Untitled Texas Attorney General Opinion ( 1942 )


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  • Honorable Bert Ford, Administrator
    Texas Liquor Control Board
    Austin, Texas
    
    Dear Sir:                        Opinion No. O-4750
    
                                    Re:   The authority of the Texas
                                          Liquor Control Board to
                                          refuse a package store permit
                                          to a subsidiary corporation
                                          because of a violation by its
                                          parent corporation of the
                                          provisions of Article 666-17(2),
                                          Vernon's Penal Code of Texas.
    
    Your request for opinion, dated July 27, 1942, has been received
    and considered by this department. We quote from your letter as
    follows:
    
          “A group  of drug stores commonly referred   to @s
          'Walgreen' Drug Stores operating in Texas are five
          separate domestic corporations which hold an
          aggregate   of twenty-three package  store permits to
          sell liquor at retail.     They are as follows:
    
                "Name of Company              Number of'permits Held
                'I
                 1. Walgreen Incorporated
                "2. The Walgreen Company of Texas
                I,
                                                        i
                     The Walgreen Texas Company         5
                ,I * Walgreen Drugs Incorporated
                 i:
                -5: Marvin Drug Company                 54
          "For"purposes of determining whether or not the Texas
          Liquor Control Act should so operate and should be so
          construed as to affect or limit the number of permits
          held by these combined companies, an inquiry has been
          made into the ownership, management, and control of the
          respective enterprises, and the facts in respect thereto
          are probably more definitely reflected in the attached
          transcript of interrogatories propounded to and answered
          by Mr. P. J. Redford of Chicago, Assistant Secretary of
          the,Walgreen Company of Chicago, Illinois. .From the
          transcript of testimony reflected by this inquiry, it
          may be observed that the five domestic corporations are
    Honorable Bert Ford, Page 2, O-4750
    
    
    
       actually subsidiaries of the Walgreen Company of
       Chicago, a foreign corporation, with earnings or
       dividends accruing to each respectively for the
       benefit of the Walgreen'company of Chicago, and with
       the general management of the subsidiary companies
       controlled by officers of the Walgreen Company of
       Chicago.
    
       "In determining whether or not the respective corpora-
       tions may each obtain and use five package store
       permits, it appears necessary to first determine the
       legislative intent with reference to the limitations
       imposed upon any person as to the number of permits in
       which such person may have ownership or an interest.
    
       "After reviewing the facts in connection with this matter,
       will you kindly advise whether or not in your opinion
       each of the respective corporations is eligible for a full
       number of five permits, or whether the limitation of five
       package~store permits would be applicable to the parent
       company, the beneficial holder of all of the stock of the
       various subsidiary companies. All existing permits will
       expire on August 31, 1942, and it is desired to resolve
       this question in advance of that date."
    
    In the preparation of this opinion we have also considered the
    transcript of interrogatories propounded to and answered by Mr.
    P. J. Redford of Chicago, Assistant Secretary of the Walgreen
    Company of Chicago, Illinois, together with the exhibits
    attached thereto; however, in view of the conclusion herein
    expressed, this transcript and accompanying exhibits wi&l not
    be summarized herein.
    
    Subsection (2) of Section 17, Article 666,Vernon's Penal Code,
    provides:
       "It shall be unlawful for any person to hold or have an
       interest in more than five (5) package stores or the
       business thereof. It shall further be unlawful for any
       person to hold or have an interest in more than five (5)
       package store permits."
    
    BY Section 3-a of the same Article, 'person" is defined as:
         . . . any natural person or association of natural
        persona, trustee, receiver, partnership, corporation,
        organization, or the manager, agent, servant, or
        employee of any of them."
    
    On the assumption that the Walgreen Company of Illinois
    (hereinafter called the Illinois Company) is the beneficial
    Honorable Bert Ford, Page   3, O-4750
    
    
    owner of all the stock in the five Texas companies, then, in
    so far as these provisions are concerned, unless the Illinois
    Company holds or has an "interest" in the package stores
    organized under the names of the Texas companies or in the
    business thereof or in the package store permits obtained by
    such stores, each of the five Texas companies is eligible to
    receive five package store permits.
    
