Untitled Texas Attorney General Opinion ( 1969 )

HE L% IRNEY GENEWAL
EXAS
May 29, 1969
Rep. Jack Blanton Opinion No. M-407
House of Representa.tives
State Capitol Re: Whether House Bill 700,
Austin, Texas 61st Legislature, can
legally prohibit a cor-
poration from engaging
in the business of farm-
ing, livestock feeding
Dear Mr. Blanton: or ranching.
In your recent request for an opinion from this office
you stated:
"I am enclosing a copy of House Bill 700
of which I am chairman of the sub-committee.
The point has been raised that it may be
illegal for us to prohibit a corporation
from farming in the State of Texas. We
request your opinion on this matter."
House Bill 700 is an act to amend Article 2.01, Subsection
B of the Texas Business Corporation Act and to add provisions
to that Article.
Pertinent provisions of House Bill 700 read as follows:
"BE IT ENACTED BY THE LEGISLATURE OF
THE STATE OF TEXAS:
Section 1. BUSINESSES IN WHICH CORPORA-
TIONS MAY NOT ENGAGE. No corporation, foreign
or domestic, except as provided in this Act,
may engage in the business of farming, live-
stock feeding, or ranching.
Sec. 2. DISPOSING OF OPERATIONS AND
LAND. (a) All corporations except those
falling under the provisions of Section 4
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Rep. Jack Blanton, page 2 (M-407)
of this Act which are engaged in farming,
livestock feeding, or ranching operations
at the effective date of this Act shall
dispose of all such interests and withdraw
from those operations within two years af-
ter the effective date of this Act.
(b) All corporations except those
falling under the provisions of Section 4
of this Act which are engaged in farming,
livestock feeding, or ranching operations
which own or hold real estate which was
acquired prior to the effective date of
this Act and which is used or usable for
farming, livestock feeding, or ranching
purposes, but which Is not reasonably nec-
essary to the conduct of the other business
of the corporation, shall dispose of the
real estate within 10 years after the ef-
fective date of this Act. A corporation
holding real estate subject to the provi-
sions of this section may use the land for
farming, livestock feeding, or ranching
purposes until the date by which it must
be sold.
(c) The ownership limitation pro-
vided in this section shall be deemed a
covenant running with the title to the
land against any grantee, successor, or
assignee of a corporation which is also a
corporation.
Sec. 3. DISPOSING OF AFTER-ACQYIRED
LAND. (a) A corporation which after the
effective date of this Act, acquires real
estate used or usable for farming, live-
stock feeding, dairylng or ranching pur-
poses by judicial process, operation of
law, or otherwise, shall dispose of all
such real estate, except that which is
reasonably necessary in the conduct of
its other business, within 10 years after
the real estate was acquired.
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Rep. Jack Blanton, page 3 (M- 407)
(b) The lo-year limitation provided
by this section shall be deemed a covenant
running with the title to the land against
any grantee, successor, or assignee of a
corporation which is also a corporation.
Sec. 4. CORPORATIONS WHICH MAY EN-
GAGE IN FARMING. LIVESTOCK FEEDING, AND
RANCHING OPERATIONS. (a) Farming, live-
stock feeding, or ranching operations may
be conducted by a corporation in which
(1) all shareholders are actively
engaged in the management or operation of
the corporation and at least 80 percent
of the gross income of the corporation
comes from farming, livestock feeding, or
ranching operations: and
(2) there are no shareholders other
than trusts or estates who are not natural
persons.
(b) The Secretary of State of the
State of Texas shall accept articles of
incorporatlon with a purpose clause or
clauses authorizing it to conduct farm-
ing, livestock feeding, or ranching op-
erations, provided such articles of in-
corporation conta~inthe limitations set
forth in Subsection (a) of this section.
Sec. 5. VIOLATIONS AND PENALTIES.
Violations of the provisions of this Act
are subject to the provisions of Articles
4.06 and 4.07, Texas Miscellaneous Corpora-
tion Laws Act (Articles 1302-4.06 and l3O2-
4.07, Vernon's Texas Civil Statutes).
sec. 6. Subsection B, Article 2.01,
Texas Business Corporation Act, is amended
to read as follows:
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Rep. Jack Blanton, page 4 (M-407)
"B. No Corporation may adopt this Act
or be orga~nizedunder this Act or obtain
authority to transact business in this State
under this Act:
"(1) If any one or more of its pur-
poses for the transaction of business in
this State is expressly prohibited by any
law of this State.
"(2) If any one or more of its pur-
poses for the transaction of business in
this State is to engage in any activity
which cannot lawfully be engaged in with-
out first obtaining a license under the
authority of the laws of this State to en-
gage in such activity and such a license
cannot lawfully be granted to a corporation.
