Court Opinion

ID: 4142257
Source: CourtListenerOpinion
Date Created: 2017-02-18 03:19:53.487849+00
Date Added: 2024-06-11T14:34:09.989071
License: Public Domain

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      Honorable Wm. J. Lawson
      sectetary of state
      Austin, Texas

      Dear Sir:                 Attention:   Will Mann Richardson

                                Opinion No. 04097
                                Rc:  The velidlty of self-executing
                                      stock, retirement provfsfons fn
                                      corporate charters.

              This department has received~your      requebt for our opinion.   We
      set out below the body of your letter.

              *The original chartar was issued to ‘the Waples-Plattar Gro-
         cery Company November 30,1891. with ah authorimed capital stock
         of $RiO,O~O. Vartous tocreases of capttal stock ware accomplished
         by charter amendment until on Juty 15, 1913, the suthoriead capital
         stock, by amendment (iled that day, was increased to $1,500,000.00.

              “At a meeting of the shareholders and directors at Denison,
         Texao. on July 26, 1928, it was delided to amend the charter,
         changing the name of the corporation to Waples-Platter    Company
         and increasing the capital stock to $2,000,000.00, ‘making the
         additfonal $500,00U.OO’capital stock all preferred, without vottng
         power, which preferred capital stock shall be of the par value of
         $100.00, and shall bear interest at the rate of six per cent per
         annum, with the option on the part of the corporation to retire
         same at any dividend paying period.’

                ‘Oa July 30, 1928, the amendment authorized at the Director’s
          meeting on July 26, 1928. was fried with the Secretary of State and
          after providing for the change of the corporate name and for the
          increase of the authorized capital stock, reserved ‘the right on the
          part   of the corporation to retire aaid preferred stock at par at any
         ‘dividend payhz data.’ The amendment containe,d the certificate
          of the officers of the corporation to the effect that the authorized
          hicrease    had been subscribed and that all of same had bean frilly
          paid in with lawful money..

             “The iscords of the Secretary of State’s office reflect that the
         Waples-Platter Company In its franchise .tax report; for the year
Honorable Wm. J. Lawson, Page 2, O-4097

   ending December 31. 1928, raported an authorized capitalization
   of Two Million  Dollars and paid the tax thereon.  Thereafter,
   and on May 25, 1929, at a meeting of the shareholders and di-
   rectors of the Waples-Platter   Company, it was voted that the
   provision for pr.eferred rtock contained in the charter amend-
   ment of July 30, 1928. be eliminated, and ‘that the action of the
   shar.eholders aad directors in time past in cancelling the sub-
   scription to such preferred stock be ratified and confirmed.
   The same resolution instructad the directors to change the
   chartar of the corporation to conform to the terms of the reso-
   lution, but no amendment was filed with the Secretary of State
   at that time.

        ‘*At a meeting of the shereholders and directors on the
   22nd of January, 1935. a resolution was passed in which it was
   recited that the amerqiment bf Tuly. 1928, had authorized an
   increase of the capita! stock of 5000 shares of preferred stock
   but that the resolution of the shareholders and directors on
   May 25, 1929. by mutual conseut of the subscribers, share-
   holders and directors, had rescinded the subscription to asid
   stock and cancelled same; that the charter had never been
   amended conforming to the terms of the resolution that had
   been passed; and directing the officers and directors to
   certify to the Seczetary  of Stats that the charter of the corpor-
   ation be amended. On February 14, 1935, the officers certified
   to the Secretary of State the amendment to the charter reciting
   the various staps that had been taken and setting out that ‘after
   A. F. Platter and L. H. McKee had paid in the snm of $250.000.00
   each on their subscription, It was deemed to the best interest of
   the corporation that all the stock be common stock and that the
   preferred stock be eliminated and that by consent of all share-
   holders, common and preferred, the subscriptions to said pre-
   ferred stock were cancelled and the money restored to the sub-
   scribers.’ It was then provided in the amendment that the reduc-
   tion of the capital stock to $1,500,000.00 be reflected and that the
   provfs.ion in the charter for the issuance of the preferred stock
   be e Urninated.

         ‘After the action of the shareholders and directors on May
   25, 1929, the franchise tax reportr filed by the corporation re-
   flected an authorized capitalisation of ‘$1,5g0.000.00 only, and
   tha franchise tax was computed on that basis. These sums were
Honorable Wm. J. Lawson, Page 3. O-4097

   accepted   by the Secretary    uf State each year from 1929 to 1941.
   On January    17, 1941, this offike called upon the Wsples-Platter
   Company for additional tax for all years after 1928 and until
   the ,amendment of tbe charter warn filed in 1935, upon the theory
   that the subscribed capital stock during that period was
   $Z,gflO,OOO.OOand that the action of the corporation in calling in
   and cancelling the preferred stock in May, 1929, did not affect a
   reduction of the capital stock of the corporation insofar as the
   franchise tax due the State was concerned.