    We construe the word "interest" as used in the above Section
    according to its legal rather than its popular usage, and
    interpret it as being synonymous with legal title or equitable
    title or both. This interpretation is in accord with that
    previously placed upon the word by the courts of this and other
    jurisdictions.   In Automobile Mortgage Company v. Ayub, 
    266 S.W. 134
     (Corn.App. 192/+), the Commissioner of Appeals held that
    a sale of corporate shares was not a transfer of an interest in
    intoxicating liquor owned by the corporation, because such sale
    conveyed neither legal nor equitable title to the liquor. A
    similar interpretation has been placed upon the word by the
    Supreme Court of the United States in applying the "commodities
    clause" of the Hepburn Act.   This clause prohibits railroad
    companies from transporting any commodities in which such
    companies "may have any interest, direct or indirect." U.S.C.,
    Title 49,            In United States v. Delaware & Hudson Co.,
    
    213 U.S. 3R
     6’(!$3) at p. 413, th e court held that the mere
    fact,~that a railroad owns part or all of the stock in a coal
    company does not mean that the railroad possesses 'an interest
    direct or indirect ' in the property or products of.such company,
    since the word "interest" is synonymous with legal or equitable
    title or both. -This construction has often been reiterated by
    the court. United States v. Lehigh Valley Railroad Company,
    
    220 U.S. 257
     (1910); United States v.Elgin,.J. & E. Railroad,
    
    298 U.S. 492
       (1935).
    
    With  the word "interest" thus construed, it is patent that a
    stockholder in a corporation does not, by the mere fact of
    his stock ownershipk have or hold an interest in stores
    operated by the corporation, in the businesses thereof, or in
    any permits which these stores might possess. We quote from
    10 Texas Jurisprudence 781, sec. 153:
    
         "In harmony with the concept that a corporation is a legal
         entity distinct from its members, the ownership of the
         corporate assets is held to be vested in the corporation,
         not in the stockholders."
    
    In Automobile Mortgage Company v. Ayub, supra, the court
    quoted with approval the following statement:
    
         "A share of capital stock is property   0f.a peculiar kind.
    Honorable Bert Ford, Page 4, O-4750
    
    
    
          Accurately speaking, it does not consist in an
          interest either legal or equitable, in the property of
          the company." Herbert v. Simpson, 
    220 Mass. 480
    , 
    108 N.E. 65
    
    Although a stockholder does possess substantial rights to the
    surplus of a corporation, once dividends are properly declared,
    and although he is entitled to a pro rata share of the corporate
    assets upon dissolution, these rights are of an inchoate nature
    so long as the organization is a going concern and so long as no
    specific property has been appropriated for the payment of divi-
    dends. McAllister v. Eclipse Oil Company, 98 s.W. (2d) 171, 176
    (Sup. Ct.); 10 Tex. Jur. 780-781, sec. 152.         _
    Moreover,~these principles are equally applicable in cases where
    all of the stock of one corporation or of several corporations is
    owned by a parent organization; even in these situations, the
    parent corporation possesses no interest in the property or the
    business of the subsidiary corporations.  Moroney v. Moroney,
    
    286 S.W. 167
    , 169 (Corn.App. 1926).  Consequently, in,,the
    situation under discussion, the fact that the Illinois Company
    is the beneficial owner of all the stock of the five Texas
    companies does not, ipso facto, make the Illinois Company the
    possessor of an interest in the package stores or in the
    businesses thereof, or in the package store permits of the Texas
    companies; however, while concentration of stock ownership in the
    hands of the Illinois Company is not in itself determinative of
    the question under consideration, it may well be an important
    evidentiary factor in connection with matters hereafter discussed.
    
    In an opinion approved by Attorney General McGraw (Opinion No.
    3004, September 1, 1937), this department ruled that ownership
    by one,peraon ofstock in three of the five Texas Balgreen
    companies now under consideration did not constitute a violation
    of Article h66-17(2) even though the three companies might, in
    the aggregate, possess more than five package store permits. We
    adhere to the opinion therein expressed, but call especial
    attention to the fact that this opinion was expressly predicated
    upon the statement of facts submitted to this department and that
    such facts touched solely upon the question of whether stock
    owner'ship is coupled with other facts, hereinafter to be mentioned,
    concerning the motives and interrelations of the persons and
    organizations involved.
    