"(3) . . . .n
Determination of the legality of House Bill 700 necessarilY
requires an examination of the Texas law pertaining to regula-
tion of statutory entities, vested property rights and consti-
tutional prohibitions against impairment of contractual obli-
gations.
Article 1, Section 17, Constitution of Texas, expressly
provides that "all privileges and franchises granted by the
Legislature, or created under its authority shall be subject
to the control thereof."
Article 9.12, Texas Business Corporation Act, which
superseded old Article 1318, Vernon's Civil Statutes,
states:
"The legislature shall --
at all times have power
to prescribe such regulations, provisions and
limitations as it may deem advisable, which reg-
ulations, provislons and limitations shall be
binding u on any a~ndall corporations subject
to the prov
-5 sions of ms Act, and the ,Legis-
lature shall have power to amend, re eal or
modify this Act." (Emphasis added+
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Rep. Jack Blanton, Page 5 (M- 401)
It is, therefore, clear that in Texas the legislature
has reserved the power to alter, suspend or repeal all laws,
providing for organization of corporations, and that such
reservation becomes a part of the charter of the corporation.
18 Am.Jur.2d 631-632, Corporations, Sec. 92, wherein it is
said:
11
. . . Corporations are the creations of the
state, endowed with such faculties as the state
bestows and subject to such conditions as the state
imposes; and if the power to modify their cha~rters
is reserved, that reservation is a part of the con-
tract, and no change within the legitimate exercise
of the power, whether directly or by an independent
general regulation, Cainbe said to impair its obli-
gations.
"General constitutional or statutory provisions
in force at the time of incorporation reserving
power in the legislature to amend, annul, or re-
peal any such corporation, are a part of the corpor-
ate charter, so much so, in fact, that it has been
held that the right to repeal the charter will not
be affected by the repeal of the general law . . .'
In accord, Jefferson County Title Guaranty Co. v. Tarver, 119
Tex. 410. 29 S.W.2d 3lb, 318 (1930).
Texas authorities likewise recognize that a corporation
is a creature of the state and it is therefore subject to its
dominion and control. Zerr v. Lawlor, 300 S.W. 112 (;_'ex.Civ.
App. 1927, no writ): McCutcheon v. Wazencraft, 230 S.W. 733,
eters-Pierce
rev. on other grounds 255 S.W. 71 Oil
Co. v. Texas, 177 U.S. 28 (1900).
House Bill 700, if enacted, would not terminate the ex-
istence of corporations now engaging in the sole business of
farming and ranching, but would require such corporations to
dispose of their interests in such activities within two years
from the effective date of the Act. All real estate acquired
prior to such date, used or usable for farming, livestock
feeding, or ranching, not reasonably necessary to the conduct
of the other business of the corporation, is required to be
disposed of within ten years after the effective date of the
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Rep. Jack Blanton, .page6 (M-407)
Act. Article 2.02 of the Texas Business Corporation Act, and
Article 1302-4.01, Vernon's Civil Statutes, Miscellaneous Cor-
poration Laws Act, require that land owned by a corporation
must be held as a necessary part of the business of the cor-
poration.
Consequently, we must determine whether such provisions
would violate the provision found in Article 1, Section 16
of the Constitution of Texas, prohibiting retroactive laws
or laws impairing the obligations of contracts. In addition,
the question of violation of due process and equal protec-
tion of the laws, in contravention of the Fourteenth Amend-
ment of the U. S. Constitution, is raised for consideration.
It should be observed in this connection that unless
"vested rights" are actually destroyed or impaired, an act
is not invalid even when retroactive in its operation.
Paschal v. Perez, 7 Tex. 348 (1851); City of Ft. Worth v.
know, 284 S W 274 (Tex.Civ.App. 192b, error ref.) Th
-ion thui presents itself, does House Bill 700 impa:r
any property rights which may be deemed "vested" so that it
amounts to an arbitrary exercise of power in denial of the
equal protection of the laws, constituting a deprivation of
property without due process of law? Does the legislature
have the power to pass a law which has the effect of 'ermin-
ating the corporate existence of such farming and ranching cor-
porations; that is, by eliminating the corporate purposes of
farming, ranching, etc.?
We find the law on these questions to be pertinently stated
in 18 Am.Jur.2d 633, Corporations, Sec. 33, as follows:
"A reservation . . . in a general law of power
to amend, alter, or repeal affects the entire rela-
tion between the state and the corporation and
places under legislative control all rights, priv-
ileges, and immunities derived by its charter di-
rectly from the state, including its very existence. . .
!I . . Under the reserved power of repeal the leg-
islature may terminate the corporate existence . . ."
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Rep. Jack Blanton, page 7 (M-407)
Among the cases cited in support of the latter statement are
Erie R. Co. v. Williams, 233 U.S. 685 1914 ; Spring Valley
Waterworks v. Schottler, 110 U.S. 347 I18@4 1; State v.
