
       Supp. Cit. 242, 54 L. Ed. 544; Smi.th vs. Dana, 77 Corm. 543,
       60 A. 117; 69 L.R.A. 76; 107 Am. St. Rep. 51; Tradesmen’s
       Publishing Co. vs. Wheel Co., 95 Tenn. 634, 32 S.W. 1097,
       31 L.R.A. 593, 49 Am, St. Rep. 943.”

           In the case of Farrington vs. State of Tennessee, 24 Law Edition,
558, the Supreme Court of the United States, in dealing with a question as to
the amount of tax a bank should pay, laid down the followtng principle8 of law
applicable here :

             *The capital. stock i.8 the money paid or authortzed or
       required to be paid In aa the basis of the buetneee     of the bank,
       and the means of conducting its operations.      It repraaentr
       whatever it may be invested in. If a large aurplur be accumu-
       lated and laid by, that does not become a part of tt. The amount
       authortzod cannot be tncreared     wtthout proper legal authortty.
       If there be lorrer which Impair it, there can be no formal re-
       ductton without the like sanction.    No power to increare     or
       dtmtntrh it belonga inherently to the corporation.      . . .*

           14 C.J., Sections 499, in part,       501 and 502, pagea   379, 380, 381,
382, and 383, read as follows:

              “(4 499) 2. Capital Stock and Capital - a. Definitton of
        Capital Stock. The ‘Capital stock’ of a corporation,   in the
        atrtct and proper sense, is the sum total fixed by the charter
        Honorable   0. P. Lockhart,    Page 6 (o-6370)

               or articles   of Incorporation  aa the amount paid in or to be
               paid in aa the capital upon which the corporation      ie to do
               business;   or the fund o,f money or other property fixed as
               the basis for conducting the business of the corporation,       as
               dMinguiahed      from the shares representing    the separate
               interest of the individual stockholders;    or, in other words,
               the money or its equivalent advanced by the corporators         or
               members     as the capital, which is usually for convenience
               divided into equal amounts called shares, for which each
               member is entitled to a certificate,     showing the number of
               shares he has in the company.*

                     =(4 501)c.   Distinction   between Capital Stock end Property
               or Assets.    The fund provided as capital stock becomes           the
               property of the corporation,       but the capital stock of a corpora-
               tion is not the same thing as the property of the corporation.
               Properly    speaking the term ‘capital stock’, as has already
               been stated, means the sum fixed by the charter or articles             of
               incorporation    as the amount paid in, or to be paid in, in money
               or its equivalent,    as the capital upon which the corporation        is
               to do business;    and in this sense it is distinguishable      from the
               tangible property and assets generally         of the corporation.     The
               property of a corporation      fluctuates and may be greater or less
               than the original capital invested according         as the business has
               resulted in a profit or a loss; but the capital stock remains
               fixed and unaffected by the accidents       of business.

                     * ‘Capital stock’ sometimes       applied to property or assets.
               The term ‘capital stock’ is often used, however, in a different
               sense, particularly    in statutes   relating to taxation, and as in-
               cluding all the property of theccporation,         in which its capital
               is invested and which is employed in carrying on M‘bustness,
               in whatever form, and even as including the entire property or
               assets of the corporation,      tangible and intangible, including its
   .I          franchise   or including its franchise      or franchise,s,   contract
               privileges,   and good will. So it is said that capital stock ‘exists
: ~.
               only nominally’ and is the mere representative            of the actual
               property or assets of the corporation,”

                    ‘(8 502)d. Capital or Capital Stock as Including Profits
               and Surplus.   Although it is said that the profits of a corpora-
               tion are mere increment and augmentation of the stock until
               separated therefrom    by declaring a dividend, and although the
Honorable    0. P. Lockhart,   Page 7 (O-6370)

       term “capital’ OP “capital stock’, as used in a statute may in-
       clude accumulated    profits when this appears to have been the
       intention of the Irgislature, the general rule is that undivided
       profits or surplus form no part of the capital or capital stock
       in the proper sense, although they do form part of the general
       capital or assets of the corporation,    But of course surplus may
       become capital by means of a duly authorized declaration      of a
       stock dividend. a .m

              Volume 2, Hil.debrand, on. Texas     Corporations,    Section   477, pages
355-356,    lays down the following rules:

            (a . . . When a corporation.   has a surplus, whether a dividend
       shall be declared,    and if declared,   how much tt shall be, and when
       and where it shall be payable, rest largely in the discretion      of
       the directors.    In the exercise   of their discretion they are not
       subject to control or interference      by the courts unless they act
       fraudulently,   oppressively,   or unreasonably,

             ‘The stockholdera      of a corporation  are not entitled, aa a
       matter of absolute right, to the payment of a dividend whether
       the earnings of the corporation       in any year exceed ita ltabilitter.
       Although there may be a large surplus, the board of directors
       may* if, in their opinion, the interest of the corporation       makea
       it aeceasary     or advisable,   expend the same in Impravemontr,
       or in 8 lawful sxtenaion of the buaineva of the corporation.         Under
       rome circumatancea,        the board of directora  may retain profita
       of the buatnesr as a rurplus fund instead of dlvidlnp it among the
       stockholders.      Whether they do so is generally l quertion     withtn
       tldr    dtrcration  to determine . . 04

             We think it 1.a char      from the above authori#nr,       tbet the aurplua
accumulated     by a corporrtt.on     is not a part of the capital rtock of raid cotpora-
tion, From the figuraa given by you in your requert, we concludr that the amount
of capital rtock, common and preferred,            of the corporation    iaquirod about ia the
total wm of $3,905,466.00,         and that the balance of tlmlaaota of sold corporation
In the total rum of $4,71,2,797.00        constitutea   the lurplua, crpttal and lnr no d,    of
raid corporation.     Therefore,      since Article 4725 horeinrbave        ret out, provider
that a llfr inauranco company organized            under the lawr of thir Stats may Invert
la or loan upon,aocuritier       therein named, and none other, one of the requirementa
of tha eorporrtioae    offariag such securittLa being that such invertment #hall not
bo mrdo la the rtock of an oil. company or manufacturing              company unlerr ruch
corporation   har capttab stock of not less than $5,000,000.00,            it ia our opinion
Honorable      0. P. Lockhart,      Page   8 (o-6370)

that the company referred   to by you does not qualify under said statute,                     for
the reason that it does not have the required amount of capital 6tock.

               Trusting     that this satisfactorily     answers’your         inquiry,   we remain

                                                              Very    truly    yours,

                                                        ATTORNEYGENERALOF                    TEXAS

                                                        By    /s/    Jas. W. Bassett
                                                                     Jas. W. Bassett

JWB:rt:tiw

APPROVED         JAN 23, 1945

/s/   Carlo8    C. Ashley

FIRST ASSI5TANT
ATTORNEYGENERAL
                                                       APPROVED
                                                        OPINION
                                                       COMMITTEE
                                                       By /s/BWB
                                                         Chairman