  OFFICE    OF THE AlTORNEY   GENERAL    OF TEXAE
                       AUSTIN




Dssr 8lr:
                  opinion x0. o-u389
                  Be: coartmat:on 0f Art
                      Ravfsed Civl



         x0 El-e in rscsipt of
.lon ca tts foltowln& :;uastl




                                   oh lnatsnos orrning
                                    two oor~ora$lonr (
                                    atian and the
                                    sarano~ c or*ra-
                              seeb where It appw8
                      af each 3oard is lCe~tioa1,
                            ooatrolllnrplatarest




         "iisa conowte     flleetr?itioaof the ques-
     tion ~~h3k 00nrr0aa     u&; tbr farlo~ing 18
     tjr3foal:
    lTha controlling stook of &auance      Qorpora-
    tion A is orned by B.C. and D, mo ocmstitaate
    1 tsBoard OS ~ir eo to r s.
                              2%. o o ntr o llirsto
                                                 l& o k
    OS   o o r p o r a g io a   finance oorjioratlon,$8
                                It, l
    owned by B,C, and D, thsy being U            ldentioal
    ~arsciis        who own the oontrolllng stock la In-
    mrsaoa          Cmpsny A,
    *Tim itines oorpxatios 1 sol18 to Imaursnoe
    Cor?oratbm A orrtaia socurltles owned b7 it.
    3%~ quwtion uhioh eonSzoat8 nm is whaOhor or
    not uuder suoh obwaritstanoes an6 la rim d
    Artfal. 412’1, notBfthstanding said Artiole 1s
    a prohibition agsinst SOW JS the directors,
    offioiels, agents do., should thr Board oS
    IasurMoe c4xaui*sjonarsreoogniza the saouri-
    ties so guraka8ed as adnlsslbla asset&P

          %I propounding the ioregolng puastions,
    I am laborirg under the izapraasion that the
    mubuss of t?m 3owd of the 8ellfng Corpora-
    tto%E have a ;eouniary interest       in the amour-
    ities sold to Inmranos Corporation        A, the Di-
    rectors oS rhich are either     ldontlcal   with the
    Direotors cd the S4vLUng Corporatfcisor owzt
    and aoatrol ths maJorffq stook.
         'CT- will note that In at9 lettsarto yaa
    of October l?th, I requested that you oonsld~~
    whether or not a distlaotlon OM? or should be
    nmde where the oirlcars and diraetors OS tko
    two oorgoretions are identical, and whether or
    not the ofriosrs and directors am not identi-
    oal, and to aomider IS there 1~ a distinction
    to be drawn between Inatanms where th* ofticer
    or director of both oorporatlonn 3p1lsthe eon-
    trolling intereeatin both coryorotiozs   or oua8
    ths a~ntrolU.ng interest in the borrow&    oox-
    porstion.

