Untitled Texas Attorney General Opinion ( 1957 )

I ,
THE A~~~ORNEYGENERAL
OF TEXAS
WILL WILSON
ATTORNEY GENERAL
July 3, 1937
flonotabla J. M. falkner, Commissioaar opinion No. WW-159
Department of Banking
Au&in 14, Texas ltc: Would the plan by rkieh
the trust cgmpany purahasaa
and owns at least 3Ts of the
capital stock of two er mare
banks be in vfolation ef Articla
341-903, V.C.S., or the provi-
liona of Article XVI, gectiem
16 of the Constitution of tha
mate of Teur, even tkeugh a0
officer or director of the parent
bsnk would be a mamher of tin
IBarrd of DirrcWore of the knke
in which capital dock is pur
bar Mr. r’alkner : chased? and r.elated questions.
Your let&r of March 13, 1997, is quoted in part AB follows:
“We request your opinion regarding the legality of certain
pl8ne, aummarined below, which have baen proposed by a national
bank doing busincro in Tsur.
“$Tbe bank (hereinafter callad parent bank) has entered into
a trust agreement whereby the eatf~c capital stock of another
corporatiin.(herainafter called trwt company), chartered under
Article 1303h, V.C.S.,, is heid in tmat for the benefit of the sbare-
holdarr of tha parent brink, with tha intaraat in the trust company
batnp automatically tranafarrod with the purchare or sale of the
&tares of tlu parent bank. The capital atack of the company was
originally purchased by tha parent bank with funds wlthdrawn
from the undivided profit@ of the paront bank, a slutkorinad by
vota of tke shareho,ldors.
“Undar oua propoatd plan tha trust company will pu?cMaa
at leart thirty-swan per coat Of%). or mom if perqisrtbil),
k two or more hanka.
of the capttal ltea of
loaorabla J. M. Fdhrer, Page 1 (WW-159)
“Under an alternative plan the trurt comprny would own
t@e intire crpttal dock of each of eaveral ‘1303b corpr~tioae’,
lmc h of w&k would in tuin purclmee and own at least thirty-
aeven per cent (37*), or more, of the capital stock of a bank.
Vndrr a second alternative plan, aaveral ‘1303b corpora-’
ttons’ would be cherter.ed and each would purcbmre and awn at
.loart thirty-seven per cent (37*), tit more, of thr capital ato&
of a bank., The entire capital atock of each of the ‘1303b corpwa-
ttaaa’ would ba ownad and held in trust by one or more individuala
am truateea for the rhareholdrrr for the parent bank. 8tock in
eitbar btrte or Xational banke coold be purclmmed and held under
8~y one of. the truet 8rrangementi
*Under War plana, dividoadr declared by the various bmka
would ba pa14 ta the truat comway or t&e iadividaal truatacr. .’
Dhridamda declared by the trust compny .&d then ba distribu-d
to tba aharekoldars of tha prraat bet&kta 8 )ro)ortion whtch the
aamber of ahares of rtoak in tlu paroat bank owned by each mcb
darholdrr-on tba date of ths declarattaa of tha dMdm+-karr
to the total number of ahares of capital deck d tka pwmt Wnk
.outrtanding on ruck date. Of courre; if soveral ‘1303b corpq~atlau’
weze aaed rather Lava only oao holdia(l eatapmay, Uun divibda
daclarad by each bank would b8 paid to tW’I303b corgnmretion’
which, owned its stock. Wvtdemdo dmhrad by each of the “1303b
corporationa’ would be paid antirqly to t& trust company Mdrr
tbp alternative plan or to tb, indhidtd tmatrea under tbe recolJ
&anutive plan; dtvidmde of the truat com~ay or the moneya
beld by the indbridual truteaa would t&n be diatrihuted to tba
of tba parent bank La the above-mentioned ratio.
lk a r e h o ldetr
“fn connection with thesa propoeed plane we would appreciate
an&m to tbe following qusrtione: (1) Would the plan by wblch
the truat company purchases and owns at lead thirty--seven per
cant (37%) of the capital stock of two or more banka be in vioIatton
of Article 343-903, V.C.S., or the proviatonr of Article XVI, Sectiea
i6, of the Constitution of tb: State of Tozaa, even though no officer
0.~ dtrcctor of the parent bank would be a member of the Board of
&rector8 of the banks in which capital stock ia purchased? (2)
Wow&l tha plan whereby the truat company owna the entire capital
.rtack of several corporations chartered under Article 1303b, V.C.S.,
each of which corporations in turn owns at least thirty-seven per
cmt (37%) of tha -pital stock of one bank, be in violation of Article
, .