        *It is the poaition of the attorneys for. the Waples-Platter
   Company that the provision in the charter amendment of July 30,
   1928. for the retirement snd cancellation of the prcferred’stock
   was and is a valid provision affording a legal method by which
   to reduce the authorized capitaltnation of the corporation and
   that the effect of the acts of the corporation hereinbefore set
   forth was ta take advantage of the provisions of. its charter and
   reduce the authorized capital of the corporation by cancelling
   the 5000 shares of preferred stock.

        ‘It Is also their contention that in view of the provisions in
   the 1928 amendment, reserving to the corporation the .power to
   cancel and retire the preferred stock, it was unnecessary that
   the charter of the corporation be thereafter amended to refl#t
   the reduction. This view of the effect of the action of May 25,
   1929. renders the amendment of 1935 unimportant except inso-’
   far as it evidences the intention of the Board of Directors that
   the preferred stock called in an~dcancelled should never again
   be reissued. Said attorneys think this amendment was unneces-
   sary because the preferred stock, once having been retired, with
   the consequent reduction of authorized capital. the corporation
   would have had no power thereafter to missue such preferred
   stock.

         *This department has always held that an amendment did
   not become effective, to reduce the capital stock of a corpora-
   tion, until the actual amendment drawn up in accordance with
   the Statutes was filed. The department has never felt that a
   provision in the charter allowing the corporation the right to
   retire preferred stock would nullify the statutory requirements
   for decreasing the capital stock of a corporation.   If a corpora-
   tion has the right to insert such provisions in its charter it could
   change the requirement that two-thirds of the voting stock authorize
Honorable Wm. J. Lawson. Page 4. O-4097

   the decrease. and in lika manner might provide for a dissolution
   by less than four-fifths of the stockholders.’ Such provisions, how-
   ever, are contrary to our Statuka and this Department does aot
   feel that they should be given effect. The language in the particu-
   lar case would allow the corporation to retire preferred stock but
   this Dupertmellt feela that such stock upon retirement became
   treasury stock and was taxable until the amendment was filed.
   The mere act of retiring the stock (which in thls case was can-
   celled rather than retired) would not decrease the authorized
   capital according to the interpretation of this Department.

        *The question presented is oua that has not heretofore been
   passed upon by this Departmont or by the Attorney General. In
   view of the fact that preferred stock retirement provisions sre
   commonly used in drafting corporate charters and amendments
   thereto, we feel that any question as to the valid.ity of such a
   charter provision should be submitted to the Attorney     General
   for detarmination.

       *The charter amendment of July 30, 1928, reserving ‘the
  right on tba part of the corporation to retlre said preferred stock
  at par at any dividend paying date,’ is attached hereto, as well as
  the pertiaent reaolntions of the shareholders and directors of the
  Waples-Plattar   Company.

         “WC believe that the following legal questions are presented
   and must be answered by you in order to determine the franchise
   tax liability of this corporation:

        *First:  Is the provision in the charter amendment of July 30.
   1928, Gviag      the right on the part o.f the corporation to retire
   the authoriced preferred stock at any dividend paying date, a valid
   provision?

        “Secoad. Under the facts and circumstances related above,
   was thcaction of May 25, 1929, effective to cancel and retire the
   preferred stock, thereby de.creasing the capital stock for franchise
   tax purposes ?

        “In order to facilitate the answer,ing of these two legal ques-
   tions, I am attaching hereto a brief prepared by the attorneys rep-
   resenting Waples-Platter     Company.”
Honorable Wm. 3. Lawson, Page 5, O-4097

        Article 1304, Revised Civil.Statutes, provid~es what a corpora&
charter murt contain. Section 6 of that Article reads:

        a***

       ‘6. The amount of its capftal stock, if any, and the num:
   be? of sharea .into which it ts dtvidtd.”