    But, although stock ownership alone does not give the Illinois
    Company an interest in the Texas companies, the company may well
    be deemed to possess such an interest through the application of
    other well known and widely accepted principles of corporation
    law. Along with the courts of virtually every other jurisdiction,
    the Texas courts have long recognized that there are certain well
    Honorable Bert Ford,   Page 5, O-4750
    
    
    defined instances in which courts will disregard the fiction of
    corporate entity and will find that parent and subsidiary
    companies are one for the purpose of charging the parent with the
    acts of the subsidiary.   As has been said, the concept of
    corporate entity is "but a lenal
                                  ,_, fiction adopted for convenience;
    it is not a sacrosanct principle granting exemption from liabi-
    lity in circumstances wherein the fiction of corporate entity~is
    opposed to the facts."   10 Tex.Jur. 640-641, sec. 45. Where the
    fiction is so disregarded, the parent possesses an "interest" in
    the subsidiary since the fictional dichotomy between the twos
    organizations disappears and they are treated as a unity.
    
    The application of this principle is well illustrated by the
    Supreme Court cases,cited supra, construing the commodities clause.
    The government in the first suit alleged only that the Lehigh
    Valley Railroad Company owned stock in a coal company whose goods
    it was carrying.~ On demurrer, it was held that no violation of
    the clause was thereby shown since stock ownership alone was not
    tantamount to an "interest, direct or indirect" in the coal
    company. After this blow, the government presented an amended
    petition in which it alleged additional facts of the nature
    hereinafter to be discussed and requested that the two cor-
    porations be treated as a unity. The court disregarded the
    corporate concept, and, looking atthe substance and reality of the
    relations between the parent and subsidiary, held that the former
    was directly interested in the coal produced by the latter.
    
    In the case of Continental Suppl Co. v. Forrest E. Gilmore Co.,
    55 S.W: (2d) 622 (Civ. App. 19323 , writ dismissed, at p. 628, the
    Amarillo court thus classified the situations in which the fiction
    of corporate entity will be disregarded:
    
         "Where the fiction (1) is used as a means of perpetrating
         fraud; (2) where a corporation is organized and operated
         as a mere tool or business conduit of another corporation;
         (3) where the corporate fiction is resorted to as a means
         of evading an existing legal obligation; (4) where the
         corporate fiction is employed to achieve orperpetrate
         monopoly; (5) where the car orate fiction is used to
         circumventa,statute;       f: where the corporate fiction
                               and (,)
         is relied upon as a protection of crime or to justify
         wrong."
    
    This classification was adopted in Pacific American Gas Company
    of Texas v. Miller, 76 S.W. (2d) 833, 851, writ refused, and was
    cited with approval by the ,Commission of Appeals in First
    National Bank in Canyon v. Gamble, 132 S.W. (2) 100 (1939), at
    p. 103. Items (l), (3), (4) and (6) in the above classification
    are inapplicable to the instant situation and will not be con-
    sidered further. Since the remaining items may well be relevent
    Honorable Bert Ford, Page 6, 04750
    
    
    
    to the solution of the matter at hand, they will be discussed
    individually.
    
    (a) Where a corporation is organized and operated as a mere
    tool or business conduit of another corporation: We quote from
    10 Tex.Jur. lOl9-1020, sec. 354:
    
          “Formerly, it was held by the Texas courts
          that:   'Where one corporation makes use of an-
          other as its instrument through which to perform
          its business, the principal corporation is really
          represented by the agents of the ,subcorporation, and
          its liability is just the same as if the principal
          corporation had done the business in its own name.'
          The authorities so holding have, however, been in
          effect overruled so far as they assert a rigid con-
          clusion of law in the circumstances stated. But
          although the doctrine that the two corporations are
          separate legal entities forbids the legal conclusion
          that one corporation is the agent or partner of another
          without facts to warrant that conclusion, the one'
          corporation may be liable for the transactions and
          acts of the other where one is in fact the agent of the
          other or where a partnership in fact exists between the
          two organizations;   Moreover, the fiction of separate
          entities is not maintained where a subsidiary is not
          conducted bona fide as a separate organization. . . ."
    