ftonorable 3. Ad. Falkner , Page 3 (WW- 159)
342-903, V.C.S., or the provisions of Article XVI, Section 16,
of the Constitution of the State of Texas, even though no offic,er
or director of the parent bank would be a member of the Board
of Directors of the banks in which capital stock is held by the
various corporations 7 (3) If, under the alternative plan, the
trust company and each of ssveral ‘1303b corporations whose
entire capital stock is owned by the trust company have one or
more identical officers or directors, would such id,entity of
officers or directors constitute such dominance or control by
the parent bank as to violate the provisions of Article 342-903,
V.C.S., or Article XVI, Section 16, of the Constitution of the
State of Texas? (4) Would either tka first plan or the two
alternative plans described above be in vtolatian of Title 126,
Articlm 7426 et seq., V.C.I. 9 *
KACKGKOUND FACT8
Article XVI, Section 16, of the Conrtttutiox of Texas provider in
part as follows:
‘Sec. 16. The Legislature still by general lsws, autkoriae
the incorporation of corporate bodies with banktrq and diecounting
privilegea, and shall provide for a eyetern of St&e rugeroiriw,
regulation and control of such bodies which will adequately protect
and secure the deporitors and creditors tkeroof.
‘1o ~ . Such body corporate &#I not be authoriaed t0 eIyjrge
in business at more than one place which shall be, desiptnated in
its charter.” (Emphasis througm is supplied.)
A report from s study by the Attorney General of posstble viola-
tions of Article XVI, Section 16. of the Constitution, and Article 349-903,
V.C.S., and tke Texas Anti-trust Laws of proposals involving an analogous
fact situation wss submitted to the state Banking Board under the date of
August 18, 1952. We refer you to thir for background>materisl.
Since tb& report wee published, and pursuent to a request by the
then Attorney Goneral and the Btate Benking Board (of which he was R mem-
ber), certain National banks in Texas redoc,ed their holdings in affiliated
State bank stock, which was truoteed through holding arr8ngements, to 37.03
pei cent of the total shares of each affiliate bank. Thh 37.03 per cent figure
was arrived at by the following process: The mean arithmetic percentage
of stock actually voted at regular meetings of the several State banka involved
Xenorabla J. ht. Falkner, Pale 4 (WW-159)
ovlt a prriod of several years was calculatad. This figure was 94.66 par
mt. This was halved, and a safety factor of tea per cent was further da-
duckd to wrtve at the figure of 37.03 per cent.
,We need not here consider the queation of whether t&s hypothetical
lituaiimu embraced in your letter would riolata tha Teua Anti-trnat &we
(Title 186, Article 7U6 et seq., V,CA). Thte tnralvaa reatratnt of trada an4
a larroaisq of competition, factors which brd not arcaamariIy involvad ia a
dotermination of whether a bonkin# corporation 1s ydohq btuineaa at more
than ene p&a*“.
A determination of whether oae bankin@ corporation is doiag buat-
MO* at more than one plum through ite relationahip to other ban- corpora-
tiona can be redocad to two major factors, which me (a) stock ownership,
diroat or indirect, c,owtituttng the powar to Influence, and (b) a reaultiq
rubotmtial flaw of buainese betwean or among t@ corporations.
ANALVSl8 OF TNK MOCK OWNKKIWI FACTOK
The parcentape of at&k required to lnfluenca a corpor8ttan dependa
an many factors, including muc hmatters lo (6) ate& dtatributtm amay tka
dstekolders, (b) the amount of dock voted by pro~r, and by rrlrosr tk pro&a
lra bald, ,and (c) outside buatnaaa and personal rolattenabipa hatwaaa ,tha lknra-
holdera
The ownership of more than 50 par cent of the ltoek would lda b $ ia h
aa a mat#r of. law, the power to influenaa. Whethar owaerahtp of &ma than
.W per e&H of tba stock wouId eeteblieh thim parer would depurd 011th llfga-
met& and distribution of othar stock. proatea held and other factorr.
By way of comparison, the Federal Government, under the Bank
Xoldirq Company Act, 11 UJ.C.A., Section 1041 et seq., ownership or contrml,
d&act OF indirect, of 15 per cant of tha voting dock of two or more banke
laMtically classifier the banke lo held am aubsidiariea, and defines the
company holding much ehartr am a bank holding company. When a bank holding
company daairaa to laqutre lddtttoaal corporate abarea, it must comply wtth
tha Act if it purcbaser more tb8n 5 per ,cent of lch stock, this parcenhge
baing considered l igatfieant for parpoaea of tnf’iuanca. (U. 8. Code Coapoa-
at-1 &&ice and Admiaiatrativa Mewma84th Co~reae, lad Seemion 1956, at
mw a%
Compare also a recent decision of the United Statis Supreme Court
in tha DuPont c&o, Unitid States V* E. 1. DuPoat Nemours L .Co&mnx, 25 L.W,.