Louisville & N.R. Co., 97 Miss. 35, 51 so. 918, 53 so. 454
(1910); People v. O'Brien, 111 N.Y. 1, 18 N.E. 692 (1888).
In 18 Am.Jur.2d 636-637, Corporations, Sec. 94, we find
this statement:
I,
. . . it has been held that the reserved
power of a state to amend a corporate charter
is not limited to changes or alterations solely
between the state and the corporation, but au-
thorizes amendments and alterations, within
certain limitations, directly affecting stock-
holders in their relations to the state, to
the corporation, and to each other, and that
such power may be invoked to sustain charter
alterations justified by the advancement of
public interest, even though they a~ffectcon-
tractual rights between the corporation and its
stockholders and between stockholders inter
se. . .I'
It is held, however, that the reserved power to amend or
repeal corporate charters does not give the legislature the
power to impair or destroy the "executed" contracts of third
persons with the corporations, as distinguished from "execu-
tory" contracts at the time the statute takes effect. Conse-
quently, as to the latter, it is held that
11
. . . The fact that a repealing statute de-
stroys the right of a corporation to continue
in existence under the statute repealed does
not make such repealing statute unconstitu-
tional even as against bondholders of the cor-
poration. The execution of the mortgage and
the issuing of bonds secured by the property
of the corporation does not affect the right
of the legislature to repeal the statute."
18 Am.Jur.2d 638, Corporations, Sec. 95; People v. Calder, 153
Mich. SUP. 724, 117 N.W. 314 (1908).
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Rep. Jack Blanton, page 8 (M-407)
We do not perceive any attempt in House Bill 700 to impair
or destroy the contracts of third persons with the affected cor-
porations. If such legislation should unconstitutionally threaten
such am impairment, as applied to the specific facts of the case,
and the legislature has not provided some special remedy, the
courts will enforce such property rights by the means within
their power. 18 Am.Jur.2d 636, Corporations, Sec. 94.
We a~greewith the Supreme Court of Illinois in its obser-
vation that
11 no corporation has a constitutional right
to be's corporation and it is fundamental tha~t
corporate powers and charters are taken subject
to the prerogative of the state to modify or
amend the enabling legislation at any time.
Kreicker v. Naylor Pipe Co., 374 Ill. 364, 29
N.E.2d 502. And this matter is removed from
the sphere of constitutional consideration by
reason of the express language of the Business
Corporation Act . . . which reserves to the
General Assembly the power to repea~l,amend or
modify the act and to impose limitations or re-
strictions at the pleasure of the General As-
sembly."
Braeburn Securities Corp. v. Smith, 15 Ill.Sup.2d 55> 153
N.E.2d 806, 811-812 (1956) upholding an amendment to a statute
limiting the general power; of corporations in respect to owner-
ship and control of stock in banks and overruling the contention
that such legislation impaired obligation of contract and was a
denial of equal protection under the,law.
In Asbury Hospital v. Cass County, 7 N.W.2d 438 (N.D.%p.
1943), the court had before it a challenge to the constitu-
tionality of an act, requiring any corporation, domestic or
foreign, owning farm land, except that reasonably necessary to
the conduct of its b,lsiness,to dispose of the land within ten
years from the date the Act took effect. It also prohibited
such corporations from engaging in farming or agriculture in
the future. In upholding the constitutionality of the statute
against the contention by the plaintiff corporation that it
operated to deprive the corporation of property without due
process, the court said, beginning at page 452:
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Rep. Jack Blanton, page 9 (M- 407)
"As has been pointed out, there are
constitutional or statutory provisions in
many states restricting the right of cor-
porations to acquire and hold real estate
and requiring that such corporations dis-
pose of real estate which they have acquired,
within a fixed period of time.
"No instance has been called to our at-
tention, and none has been found, where such
legislation was predicated upon the proposi-
tion that the State was without power to re-
quire a corporation to dispose of real prop-
erty that it had acquired before the statute
or constitutional provision became effective:
and in some of the states, the legislation
restricting the right of corporations to hold
real property is specifically made applicable
as well to property that had been acquired
before the legislation became effective as to
property subsequently acquired . . . [citing
numerous authorities] In Commonwealth v.
Clark County National Bank, supra, It was con-
tended that Inasmuch as the land sought to be
escheated had been acquired by the corporation
before the adoption of the constitutional pro-
vision,'the corporation had a vested right
which was unaffected by the adoption' of the
new constitution containing the provision as
'there could be no impairment of the obliga~-
tion of contract or rights acquired and vested
before the making of the law.'" [x37 Ky.sup.
151, 219 S.W. 1821
"The Court of Appeals of Kentucky held
that . . . (the) enactment of the statute did
not result in 'unconstitutionally' impairing
the 'contract or vested rights' of the corpora-
tion.