       Arttcle 1330. Revised CLvil Statutes, as amended, Acts 1931,
4gnd Legtsiature, Page 78, Chapter 51, Section 1, stipulates how a corpor-
ation may incrc8se its capital stock thualy:

        ‘The Board of Directors    or other managing officers of a
   corporation may incrcaae its authorized capital stock, includ-
   tug the issuance of,prefetred   stock, which stock shall have
   .&Ma, powers, privileges     and preferences   aa are now author-
   ized by law. when empowered to do so by a two-thirds vote of
   all of its outstanding stock with voting privileges, at a special
   or regular meeting called for that purpose by complying with
   the provisions of Article 1308, and/or Article 1538-D, as the
   case may be. Par value stock, issued. or unissued, may be
   converted   Into preferred stock In the same ~tnanner and sub-
   ject to the same limitations as no par stock Mayo be so con-
   verted under Article 1538-H. Revised Civil Statutes of 1925.

        “Upon such increase or conversion of stock being made in
   accordance with such provisions and certified to the Secretary
   of State by the D,frectors, and, lf the increase baa been made
   In accordance with law, he shall file such certif,icate; and there-
   upon, the same shall become a part of the capital stock of such
   corporation.   Such certificate shall be filed and rec,orded in the
   aame manner as the charter. All preferred stock heretofore
   authorized to be issued, or issued, or stock convertad into pre-
   ferred shares, by vote of two-thirds of the outstanding stock-
   holders, is hereby ratified. legalized and validated.”

        For the sake of brevity, we shall not set out Article 1308 but wtll
simply say that it deals with the capital stock of a corporation, saying of
what it may consist and requiring the filing of an affidavit with the Secre-
tary of State relative the subs~crtbers thereto.
Honorable Wm. J. Lawson, Pagb.6,      O-4097

        Article 1332, Revised Ctvtl Statutes, sets out corporate capital
stock reduction procedure, as follows:

         ‘A corporation may decrease its capital stock by such
   amount as its stockholders    may decide, by a two-thirds vote
   of all its outstanding stock, tn like mauner as 1s required for
   an increase. No such decrease shall prejudice the .rights of
   say creditor of such corporation      in soy claim or cause of ac-
   tion such creditor may have againat the company, or any
   stockholder thereof. Such decrease ahall.uot become effec-
   tive until full proof is made by sffidavi,t of the directors to
   the Secretary of State of the financial condftion of such cor-
   poration, giving therein all Its assets and liabilities, with
   namaa and postoffice addresses       of all creditors and amount
   due each; and the Secretary of State may require,       as a con-
   dition precedent to the filing’ of ‘such certificate of decrease,
   that the debts of such corporation be paid or reduced.”

        In Fletcher’s   Cyc. of Corporations,   Section 167. it is said:

        ‘The right to be a corporation is not a natural or a civtl
   right of any person, but it Is the general rule that the crea-
   tion of corporations 1s dependent upon the consent of,the sov-
   ereign power.

       .** * *

        “In the United States a prerequisite to the right to become
   e corporation  is the consent of the sovereign power, which is
   exercised by the legislative department of the state or terri-
   tory, or by congress, as the case may be.”

         The right of regulation by the creating sovcre~ignty naturally
follows this power of creation,. Ar a condition of the act of creation,
the Legislature may impose upon the corporation any requirement,
regulation, or restriction.   This power is limited only by the Federal
or State Constitution.

         The terms of Article 1332, supra, expressly provide      how the
capital stock of a corporation may be reduced in this State.      By the
statute’s enactment. the ~Legislature impliedly denied to the     corpors-
tion any other method of reduction. The Legislature plainly       revealed
their intent.
Honorable Wm. J. Lewsoa, Page 7, O-4097

        The capital stock is that amount of money, or its kind. which the
corporate shareholdera put up for the purposes of the corporation.    It is
to be used to satisfy any obllgatlona the concern may assume during lta
corporate existence. But, the capital stock la not for the convenience of
the corporatora alone. Another purpose, and moat important it would
seem, is that it serves as a source of information and providds security
to the public at large. Section 6 of Attlcle 1304, aupra, requtes that the
charter of a corporation shall stats the amount of the capital stock. The
reason seems obvious. It represents a definite and fixed sum which can-
not be increased or diminished at whim. This can be accampllshed only
by the prescribed statutory mode. See 5 Thomp. Corp., Sections 3408.
3686 and 3688; Turner vs. Cattleman’s Trust (Corn. Ape.), 215 S.W. 831.

