Untitled Texas Attorney General Opinion ( 1946 )

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