                l   * * I   .*


                R sfetec c e    is mdd      to h r ti01 0 4VE7, Uti8e6
Civil StatPlieS,          1925.         I.itsve given nost oamical con-
8fdsntica   end analysis to thf 8 eftll statut8. II 18
OwT utudied a.$nion that the prohibition contained
th8roin  do48 not agply to tha oircmt8nara    you hare
d48crlbsd. S84 in this   uonnsction Cbnferenoe G&x.ion
X0. 5097 or t%i8 departrent.
         Art1ole 4727 and Artlale 577, Penal C&4, 1925,
Eave a8 their aceibinsd obfsative    the prohiblthm an8
psnalitlng of IIdirector and offioer or dlreatorr    end
otiksr8   of aor~oratlon8  in re8prat   to oertaioper8an-
a1 aot8. Both the prohlbltion and the p8tmlty apply
to indirldualr. They do not embrace tha oorporation
itaslt 68 an entity. The language ir alerr, umablgu-
0128 an6 not 8Ubj44t to aoatruotfon.
         Th4 lneetiion ot th8 prwirion8 aoncarning
polio loa!m WQSundolabtedlpfor the xrpoae of anabl-
fng d ITO4tOr8 md OfffO8rs of fwiurance oo~paxi48 to
take e&vantage af tr:lrxell-rcocg~-.lzedclass .ztf
                                                 loaae.,
It camot   be cocaluded that it f.?dic&tsra legislative
intent   thet bXt~ranCCiCO2pa?ii48, ~8 aSu   48 th8h   &-
dltidual dlreotors and officers, mre     within    the atat-
utmy inhibition.
        Artlole 577, eapra, 4XpT4881l 8tate8 that *4~
       VfOlati,w any proti8ioIloi thi8 article 8hal-d.
 brlloll
ha-   not le8.8than thres huMred nor more than  one
thousand Qo11ems'r (t3nber8corlng Our8)*
        The raat tbut  irticlo 4727 and brticlo 577 are
not a.?pUoable d,aea not amen that the kerd of Insurance
tkd88iOZWr8    18 pOwerlsBS to OOntrOl the 8dsi84ibllity
oi asset8 of life lnsuranas co.:paniel aaquired under
the oirewnstence8 outlined in your letter.
        ‘Ilrk8I.8aZl in0Ur~Ce OO%~ell~>Ur4h4888 88OtSitie8
from a aor>oration whose 3mrd of ikectorr haa a member-
8hlp identical    with thst of the ,inzreharin8
                                              Insurance
th~~p~~y~th8 Board Of ~8UmUX?~ Ca.BSLiSlrianOr8  i8 entitled
to b8 g~l&~d by asrtain itlndaaS?.t?idm148 of hW in &O-
twaiofng th0 adaLi88ibility    Of 8uch 88WritLa8     a8 elreet8
of the in8urance ecxpany.
          It   18 toa ~.a11sstablfshcd to requim    citation
of out::oritythct ciilmrr    und especially diXMtOr8
of 0or~orat:onr are riduclsrier. SO, kO01OVer,8
yyv3s*tJ cz X",
              ....K IntP
                 ....~i&iS. Ch. 49, p. 777 *DutIe8 and
Tower8 ot DIreotor8 a8 Piduoiarie8ng 2 COW3 OX XY-
emotive 1451 B 5094 on *Dlreotorrr~ 25 BAWARD LAW
iUXBU 427 gInterloeklng tireotoratea, The Problem
Mid   it8    sOh.Oll   -;       TRmrTr-mBsAL              nsmw3       caxrA?a
XT AI, 1. HS?XLL 22’ AL 101 S.W. (2d) 607.
        ??hO ia4t that    8 QUt   OT 811 Of the dlnO%‘X8
of 054 ooatreating    oorporatfon   8re dirclotz-nt of the
other oontraatl.ngoorporatioa      afford8  a ground ior sub-
jeoting the oontzwat     Into r!xiohthey enter to the 8triot-
88t sarutiap by courts     of e uity. a lFSXQ%ox     C34Co&OR-
.?TI@XS841; 10'TSX. JUR. 953 .
          ?ho true rule in Texa8 with relrpeatto colt-
tract8 betaeen wrporation8 having intarlooking alrsct-
oretea or dricers lb cownon poerally nap :33round
enunaiatod in CITY H:,T?&%L %XGi WJ. %lSXJTS*     QiD
xii33RS     XxX.%.   SMX. 105 s.3. 336 (c&i 1907). to
the  0rfe0t  thfet
          ‘1% 18 nOti fnhW4Xitly Wona;    fW tW0 OOr-
      poratIon8, hrrvlng all or a part of their aoa-
      trolling oriicrers   In aasao5, +ABaont?a& with
      eaah other. Xven when a majorityor 811 of
      the aontiscting    0rsicers of two cor~osationa
      8zO memm      to b!th, that raot alom bow 2ot
      mke e eontreat between th8 tW0 COrgarationU,
      entered into by euah oontraotiq oiiioar8,
      ab8olntely void and incagable of refificafion.
      TS4 current of modern autkmitY      5oldr that



       funfi          siltii it    *   ld awear, upn
      ;,,e&&;:%.i'   that the aoi%::ot    18 ialT md
      thoro has bee; no abuse of the trust relation,



      .q~.crrn
            by the sdjudiontod                 cfis48.   de;.Ond8in   a
      -of-                  ,
Son. ‘#alter C. L’oo4ward,Chairman,      pa+y   5



    lor case.        20 lnflaribis rtllahas b;on sstnb-
    llehed.*
           The ale     wae ateted rtth remarkable   clarity
by Xr. Justice Clark, apeaklng ror the 3tited States
salpramacourt in GsT&s TS. j&,fJ;xDj,CC;;';;,3
                                            ',cI;:x:G
                                                   CC&
PAST, 254 U.S. 590, 599, 41 9. ct. 2G9, 65 L. 3d. 425,
when he eaidr

          Y?ie relation  0r Clreator8 to oorpratlonr
    is of such a tidueiars nature that traa%eation%
    between board8 her&g acanon ms.bers are reqrd-
    ed as jealously by the lsa ae arc ;ersonal deal-
    ingo b&mm      6 direotor and &i8 corFretion,
    and where the raimes8 Or meh transaction% i%
    ahallengsd tha burden 1% upon those who wcxlld
    maintain them to show their entire rabies6 an8
    wkeerea sale :s ictolved the full cd%quacy of
    the cmr;i4er:&io~. 33,waially is this true
    whore e common director is do5inetlni;in i,*lu-
    exe or in ohsraoter. T::iri   court has been con-
    sletently emphatic in the appllcetlon 0i this
    rule, uhlah, It has dealarea, is fMlnded in
    soundest  morality, and wa mm add ln the sound-
    est   busln4s%    policy.*