                   "Piercin the Veil of Corporate Entity," 12 Columbia
     ~~~~~%~'496      (1912?, at pp. 504-505, it is said: -
    
          "It cannot be too strongly emphasized that mere identity
          of stockholders per se does not operate to destroy the
          distinct corporate existence of two corporations.  So much
          is clear. It must further appear by clear and convincing
          evidence that the corporation created is only an adjunct
          of the business of its creator - a mere agency or instru-
          mentality, through which it acts - a mere business depart-
          ment, or bureau, so to speak. Once, however, these facts
          appear, a court . . . should look through the thin guise
          of corporhte entity to the actual substance of things and
          should not hesitate to cast aside the entity concept in
          order to achieve justice."
    
     In Humble Oil & Refining Company v. Railroad Commission, 128
     S.W. (2d) 9 (19391, at P. 11-12, the Supreme Court stated:
    
          "In the c ase just cited (State v. Lone Star Gas Co., 86
          S.W. (2d) 484, 491, writ refused) the rule of law here
          involved is thus stated:   'The cases are legion which
    Honorable Bert Ford, Page 7, O-4750
    
    
    
        deal with the relationship of two or more corporations
        from the standpoint of ownership of the capital stock
        in one by another, and from the standpoint of associa-
        tion together for the purpose of carrying on a single
        or common business enterprise. The rule is well settled
        that courts will look through the forms to the realities
        of the relationship between two or more corporations in
        order to determine whether each is a separate entity or
        corporation: or whether their commingled affairs are such
        as to constitute them one integrated and sinale business
        enterprise; or whether, through IntercorporaFe set-up,
        affiliation, or stock ownership, the purpose is to con-
        trol the subsidiary corporation or corporations so that
        they are used as the mere instrumentalities or agents of
        the owning corporation or corporations.    In discussing
        the rule, it has been held that while "ownership, alone,
        of capital stock in one corporation by-another, does not
        create an identity of corporate interest . . . or create
        the relation of principal and agent or representative
        between the two"; still it has been repeatedly held that
        such rule is not applicable "where stock ownership has
        been resorted to, not for the purpose of participating in
        the affairs of a corporation in the normal and~usual
        manner, but for the purpose . e . of controlling a
        subsidiary company so that it may be used as a mere
        agency or instrumentality of the owning company or
        companies."   Chicago, M. & St. P. Ry. v0 Minneapolis
        ,Civic & Commerce Ass'n, 247 U.S. 490,38 s. Ct. 553,557,
        
    62 L. Ed. 1229
    ; United States v. Lehigh Valley R. Co.,
        
    220 U.S. 257
    , 
    31 S. Ct. 387
    , 5 L. led. 458; United States
        v. Reading Co., 
    253 U.S. 26
    , 0 s. ct. 425, 
    64 L. Ed. 760
    ; United States v.             L. & W. R. c0.,~238 U.S.
        516, 
    34 S. Ct. 873
    , 
    59 L. Ed. 1438
    . Also, in discussing
        the rule, the fact that the same persons are directors
        and managers of two corporations has been given con-
        sideration (McCaskill Co. v. United State;.sd2;6 U.~S.
        9i,ses; s. Ct. 386,391,54 L. Ed. 5901,            growing
                y is therefore exhibited in the,courts_?o look
        beyond the corporate form to the purpose of it, and to
        the officers who are identified with that purpose."
        See, also, Gallatin natural Gas ,Co. v. Public Seruice
        co., 79 Mont. 269,256 P. 373. 'Where one corporation
        owns or dominates another, it has been often held that
        "the independent entity of the two companies is so far
        disregarded that each is considered as but a part of the
        indivisible whole." Kimberly Coal Co. v. Douglas (6 Cir.),
         (C.C.A.( 45 F. 2d 25,~ 27; In re Kentucky Wagon Mfg. Co.,
                
    3 F. Supp. 958
    ; Law.v. McLaughlin, D.C.,,,2F Supp.
               And.."t,herule which appears to be established by
        theie cases is that, where the corporate organization and
    Honorable Bert Ford, Page 8, O-4750
    
    
    
         affairs of one railroad company are controlled and
         dominated by another railroad company through ownership
         of stock or lease, the roads must be regarded as
         identical for the purpose of rate making."    Pontiac,
         0. & N. Ry'. Co. v. Michigan R.R. Corn., 
    203 Mich. 258
    ,
         168 N. w. 927, 929.
    
