Untitled Texas Attorney General Opinion ( 1952 )

THEATTORNEY GENERAL
OP TEXAS
AUHTIN 11. -~-EXAE
PRICE DANIEL
.4TTOFlNEY
GENERAL
August 29, 1952
Hon. Sack Ross Opinion No. V-1520
Secretary of State
Austin, Texas Re: Issuance of stock dividends
out of surplus. created by an
appreciation in the value of
Dear Sir: corporate assets.
your office has requested an opinion on the follo+ng &es-
tion:
“Can appreciation in the value of the assets
of a corporation form the consideration for the
issuance of additional capital stock by means of ‘,
a stock dividend to its stockholders 7”
According to the records and information furnished with
your request, the fact situation out of which the above question
arose is as follows: A corporation chartered in Texas in 1923
with capital stock of $250,000 has made application to increase
its capital stock to $500,000. The increase is to be made by
means of a stock dividend aggregating $250,000, to be,distributed
to present stockholders in the same proportion as their present
stock ownership. The assets of the corporation have been re-
cently appraised by an independent and reputable firm’ of apprais-
ers, and based on present values the appraisal shows the corpora-
tion’s surplus to be in excess of the $250,000 which it proposes
to convert into capital stock. You have stated that you are satis-
fied that the assets are presently worth the resppraiaediraluez.All
of the stockholders of the corporation and all of the directors have
authorized the proposed increase.
It appears from the factual statement submitted by the cor-
poratlon tbat a portion of tbe surplus has resulted from investment
of earnings in plant expansions, We have not been furnislied with
prior financial statement6 ff the corporation, and consequently we
do not know to what extent the stated surplus has resulted from ap-,
preciation in the value of amet since the date of tI+acquisftion.
However, your question aecrssmdly spumes %hat a portion of the
stated surplus repraents appreciation in the value of corporate
assets.
ArticJe XII. Section 6 d the Texas Comtitutlon provides:
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Hon. Jack Ross; page 2 (V-1520)
“No corporation shall issue stock or bonds
except for money paid, labor done or property
actually received, and all fictitious increase of
stock or indebtedness shall be void..
Article 1353, V.C.S., reads:
“No corporation shall issue any stock what-
ever, except for money paid, labor done, which is
reasonably worth at least’the sum at which it was
taken by the corporation, /or property actually re-
ceived reasonably worth it least the sum at which
it was taken by the cornPi ny. Any corporation
which violates any provision of this article shall,
on proof thereof in any court of .competent juris-
diction, forfeit its charter, permit or license, as
the case may be, and all rights and franchises
which it holds under, from, or by virtue of the
laws of this State.”
There are no cases by the Supreme Court of Texas di-
rectly in point on the question of whether appreciation in the value
of the corporate assets fulfills the constitutional and statutory re-
quirements of money paid, labor done or property actually re-
ceived is the consideration for the issuance of a stock dividead.
In O’Bear-Nester Glass Co. v. Anti-Explo Co., 101Tex.
431,108 S.W. 9b7 m) the Supreme Court said with regard to
.:~:
gection 6 of Article XIII
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The purpose of the convention in enact-
ing ~t~p&vision of the Constitution was to se-
cure creditors as.well as stockholders of corppra-
tfons against the practice which was too common,
of cdrporatiom @suing fic~titiom,,stock and. stock,
upon an insufficient consideration, whereby the
actual capital was much less than ~theamount rep-
risented by the shares issued and sold by the car-
poration. The terms in which this section of the
Constitution is expreseod indicates the purpose
that,the assets of the corporatfon should bo some-
thing substantial, and of such a character that they, .’
could be subjected to the payment of claims igainst
the corporation as well as to secure the aharehold-
ers in their rights in the capital dock.” ,’
in Cattlemen’s Trust Co. of ,Ft. Worth v. Turner, l&3 S.W.
:: ,438 (Tea Civ. AAT reverse on 0 er groun s. urns3 v.
Hon. Jack Ross, page 3 (V-1520)
Cattleman’s Trust Co,, 215 S.W. 831 (Tex. Comm. App. 1919). the
Court explained the purpose of these constitutional and etatutoiy
provisions as follows:
-By the common law of the land owners ,of
stock in corporations are entitled to a’ratable
share in its assets, and,the evident purpose of
the constitutional and statutory provisions under
consideration was to protect the purchasing pub-
lic in the acquisition of stock ,or bands of ear-
porations that was not represented by an equiva-,
lent’.in the way of assets belonging to the corpora-
tion issuing the stock, . . .”