4343, (June 3, 1931), where tha ownership of 13 p&r cent of the stock of one
-reblo f. M. F&a.?, Page 5 (~0159)
corporrtion by mother vae tacitly conceded by the partiee and, the Court to
constitute a sufficient ownetahtp of the dock of one corporation by another
corporation to ,infiuence the bueineee affair6 of the corporation 80 held tn
datermining 4 related question under Section 7 of the Clayton Act.
We attach no speci41 eigaificancc to a atoek ownerehip of 37.03
per teat. Where the ownership is Ltra th4a 50 per cent, ite we to influence
the bueincrs decisions of the bank wtll depend upon ite rel4tionahip to the
other stock and other fbetore.
.ANALYQB OF TSR RUSXF3E85FLOW FACTOR
Tkere 4re m8ay opportuaitiee for invsatment in our economic
system. When 4 brnk buye stock in 4nother bank, the question arbor: W4r
tke rcquirition m4de solely for tnuestment purporem or ‘110sit made for the
purpose of ckennelhg bueiheee into the pureharin# honk or ite affiliatea?
If inatead of acquiring the flow of bueisaw through superior 8oitiu or other
competitive f4ctore, the bwinerr is tn f4ct acquired by lafluencr hernm~
from stock owaerrhip, then thir deployment of ik’ capitel allow l baak to
do baeiness &t more then one ,place. An *inaoton” of one bbnk’e innor smacr@r
myt eenctorium throu@ &tackpurchaer by amtlwr bank 4utomaticalIy dia-
rupts an 4rms lenqth relrtionbhip. Tht4 *ght ultiuaataIp tortit in tnjury to
tb, Utatr Daak.by the loss of its brrgainltq power ia do&q w4a-r knL,
cdl cdl4 bs a vioh&n arf the dodtttutim. If en cmmfshir d m f&w Oc
*utaeB between tb&fnke before mndafter tlu aquteition of roU& ranala
4 siqnifiant inar*ree in tke flow of burtneu to tke purcbsing b4nk or its
8ffil.Wes, the purebssing bmk io doing buain~ss at more than oaa plaeo through
m lueretse of rtoak ownership.
A kale inquiry r4ieed by you? lutter is: Are 18@A corporMoru
4utkoriwJ by l4w to ucomplirh tka ob+tivw pioporrd ? Arti& 13094
provid**:
“A prbata corporatiam may be formed for any one or more
of th* followtq parpoles, without hnJrin(r or in~armice privileges;
. a * to l,ubwriba for, parchase, invest in, hold, ovm, http, pledge,
aad otherwise 4441 in and diepoae of rh8r.er of cepitel ltoeke, Weda,
msrtg4~de. debentures, note8 aad other 8eeuritiee ot obR+lou8,
eontr4cte aad evideacsr of indebtedness of fore.iqn or dotw4ettc
carpor4tione not eofn8eting with each other in tbu rrme lina of
bw~or~ , e e Provided thet the power and authority berels con-
Arable J. M. Falluwr, Rae 6 (WW-159)
ferred~~ahll in no way effect any of the proviclions of the anti-
trurt lawa of thii State.” Acta 1927, 40th Leg., p. 414, ch. 275,
he. 1;‘Acts 1945, 49th Leg., p. 96, ch. 67, Sec. 1.
Tbe,re are no court decisions construing thie statute, but the plain
m* of the Imgwge “‘not competing with each other in the same line of
bamtwse~‘wouJd prohibit a 1303b corpqretioa from holding the dock of more
W one baJs.in the aame general geographic lc+ation. Therefore; the hold-
ir((r by 4 1Nt3b corporation of stock in two banks under the facts submitted
tid clearly be unauthoriaed by thie ltatuta.
