Eonorable Lloyd Criss                 Opinion No.JM-630
Chairman     -
Labor and Employment                 Re: Constitutionality of amend-
   Relations Committee               ments to article 342-101. et
Texas Eouse of Representatives       -9    V.T.C.S., the Interstate
P. 0. Box 2910                       Banking Bill
Austin, Texas   78769

Dear Representative Criss:

     You ask several questions about the Interstate Banking Bill
enacted during the recent   called session of the legislature. Acts
1986. 69th Leg., 2nd C.S.. ch. 14, at 71. Bank holding companies are
regulated pursuant to the federal Bank Holding Company Act of 1956, as
amended, 12 U.S.C. 551841 et seq. The act provides the following in
pertinent part:

            Notwithstanding any other provision of this
         section, no application . . . shall be approved
         under this section which till permit any bank
         holding company or any subsidiary thereof to
         acquire,   directly    or   indirectly . . .   any
         additional bank located outside the state in which
         the operations of such bank holding company’s
         banking subsidiaries were principally conducted on
         July 1, 1966, or the date on which such company
         became a bank holdinn
                             - comnanv,
                                   . _- whichever is later.
         unless the acquisition . . . is specifically
         authorized by the statute laws of the state in
         which such bank is located, by language to that
         effect and not merely by implication. (Emphasis
         added).

12 U.S.C. 91842(d). The second called session of the Sixty-ninth
Legislature enacted amendments to articles 342-101. et seq.. V.T.C.S.,
[hereinafter the Interstate Banking bill] that were intended to
constitute such specific authorization. permitting out-of-state bank
holding companies to acquire a state or national bank or bank holding
companies owning or controlling a state or national bank located in
Texas. Acts 1986. 69th Leg., 2nd C.S.. ch. 14, at 71.




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     Article XVI, section 16, of      the Texas Constitution, however,
provides in pertinent part:

             Sec. 16. (a) The Legislature shall by general
          laws, authorize the incorporation of state banks
          and savings and loan associations and shall
          provide for a system of state supervision.
          regulation and control of such bodies which will
          adequately protect and secure the depositors and
          creditors thereof.

             .   .   .   .

          No foreign corporation, other than the national
          banks of the United States domiciled in this
          State, shall be permitted to exercise banking or
          discounting privileges in this State. (Emphasis
          added).

You are concerned that the recent bill may violate the underscored
portion of article XVI, section 16. Accordingly, you ask a series of
questions regarding the proper construction and constitutionality of
the recent statutory amendments. We will address each of your
questions in turn.

     With your first question you ask:

             If a foreign corporation acquires a state or
          national bank domiciled in Texas, will that
          foreign corporation be in violation of article
          XVI. section 16, of the Texas Constitution by
          virtue of its direct exercise of banking or dis-
          counting privileges in Texas? (Emphasis added).

     We answer your first question in the negative. The 'Interstate
Banking Bill does not purport to authorize foreign corporations to
engage  in banking and discounting privileges. gather it merely
authorizes out-of-state bank holding companies to purchase Texas state
or national banks or bank holding companies. Section 5 of the bill
amends the Texas Banking Code of 1943 by adding article 342-916,
V.T.C.S., which provides the following:

             Section 1. Except as otherwise provided by
          this article, an out-of-state bank holding company
          -Y. directly or indirectly, acquire or acquire
          control of a state bank, national bank located in
          the state, or bank holding company owning or
          controlling, directly or indirectly, a state bank
          or national bank located in the state.




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Acts 1986, 69th Leg., 2nd C.S., ch. 14, section 5, at 81.   The bill in
section 1 defines "control" as

          [t]he ability or power to vote, directly or iu-
          directly, 25 percent or more of any class of
          voting securities or the ability to control in any
          mauuer the election of a majority of the board of
          directors.

The Banking Code, as amended, still requires that any corporation that
exercises banking and discounting privileges in the state of Texas be
a Texas corporation.

     Your next question is:

             Does the legislative history of article XVI,
          section 16, vhich was enacted prior to the
          institutional use of holding companies, indicate
          that the intent of this article was to prohibit
          foreign ownership of banks, as well as the
          exercise of banking and discounting privileges in
          Texas?

     We answer your question in the negative. There is little legis-
lative history extant regarding the adoption of the 1904 amendment to
article XVI. section 16. That which does exist indicates no intention
to forbid foreign ovnetshiR of banks in Texas; rather, foreign
operation of banks was intended to be prohibited. The Eouse Journal
entry for the proposed constitutional amendment to article XVI,
section 16, recites among its purposes to be "prohibiting foreign
corporations with such powers [banking and discounting privileges] E
do business In this State." H. J. of Tex., 28th Leg., Reg. Sess. 633
(1903).