If the only purpose of the constitutional and statutory pr,o-
visions is to protect present and prospective creditors and stock-
holders against a fictitious increase in values, as these two cases
indicate, it is difficult to see how the proposed stookdfvfdend in
the present case would be illegal. ,In order to ascertain if there
will be a possibility of harm,, to stockholders or creditors, it is
ne.eessary to understand the nature of a stock dividend. In a re-
cent opinion (Letter Opinion to Hon. John Ben Shepperd dated
April 11, 1951). this office approved the following deftnition of a
stock ,divfdend as stated in 13 Am.Jiir.. Corporations, 8 648:
“In its ordinarily accepted meaning a stock
dividend is a dividend payable in stock instead
of cash, the declaration of which involves the
creation or issuing of new stock to be distributed
pro rate to the shareholders as evidence of the
contemporaneous transfer of an equivalent amount
of the surplus earnings or profits to the capital
fnnd of the corporation. A cash dividend differ@
matrrklly from a stock,divfdend in that a cash
dividend, being declared on the then existing cap-
ital dock, subtracts so much from the trea-sury~,
of the corporation and transfers’it to the pocket
of the stockholder, while a stock dividend takes
nothing from the property of the corporation and
adds nothin% to the interests of the rtockbolders.
A hxk~dividmd implies a continuance of the cork
porath *itb the Bama asmets and the lame Ul+i-
ities, The title ta all corporate property remins
in the corporaUoia a8 bofwe, bt+cOrpora~ pQfi*
or surplus ir prunaently lpproprkbd to fixed
capital, the shareholders receiving merely symbols
or evidences of such appropriation. Where a atack
dividend issues, Uw t%nterprise rem&s the same;
the increase Pn capital dock simply dilutes tha
shares as they aatMOd’-Lur-’
Hon. Jack Ross, Rage 4 (V-1520).
You state that you are satisfied that the assets of the eor-
poration are worth the reappraised value, In the light of the above
explanation of the nature of a stock dividend, we fail to see a likeli-
hood of injury from the proposed increase in capitalization.
Neither the O’Bear-Nester case nor the Turner case men-
tions increase in capitalization or issuance of stockd on an
enhancement in the value of the corporate assets. Two opinions by
Courts of Civil Appeals have said that increased value of the assets
could not support a stock issue.
In Houston Cemetery Co. v. Drew, 36 S.W. 802 (Tex. c,iv.
App. 1896, error dism.), the question decided by the Court of’Civi1
Appeals was whether the district court had actad’properly in aI;-
pointing a receiver for the corporation Rending a hearing on the
merits. One ,of the grounds upon which the appointment was sought
was that the corporation had issued watered stock. On this point
the court said by way of dictum:
. . . . The capital stock was afterwards increased
to $100,000, upon the estimated increase in value of
the land bought for the purposes of the cemetery; and
the certificates of stock were issued to the shareholders
at the ratio of 16 of ‘the new shares for 1 of the old. This
was apparently within the inhibition of the constitution
(article 12, 8 6) against the issuance of stock except for
money Raid, labor done, or property actually received.”
In Cole v. Adams, 49 SW. 1052 (Tex. Civ. ARp. 1898). tbe
receiver of an insolvent corporation brought suit to compel payment
by the stockholders of the balances alleged to be due upon the stock
issued to them. The corporation had been chartered on September
27, 1889, and after organization the defendants conveyed certain
real estate, for which they had paid $14,000, and certain contract
rights to the corporation. On May 22, 1890, it wae estimated that
the actual value of the property, rights, and franchisee,tiien owned
by the corporation,,,inqluding .enhan~ementin value of .the .real prop-
erty ‘air@ tts con&+% to $he...&ovbofat.fon,over and above’ite~ ini ,
debtednessi was $28,000: Basti on that+aluation, the corporation
issued 40 shares having a par value ,,of $100 to each of the seven de-
fendants, Between that date and September 1, 1890, six of the defend-
anta: had contributed $500 each to the corporation, and that to-
gether with $10,000 out of earnings of the corporation had been in-
vested in further plant expansions. On September 1, by agreement
of the stockholders, the corporation issued 10 additional shares :
.to each nf, six of the defendants. Tbe receiver sued each of the de-
fendants for 50,per cent of the par value of the shares issued to him,
upon thetheory~that the defendants were not entitled to credit for “es-
timated enhanced value of the properties of the corporation,contracts,
Hon. Jack Ross, page 5 (V-1520)
proceeds, extensions made, and earnings from operation of the
plant between the dates of the charter and the issuance of the
stock.” The Court of Civil Appeals sustained the receiver’s
right to recover for amounts based on enhanced value:
“The appellants, under their first and second
assignments of error, submit these, two proposi-
tions: (1) The corporators who were not subscrib-
ers for capital stock were entitled to shares of Raid-
up capital stock to the full value of the property and
effects owned and held, by the corporation over and
above its indebtedness at the time the stock was is-
sued. (2) The corporators and stockholders of a
corporation are the real and beneficial owners of
all the property and effects held by the corporation,
and they are entitled to full paid up shares of stock
for the value of the property and effects of the cor-
poration over and above the liabilities of the corpora-
tion. We cannot assent to either of these propositions.