         "A somewhat analogous question was decided by this
         court in A.T. & S.F. R     Co. v. R.R. Corn., 
    77 S.W.2d 773
    , 775 (w-1.t refused 7: whereinit  was held that
         subsidiary corporations, owned, controlled, and operated
         by railroads to carry on pick-up and delivery service,
         did not possess separate legal individuality from the
         parent corporation, as regards the jurisdiction of the
         Railroad Commission; and wherein it was held as follows;
         "To permit railroads to perform such steps in the process
         of transportation through other separate legal entities
         created and owned by them would enable them to defeat
         the jurisdiction of the commission over such transpor-
         tation. And in such case where the stock of such
         separate corporation is owned by the railroad company, and
         itz.zole function is merely to help conduct the business
         of the parent corporation under whose complete control it
         operates, and in the instant case largely, if not wholly,
         through the same employees, the subsidiary corporation
         will be treated as if it were a mere department of the
         railroad itself."'
    
         *The judgment in the Lone Star Gas Company case, zupra,
         was reversed by the Supreme Court of the United States
         (
    304 U.S. 224
    , 
    58 S. Ct. 883
    , 
    82 L. Ed. 1304
    ), but the
         rule of law above announced was not questioned. 'We
         here and now approve and adopt as the holding of this
         Court the above-quoted holding of the Court of Civil
         Appeals."   (Emphasis ours)
    
    The difficult'problem is the ascertainment of what facts of
    ownership, control, and management in a common enterprise are
    necessary to justify the characterization of a subsidiary as
    an "adjunct," "agency," instrumentality," or "creature" of the
    parent.  In Ballantine-on Private Corporations (1927) at p. 37,
    we find the statement:
    
         "It is submitted that no mechanical rule based on objective
         facts of control or connection which will furnish a
         certain test is possible of formulation.  Identity of
         stockholders, identity of officers, the manner of keeping
         books and records, the methods of conducting the corporate
         business as a separate concern or as a mere department of
         the other concern, may be evidential facts to be conzider-
    .
    
    
    
    
        Honorable Bert Ford, Page 9, O-4750
    
    
    
             ed as bearing on the question of juggling of separate
             capacities and whether the subsidiary is being managed
             in such a way as to make the controlling corporation
             justly responsible.   (citing cases) But after all it
             comes down to a question of good fai~th and honesty in
             the use of the corporation for legitimate ends. If a
             corporation is owned and controlled by another and is
             manipulated by the owner for its own purpose and in its
             own interests to the vreltidice of innocent third vartiez.
             or the public welfare; ii may be necessary to limit zuch
             abuse of the corporate capacity or shield."   (Emphasis
             ours)
    
        In Anderson, Limitations of the Corporate Entity   (1931) 334-335,
        1 345, the criteria are stated thus:
    
            "Some of the controlling circumstances sustaining liability
            of the parent corporation are sometimes asserted to be
            ownership of all of the stock of the subsidiary or even
            a majority of the stock, coupled with control or ownership
            by the same persons of the stock of both the parent and
            subsidiary corporation , . . Of course consideration is
            given to the degree that the subsidiary is financed by
            thenparent, coupled with which is the maintaining of such
            financing.  Likewise, consideration is given where a
            common directorate is found functioning both corporations,
            as also is the case where there are common officers and
            employees. Decisions are influenced by the extent of the
            commingling of stockholders' and directors' meetings and
            also the extent to which both the parent and zubzidiery
            have common transactions of business.  The degree to wnich
            interests between the two are favorable~one to another has
            an influencing effect upon holding the entities the same.
            The manner of bookkeeping will be looked to, but this is
            not a controlling circumstance.  Of course, consideration
            will be given to the extent to which an officer or director
            of one corporation is permitted to dictate the policies of
            the other. It hardly need be said that in such decisions
            will be involved the character of business that such
            corporations are engaged in and the extent to which the
            trade or public generally regards the two as separate or
            one. "
    