         In oorrinenting
                       on thi% rile, the United State%
Suprome Court in TCmz-LrCE EL CG.;ZY V%. x.zG3mY, 91
U.S. SQ7, 23 i. 3id.322. said,
          8 * * + when the lendsr is a direator,
    aharged rlth others, with the oontrol and man-
    agxzxmt 0r.m     alfairs 0r the corporation, rep-
    resenting, in this regctrd,the aggrorjatsintereat
    of all the etockkoldere, hia obiigetloc, if he
    beeme     a 2srty to a oontract -siththe CCI ,+Cy,
    to cozxior  and tfiir des:lq, ir: lncreorod in
    the precise degr;rao  t:w*ttis raixesa3tiitive
    oharacter hii%given tin gower and confrsl de-
    rived rra the coidlJence repwed in him by the
    atockholdara ah0 aoyointe4 h.kattelr aGent.*
         In England, the ~11s is that c;rgzations
having dirsotore Ln ccmzon izegxot cozArc.ct. i-c82 Tkmg-
6x1 Corj2orstions846. s: :;TT. F::,TL3jto. IL‘,;,~,s~#g
                                                     cc.,
Hon. IfalterC. :&xlward, Chalrsan, pit* 7

    lwality of o p ;o r tua ity
                              to all entitled tkers-
    80 abuaa a nd violate the flduaiary relation
    aa trust obli~etioa of dlTeef&ra.
    a                                     3aw treat-
    ment must be rtow    to an-e o~dsstro~ the
    evil .a
         A8 utstrd another rag ia EnBYE         WI. 3RO+?S,?30
   583, 635 (1380):




          Wo take the liberty to quote a&z' from the
artlola in 39 3 .L.R. (this tlzrie   at p. 4741, w3ich is a
QOllCiSO rtatmrieatcf our ~osl.tionr




         Th@     the2 great might 0r autmrity
    supgorta the ~onoluaioa  that oontreotr made
    by corporations, in wclch ita directors are
    interested either individually, or through
    theeirarfiiiatfons -irfth  other eorpretlms,
    are aot void ab fnftlo, but asr8ly voidable,
    yet th6 rule 0r law in this respect is such
    that a11 praotlcal plrpose8, if tha CQxtraot
    or transaotlaa be attacked, It will be archled
    ahoat a6 a matter 0r cow86, ‘booause the
    puastlon   or tha ixtegity   or ?a @od rolth
    oi the treneaotion    will -:otbe irr;uked into.
    The uourt.8  will not contidbrwbther or xot
    the traxtztion     Lairbeen 5xjurious. Zxclaad,
    they have g&a so far zs to hold tb.et even
    whiHI0 It CQUld   be smZUeitiVsIy   CLapm    that
Eon,   34lter   C. Xocdwnrd,   Zhalmse,   pgr   9
Eon. Xalter C. Gxduard,    Cbairaan, pa,ge9

say refuse adtisaibillty ar asset8 of the lnsuranaa
ooz?any aaourltisa obteimd by purobaus frruaa aorpor-
ation hating an Identical Board of Diraotore.
                 na605ing
        TJi0861~10             spglle~ ia thor0 0as48 where
tba Board of Xreotorr of the pmoha&.ng insurance ccan-
pw   and the sslliag aorporatioa have an identloal ma-
                   l 14lu4nt..
jority oontrolll.llg
          Iho refusal of tha Board of fnaunnoe Oaamis-
8ioaer8   to admit aertein 840uritlar a8 a804ts of ths
        nt of ?.hoaagital atook of an in-oe        oompeny
pnq;rrr hrtiola 4748, llarlsedCiTil St4tflto8, 19e5.
Whdhar impalrnwrnt18 brought abou4 a~ not bfthlm le-
firra,tbs authority of tha Boerd of Imurancs Cmds-
sloaers is the aamm whem the transaotion between the
insurance aar;.jaay and the oprporatioa having OO~KMS
dlraotorfi  doe8 oat -84 the tar4 of fairnee8or 18 a
riolatioa of the trust rabtlon8hip.
        In thf8 opinioa ws ars not passing u;ron ths
4uertion of whether or no4 tha individual dlraotoz6ia
the sl4untion do8orikd are guilty of rfolating  ktiolrs
47Bt utd 6t7, mapre.
        Truathg that   we hare 8eti8faotorll~ answered
your in@ry,   wo are

                               Your8 ~4ry truly
                              ATTOR!EWC-AS,        OI TEXAS


                              BY             I L\< s3?x$
                                         9     Dickstixlt
CSt0b                                             RsaiRt4nt




             App~ovEcMAy 16, 1940


             ATTORHEY GENERAL OF TEXAS