"We think it clearly follows from the prin-
ciple announced by the Supreme Court of the United
States in Connecticut Mutual Life Insurance Company
v. Spratley, supra (172 U.S. 602) and Phillips
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Rep. Jack Blanton, page 10 (M-407)
Petroleum Company v. Jenkins, supra (297
U.S. 629), that the provisions of the statute
in question here restricting the power of the
plaintiff to hold real estate, used or usable
for farming or agriculture and requiring it
to dispose of the same within ten years from
the date the act took effect, do not impair
the obligations of any plaintiff, or impair
any vested property right of the plaintiff.
"The question next presents itself whether
such provisions operate to deprive the plaintiff
corporation of its property without due process
of law. This question must be answered in the
negative. The State having the right to restrict
the power of the plaintiff and corporations sim-
ilarly situated as to the acquisition and owner-
ship of real estate within the State, it naturally
follows that any legislation which it might enact
to carry such polic into effect must have a be-
ginning, and 'the 1E th Amendment does not forbid
statutes and statutory changes to have a beginning.'
Sperry & Hutchinson Co. v. Rhodes, 220 U.S. 502,
31 S. Ct. 490, 491, 55 L. Ed. 561. Of course, the
State could not put its new policy into effect
in such sudden and arbitrary manner as to prac-
tically sacrifice and confiscate the interest of
the corporation In the property that it had been
permitted to acquire within the State. In making
the change it must give the corporation reason-
able time in which to dispose of its property.
17 Fletcher, Cyc. Corps., p. 799. See also,
State v. Crescent Cotton Oil CO., 116 Miss. 398,
77 So. 185; Crescent Cotton Oil Co. v. State,
121 Miss. 615, 83 So. 680; Crescent Cotton Oil
Co. v. Mississippi, 257 U.S. 129, 42 S. Ct. 42,
66 L. Ed. 166. The statute gives . . . ten
years in which to dispose of it before such
property becomes subject to the provisions of
the statute providing for disposal of the prop-
erty under the procedure provided by the statute.
Clearly the period of time . . . cannot be said
to be so unreasonable or arbitrary as to operate
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Rep. Jack Blanton, page 11 (M-407)
to deprive corporations holding land subject to
the statute of property without due process of
law . . . [citing authorities] Such period is
considerably longer than that prescribed in an-
alogous laws in other states. Thus, Oklahoma
prescribes seven years, and Kentucky five
years . . .'
With respect to the discretion of the legislature in exer-
cising its reserved power to repeal or alter the corporations
charter, It is the general rule that no notice need be given
to a corporation of such exercise. Jefferson County Title
Guaranty Co. v. Tarver, supra, 119 Tex.
410,
(1930); 18 Am.Jur. 638, Corporations, Sec. 95. House Bill 700,
however, does allow two years from the effective date of the
Act within which the subject corporation may withdraw from its
farming and ranching operations and dispose of its interests.
The ten year time period applies to real estate acquired prior
to the effective date of the act. Such periods appear reason-
able, and our research fails to reveal any such periods as
having been held to be unreasonable.
Texas laws recognize limitations u on the right of corpor-
ations to hold property. Article l3O2-E *Ol V.C.S., the Mis-
cellaneous Corporations Laws Act prohibits a corporation from
acquiring land except such as may be necessary to conduct the
type of business for which it is incorporated. Article 1302-
4.05 of the Miscellaneous Corporation Laws Act accords relief
only to the extent of permitting corporations to acquire urban
land, such entities being known as Town Lot Corporations. Ar-
ticles 8.19 and 3.40 of the Texas Insurance Code require dis-
position of certain realty of Casualty and Life Insurance Com-
panies within a five year period. See Attorney General Opinion
No. O-1470 (1939). Article 4.02 Miscellaneous Corporation Laws
Act, (old Article 1360, prior to 1961) Vernon's Civil Statutes,
gives a fifteen year time period to corporations to dispose of
lands deemed unnecessary to, or In excess of their business
needs. All of these laws have remained unchallenged to this
date and are presumably valid.
In view of all of the foregoing considerationsr we con-
clude that House Bill 700, if enacted, would be constitutional.
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Rep. Jack Blanton, Page 12 (M-407)
SUMMARY
House Bill 700, prohibiting corporations from engaging in
the business of farming, livestock feeding, or ranching, and al-
lowing a two year period for such corporations to withdraw from
operations and to dispose of their interests and a ten year
period to dispose of their real estate, if enacted, would be
constitutional.
Veryely yours,
Prepared by Neil Williams
Assistant Attorney General
APPROVED:
OPINION COMMITTEE
Kerns Taylor, Chairman
George Kelton, Vice-Chalrman
Ralph Rash
Terry Goodman
Malcolm Quick
Bill Allen
W. V. GEPPERT
Staff Legal Assistant
HAWTHORNE PHILLIPS
Executive Assistant
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