Montana Attorney General Opinion 15-236

Opinion No. 236 (;orporations-Capital Stock-Prefel'red . Shares-State Investment . . Commissioner. The capital stock of X corporation, all common at the time of its organiza- tion, was fL-xed at $200.000. Subse- fluentl~·. it amended its articles of in- l'orporntion as to increase its capital stock from $200.000 to $300,000 hy issu- ance of 1000 shares of preferred stock at the par "alue of $100 each. The actual capihll paid in mllountell to only $750. HELD: Such increase is legal. since authorized capital stock has no exist- ence or validity until it is actually is- sned 1lnd subscribed for; but the' State Inyestment Commissioner' properly re- fused the corporation a llermit to sell all the preferred stock. since the ratio of at least $1.50 of capital to $1.00 of preferred stock must alwa~'s be main- tained. June 8, 1933. According to your request for an "pinion, X, is a Montana corporation. At the time of its organization the amount of its capital stock, all COlll- mon, was fixed at $200,000.00. Suhse- quently, it amended its articles of in- corporation so as to increase its capital stock from $200,000.00 to $300,000.00, by ·authorizing the issuance of one thousand shares of preferred stock at the par yalue of $100.00 each. The ac- tual capital paid in amount.., to only $750.00. You then inquire whether 01' not such increase of the capital stock was legal in view of the provisions of Section 5994, Hevised Codes 1921, as amended hy Chapter 33, 11:1wS of 1931, the ap- plicable part of which is as follows; "The power to increase or decrease the stock, as in this code elsewhere pro- yided, shall apply to any and all classes of stock; hut at no time shall the total amount of the preferred stock exceed two-thirds of the actual capital paid in cash or property; and such preferred stock, or any series thereof. may, if de- sired, be made suhject to redemption at not less than par. at a 11I'ice, to he expressed in the. stock certificate thereof." Our view is that it was. The quoted lan~na~e commencin;,: with the word "hut" applies, of course. to preferred stock actuall~' issued. not to preferred stock unissued. (S'el' opinion No. 149, this yolume.) Authorized capital stock has no exist- ence or validity until it is actually is- sued or suhscribed fm·. (Missouri Val- ley Grocery Co. y. Hall. 178 X W. 193; }<'t:ank Gilbert Paper Co. v. Prankard, 198 );. Y. R. 25; 14 C .• T. 38::\). There is 110 such thing as capital stock until it is issued and owned by the subscrib- ers or purchasers. In other words, cHpital stock is not in esse and is not property until it is subscribed for; be- fore that time it is a mere legal fiction. or, at most, a potentiality and not a n:ality. {Chicago etc. H. R. Co. v. Har- ilion, 89 Mont. 1; Fletcher, Cyclopedia Co l1)orations. (Perm. Ed.) Sec. 50R2; H C .. J. 406.) You also state in your letter that the corporation has applied to you, as In- ,-estment Commissioner, for II permit to sell all the preferred stock, and you take the position that the permit should not issue. W'e agree with you. Umler the circumstances here existing, we do not see how the corporation could lawfully sell more than fifteen shares of the pre- ferred stock, and then 'only in the event it sold them Ht par amI placed the en- tire proceeds in its tt·easury. The ratio of at least $1.50 of capital to $1.00 of preferred stock must always be main- tained.