        These excerpts are but suggestive; any evidence tending to show
        that the subsidiary exists merely as the shadow and the creature
        of the parent will be relevant in determining whether the two
        should be treated as one for the purpose at hand, and such
        evidence is found in the actualities of the transactions among
        the corporations rather than in the carefulness with which the
        identity of each corporation is preserved on paper.
    Honorable Bert Ford, Page 10, O-4750
    
    
    
    (b) Where the corporation is used to circumvent a statute:
    Courts are not so myopic as to allow the fiction of corporate
    identity to be used to circumvent a statute. Thus in Northern
    Securities Company v. United States, 
    193 U.S. 197
     (1903) the
    court struck down an attempt to avoid the intent and purport of
    the Sherman anti-trust statute by recourse to the fiction of
    corporate identity. Likewise, in United States v. Milwaukee
    Refrigerator Transit Company, 142 Fed. 247 (1905), the identity
    of a subsidiary was disregarded when its recognition would have
    resulted in the evasion of provisions of the Interstate Commerce
    Act and the Elkinz Act of 1903. The same kind of action was
    taken in the commodities clause cases cited zupra.
    
    Several of the exce.rptz quoted above have stressed the fact that
    the fiction of the corporate entity of a subzidiarywillbe
    disregarded when the recognition of this fiction would be against
    the vublic interest or the public welfare.   It is common
    knowled,ge that the legislature included Article 666-17(2) of the
    Penal Code of Texas in the Liquor Control Act because of the
    detrimental effect upon the,public,of the prior operation of
    chain liquor stores and because of a belief that the interests
    and welfare of the people of this State would best be furthered
    by confining the ownership and operation of package stores to
    relatively small and independent units. Moreover, the article
    expressly makes the violation of its provisions an unlawful act.
    In view of the langauge~ contained in the Gilmore case, zupra,
    and approved in the Gamble case, zupra, the separate identity of
    a zubzidia~ry controlled by its parent when to do so will be to
    sanction an evasion of this article, to ignore the public policy
    expressed by the legislature, and to point an easy way for future
    evasions by the simple act of incorporation.
    
    While the facts submitted in and with your letter of July 27,
    1942, are not sufficiently detailed and sufficiently compre-
    hensive to allow this department to say as a matter of law
    whether or not the Walgreen parent-subsidiary organization fall8
    within the two categories above discussed, you are respectfully
    advised that:
    (1) If you determine that the factual inter-relationship (a8
    distinguished from the paper interrelationship) existing between
    the Illinois Company and the five Texas companies is such a8 to
    constitute the latter mere "adjunctzV or "business conduits" of
    the former, accordi~ng to the criteria above discussed, then-the
    Illinois Corn any will be guilty of a violation of the provisions
                $:
    of Article h.h-17(2)  of the Texas Penal Code; and, under Article
    666-~(2)  and the definition, contained in Article 666-11(9),
    none of the five Texas companies will be eligible to receive a
    package store permit.
    Honorable Bert Ford, Page 11, O-4750       '
    
    
    
    (2) If you determine that the five Texas companies were
    organized by the Illinois Company or"%hat they were acquired
    by the Illinoiz Company or that they are maintained by the
    Illinoiz Company as ostensibly separate organizations primarily
    for the purpose of evading the provisions of Article 666-1712)
    of the Texas Penal Code or of subverting the public policy
    therein embodied, then the Illinoiz Company will be guilty of a
    violation of the provlzionz of this article; and, under Article
    hhh-ll(2) and the definition contained in Article 666-11(q)
    none of the five Texas companies will be eligible to receive a
    package store permit.
    You are further respectfully advised that should your findings
    fall within either of the above mentioned categories, the
    provisions of Article 666-1.1 (2) will prevent the issuance of
    any package store permit to the~Illinoiz Compan for the permit
    period from September 1, 1942, to August 31, 19E 3.
    
                                      Very truly yours
    
                                 ATTORNN    GENERAL OF TEXAS
    
                                 zi R. Dean moorhead
    
                                 By
                                      R. Dean Moorhead
                                             A,zoiatant
    
    RDM;QO/cge
    APPROVED AUGUST 26, 1942
    d GERALD C. MANN
    ATTORNEY GENERAL OF TEXAS
    
    
    APPROVED OPINION COMMITTEE
    By BWB, Chairman