The relation of the corporators to the corporation in
respect to its capital stock is not different from that
of subscribers for the stock. Stock can be issued to
neither, except for money paid, property conveyed or
sold to the corporation, or labor done for it. The
stock, it is well settled, which is unsold, is to be held
a$ a security for the creditors of the corporation; and
an enhancement of the value of the properties of the
corporation will not authorize an additional issue of
the etook to either corporators or subscribers for the
stock.
I)
. , . ‘From what we have said, it follows that
we thfnk the court did not err in refusing to consider
the alleged enhancemsnt in the value of the franchises
and properties of the corporation between the datas of
the acquisition if [sic] its properties and that of the
issuance of 8toFr me corporators, as any part of
the cqneideration for which the stock was sold. . . .”
In an earlier opinion involving the same fact situation,
Cole v. Adams, 92 Teat, 171,46 S.W. 790 (1898), the Supreme Court
in answering certified questions bad made’ statements which, taken
alone, we would be fnelined to construe as holding that enhancement
in value between the time the property was transferred to the cor-
poration and m time the stock was issued could constitute the con-
sideration for the issuance of stock. But the Court of Civil Appeals
evidently did hot so construe tbe Supreme Court’s answers to its
questions, and we do uot feel at liberty to substitute our interpreta-
tion of the holding for that nnde by the Court of Civil Appeals.
Hon. Jack Ross, pnge 6 (V-l520),
The recent case’of Adams v. Farmers Gin Co., 114S.W.,,
i2d ~583(Tex. Civ. App. 1938), indirectly supports tbe ho ir rgin :
,~Gole v, madams. Tn that case the corptirath had issued apprti-
imatelyres of stock at;a par value of $25 per share. or
an aggregate value, of about $3,ObO. Subeequently~ the gin &ieh
the corporation owned and operated bad burned, and the corpora-
tion bad’received $&O,OOOin insurance. This sum, together with’
the land on whjch the gin stood, constituted the corporationfd as-
sets at the time a stockholders’ meeting was held to decide whetb-
er the cor’poration should dissolve or should rebuild and contfnue
in operation. At that meeting, it was agreed that the stockholders
would “loan” to the corporation the amount which they would have
received~upon dissolution (about $125 parsebare) and that the cbr-
poration would build another gin and repay the “loana” out of fu-
ture profits. Certain ,of the stockholders sued to recover the 10-
Raid portion of the so-called y108ns.e and in the alternative they,
contended that.the agreement amounted to the declaration of a
stock dividend. The Court of Civil Appeals rejected this conhn-
tion in the following language:
-Article 12, section 6, of the Constitution of
Texas, quoted abwe, is. we~think, a completean-
swer to plaintiffs’ proposition No. 1, that is, their
contention tbat a stock dividend was declared. A
finding that a stock dividend was declared would not
have ,found clupport in either the pleadings or evi-~
dence. The charter fixed the amount and par value
of the stock. No action for the creation of preferred
stock was taken. No amendment of the charter and
the approval and filing of same by the Secretary of
State, as required by article 1314,is shown. Plain-
tiffs paid no money and performed no labor and the
corporation received no property from ,them as a ,.
legal basis for the issuance of stock. No net profits
are shown to have been earned and unpaid on May 1.
1926. As heretofore stated, the corporatiop then
held and owned the insurance money and all other ae-
sets. There was no transfer or conveyance of prop
erty, either actually, or in legal e~ffect,,‘from the ’
etockholdore to the corpordion as a lawfulbaeir for
a debt or for, stock of the corporation. An agreement
to pay tho stockhdders cannot be enforced as a de-
clared dividend or otherwise6 except upon dissolution
of the corporation, Dividends may be paid oat of
profits but not out of thw capital aeswtu of tlae cot-,
poration.g .
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Hon. Jack Rotis, page 7 (V-UZO)
In the three cwer lart cited, thwcourt &I each inetance
unmistakably indicated that an iacreare in tbe value of the cor-
porate ascleta would not support UIe dochratbn of a dock divi-
dend. Ar against the gonerel rtabmenta in the O’Bear-Neater
and Turner casen, we mwt accept #here exprereiona as being
more-y decisive of tlw #cope of the prohibition contained
in Saction 6 of Article XII of tbe ConaWuUon. Consequently,
it is our opinion that thin sectia, of the Constitution forbid6 the
issuance of additional capital ltwk ia the form d a stock divi-’
dend baaed on the appreciated valw of corperati awets.
SUMMARY
Art. XII, Sec. 6 of the T-8 Coastitutlon pro-
hibits a corporation from iomdag aphl dock
based on the appreckted tilw of the corporate
assets.
Youm very truly,
PRECE DANIEL
APPROVED: Attorney General
‘E. Jacobrat
Reviewing Asclirtant
Chnrles D. Mathewe
Fir& Ad&ant
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