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 Ten. 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




                                   :    .‘,




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