In our opinion, with reference to your second alternative plan, tbe
~eonrto rould not permit the de&ice of severs& 1202b corporetionr. each owning
u-rata dock.h rep8rrt.e banks competing with each other tn the eame line of
bueiuu to circumvent the pl4in intent of the statute. This legirlative purpoee
1~ furtkor eaprawed by the concludtng provieo of Article 1%3b, V.C.6. : ?ro-
vidod that the power and authority hereIn ctmferred lball in no way affect 4ny
of tha provieions of the anti-trust lawe of this mte. )I Courts will disregard
mdtare of form end laok to matters of substance on inquiring late alleged ua-
hwful acts of affiliated, parent-subsidiary, tnterlocking ownership or otker
cloeely associated corporate arrangements when the subject of iaqoiry 1,s tha
violation or circumvention of the law or of valid corporate rrgulations. State
v. wift and CO., 167 S.W.2d 127 (Tex.Cir.App. 1945, error ref.); Fisot N-1
Bank v. Gamble, 134 Tenn. 112, 132 &W, 100 (1939); Pacific American Gaeollne
Co. v. Miller, 76 S.W.2d 833 (Tex.Civ.App. 1~934, error ref.); Qoodwin v.
Abilene State Bank, 294 S.W. 823 (Tex.Civ.App. 1927, error rir
Section 1 of Article 1524a, V.C.S., is quoted in part as followa:
“Artida 1524a. Corporations for loaning money and
dealing in bonds and securities without banking and discounting
privileges; regulations.
“Sactton 1. This Act shall lmbrece corporations bereto-
fore croated sad hare4fter created having for their purpoee or
purpoaer 4ny or sll of ,jhe powr4 now sutborised is Subdivieione
48. 49 or 50 of Article 1503, Revised Civil Statutei of Texu
(1.921), and harakfore or hereafter created having in who10 or
in part any purpou 09 purporea am luthorisod in Ckapter 275,
#aabta Bill No. 232 of the General and Special Laws of the Regu-
Iar geseion of the 40th Legislature, No euch corporation lhall
act le agent or trustee in -ti comoltdation of ar for the purpose
d combtatng the iuets, buoinem or me8m of other permona,
,
.
l88orable J. M. Falkner, Page 7 (WW-159)
firms, associations or corporations, nor shall such corporation
as agent or trustee carry on the business of another, . . “’
This statute providing for certain regulations of such corporations
further evidences the legislative intent expressed in Article 1303b that is, that
1303b corporations shall not be used for combining asse,ts of corporations
“competing with each other tn the same line of business”.
“The princtpal rula that has been formulated for the interpretation
of charter powers is that only such powers are given as are clearly embraced
in the words of the act or charter or derived therefrom by necessary impltca-
tioa tn view of the object of the grant. Another cardinal rule applying particu-
larly to charters under which special privileges are claimed is that any
ambiguity or doubt must be resolved in favor of the public as against the
grantearn of the c.hariar.” 10 Tar. Jur., Corporations, Sec. 243. See E
Texan Electric &o. v. Woods, 230 S.W. 490. 503 (Tex.Civ.App. 1921, error
dism.); Galveston Wharf.Co. v. Gulf C. L 8. F. Bailway Co., 81 Tex. 494, 501,
17 S.W. 57 (1891); Victoria County v. Victoria Bridge Co., 68 Tex. 62, 4 8.W.
140 (1887).
Since your letter mentions a plan for chartering new “1303b corpora-
tionn I’, it should be mentioned that a recent opinion of the Attorney General
dated April 1, 1957, to the Honorable Zollie Steakley, Secretary of State, Gpin-
ion No. WW-77, has ruled that Article 1303b wan repealed by the provisions of
Article 9.168 et seq. of the Texas Business Corporation Act, and that no new
13oSb corporatioaa may be formed under said Act.
The foregoing discussion cwcerntng Article 1303b and Article
1524a, V.C.S., with respect to the powers of such corporations, would there-
fore apply only to all presently existiag corporations organisad prior to the
effective date of the Texas Businesm Corporation Act undor Article 1303b,
V.C.S.
No new U1303b” corporations may be chartered.
Existing “1303b” corporations arm without charter
powers to legally participate in any of the hypothetical
arrangements proposed by your letter. The ownership
of 37 per cent of the stock of ono bankiq corporation
by another banking corporation may or may not present
a violation of Article XVI, Section 16, of the Constitution
licmorahle 3. M. Folknor, Page 8 (WW-159)
of Texas, and the statutes enacted pursuant thereto,
depending upon the factors ckti&ed ia the body ai
tb dpinion. We express no opinion as to whather
the hypotbctical situations embraced in your let+
would viola6 the Texas Anti-truat Laws.
V*r$ tiuly yowl,
Houghton brownlee, Jr.
#I):tiw. Assistant
AmOVED:
&‘JNIGN COMMITTEE:
H. Grady Cbandlar, Chairman
d . ‘Lt. Richards
Ti -3iqwruncc Jaws
Jamea .N. tudlum
REVIEWED FOR THE ATTORNEY Q-AL
.BY: Geo. P. blackburn
: .‘,
.
.