        ‘It is a general rule that where a statute gives a right and
   prescribes a remedy, the statutory remedy must be strictly
   pursued.; hence, it follows that as there can be a reduction of
   the capital stock of a corporation only on express statutory au-
   thority, the method prescribed by the statute must be followed.
   For obvious reasons the law would not tolerate any secret or
   clandestine reduction of the stock; it must be done openly, and
   the public must have the same opportunity to know of such reduc-
   tlon aa of knowing the origlnal amount of the capital stock. Thus,
   the statutes in the several jurisdictions usually provide that any
   change in the amount of the capital stock of a corporation shall
   be made at a stockholders’ meeting ,callad for that purpoae upon
   a notice specifying the object of the meeting and the proposed
   change. It has been suggested that the publicity required in such
   proceeding wsa for the purpose,, in part, at least. of advising the
   public dealing with the corporation of the proposed change. Any
   secret contrivance or arrangement to produce a change in the
   capital stock is contrary to the usual statutory requirements,
   (a) that the certificate of incorporation shall state the amount of
   tha capital stock, and (b) that any change in such capital stock
   shall only be made after extended public notice.” 5 Thomp. Corp.,
   Section 3688, Page 518 and 519, and cases cited.

         It is not our intention to imply that the stock reduction in the sitUa-
tion before us was accomplished Ln a *secret or clandestine” manner; but,
we believe the above quotation ably states the purpose or the motive behind
our statutory requirements relative to the reduction of corporate capital
stock.
Honorable Wm. 3. Lawson. Page 8, .O-4097

        It fOuOWS from that which foregoes, that this depsrtment is of the
opinion that the action of the Board of Directors on May 25, 1929,.did not
legally reduce the capital stock of the Waples-Platter Company. Their
purpose was not accomplished until the provisions of Article  1332, supra,
were met and complied with, allegedly ou February 14, 1935.

          It is the contention of counsel for the company “that the provision
.iu the charter amendment of July 30. 1928, authorizing the increase of the
 capital stock by the issuance of Five Hundred Thousand ($5OQ,OOO.O0)Dol-
 hrs   of preferred   stock and reserving   the right ou the part of the corpora-
 tion to retire the preferred stock at par at any dividend paying date, was
 and is a valid charter provision.     Further, that under the terms of the
 corpcuate charter itself, a method of reducing the capital stock of the
 corporation was provided, rendering unnecessary any further amendment
 of the charter,to reflect tha raductioal” To this, we shall say that no
 corporations can dispense with statutory prescriptions by charter provi-
 sion. International Travelers’ Ass’n. KS. FranciP, 23 S. W. (2d) 282, 119
.Tex. I.

          “The rule is well settled that when a corporation is organ-
    feed under a general law the law itself limits the powers of the
    corporation and the nature and extent of the cOrporate,privlleges;
    and the powers, privileges and immunities specified in the legis-
    lative act authorizing its organiestion cannot be added to or en-
    larged by the chartsr or other instruments. In ali cases where
    there is conflict between the charter or articles of incorporation
    and the general law, the latter,governs.    But the mere fact that
    the powers enumerated -- in the regulations of the assoctation,
    for example -- are in excess of those conferred by the general
    law, will not entirely invalidate the’charter; the charter is valid
    as to the legitimate powers of the corporation and the enumera-
    tion of unauthorized powers is treated as surplusage.” 1 Thomp.
    Corp., Section 190.

          Counsel for the Company submits for our attention a Virginia case,
.Supetior Steel Corp. vs. Commonwealth 136 S.E. 666. In that case, the
 Supreme Court held that a corporate charter provi6ion reserving to the
 corporation the right to redeem its preferred stock placed the franchise
 tax collection agency upon notice of a possible reduction in the taxable
 corpo,rate capital stock; consequently, the commission was charged with
 the duty to make such investigation as might be necessary to ascertain
 with certainty ‘the’authorized maximum     capital stock which the corpora-
 tion baa the authority to issue at the time of the assessment.’
Honorable   Wm. 1. Law8on. Page 9, g-4097

         The Virginia case does not control the situdtion whtch confronts us.
The applicable.statute in this State is quite different from that which rules
the Virgini   instance. Article 1332. supra, specifically states that a reduc-
tion or decrease in the cap.ital stock of a corporation ‘shall not become ef-
fective* until the required proof is presented to the Secretary of State through
the medium of an affidavit. (Underscoring ours)

        We shall now answer your questions, numerically,        as presented,

        First:  The provision in the charter is not invalid in the strict
sense ofthaord.     Rather, it is of no force or effect, unless, accompanied
by proper corporate act8 constituting a compliance with the statutes of this
Sbb.

        .Second:   On the facts before us, our answer is in the negative.

        We believe   that this fully answers your inquiry.

                                               Yours very truly

                                          ATTORNEY     GENERAL       OF TEXAS

                                          BY

    FIRST ASSISTANT
    ATTORNEY GENERAL

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