     You next ask:

             Does the legislative history of article XVI,
          section 16, further indicate that the intent of
          this article is to allow for major changes in
          bauking policy and procedures in this state, such
          as that proposed by Senate Bill No. 11. to be made
          only upon the passage of a constitutional
          amendment duly enacted by the voters?

     Again,   there is little legislative history extant on the 1904
amendment.    If the legislature had intended that foreign ownershiP, as
opposed to    foreign operation, of banks in Texas be prohibited, it
would have    specifically so stated. More important. it is a well-
established    priociple that the legislature, in the absence of an




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Honorable Lloyd Crlss - Page 4   (~~-630)




express constitutional prohibition or requirement, has the power to
enact significant legislation without express voter approval of those
changes.

          The legislative department of the state government
          may make any law not prohibited by the constitu-
          tion of the state or that of the United States.
          Therefore, the rule is that, in order for the
          courts. to hold an act of the legislature un-
          constitutional, they must be able to point out the
          specific provision which inhibits the legislation.
          If the limitation be not express, then it should
          be clearly implied.

Shepherd v. San Jacinto Junior Colleges Dist., 363 S.W.Zd 742, 743
(Tex. 1962). quoting                    , 61 S.W. 114 (Tex. 1901). As
the Texas Supreme Court declared iu Texas National Guard Armory Board
v. EfcCraw. 126 S.W.Zd 627, 634 (Tex. 1939), quoting Middleton v. Texas
Power and Light Co., 249 U.S. 152, 157 (1919).

          There is a strong presumption that a Legislature
          understands and correctly appreciates the needs of
          its own people. that its laws are directed to
          problems made manifest by experience, and that its
          discriminations are based upon adequate grounds.

While the Interstate Banking bill undoubtedly effects a major change
in the Banking Code, it does not permit anything which is expressly or
impliedly prohibited by the Texas Constitution.

     You next ask:

             On what basts is there a distinction between
          the institution of branch banking through a
          constitutional amendment (S.J.R. 4). and the
          institution   of   interstate banking   through
          statutory legislation?

     The distinction is simply that the limited form of branch banking
authorized by Senate Bill No. 10 (Acts 1986, 69th Leg., 2nd C.S., ch.
13, at 63) was prohibited by article XVI, section 16; accordingly a
constitutional amendment was required to permit it. On the other
hand, ownership of Texas banks by out-of-state holding companies is
not prohibited by article XVI, section 16; only operation of banks by
foreign holding companies in Texas is prohibited. And the Interstate
Banking bill authorizes foreign ownership. not foreign operation.

     You next ask:




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             If the foreign corporation, on a direct basis.
          is not in violation of the above referenced
          article, will the foreign corporation's exercise
          of control over the state or national bank
          domiciled in this state result iu the foreign
          corporation exercising banking or discounting
          privileges in this state?

     It is important to note the actual effect of the Interstate
Banking bill. Prior to its passage, Texas banking was dominated by
four "giant" holding companies that. in the aggregate, controlled over
200 banks in the state. Each of the four is a Delaware corporation.
See generally Zamora, Regulating Foreign Bank Operations in Texas, 19
Hous. L. Rev. 427 (1982). The assets of each corporation consist of
stock in Texas banks. The Interstate Banking bill merely permits
out-of-state holding corporations whose assets consist of stock of
banks in other states to acquire also the stock of Texas banks; it
does not permit such holding companies to disregard the separate
corporate existence of the banks owned by it in violation of the Texas
Constitution.

     In Attorney General Opinion H-606 (1975). this office concluded
that the ownership by a bank holding company of more than 50 percent
of the capital stock of two or more Texas banks did not violate the
branch banking prohibitlou of article XVI, section 16, of the Texas
Constitution. The opinion specifically focused on the distiuction
between ownership of stock iu more than one bank by a bank holding
company and the yeration of one bank by another. The opinion relied
in part on a report issued by the Attorney General on August 18, 1952,
to the State Banking Board, and in part on Bank of North America v.
State Banking Board, 482 S.W.Zd 923 (Tex. Civ. App. - Austin 1972),
aff'd per curiam, 492 S.W.Zd 458 (Tex. 1973), cases involving a
challenge on the basis of an alleged violation of the branch banking
prohibition to the granting of an application for a bank charter. The
court of appeals, whose opinion was affirmed Per curiam, declared that
"[t]he bare fact of ownership [of one bank's stock by another bank],
without more, does not constitute a violation of section 16." 468
S.W.Zd 532. The Texas Supreme Court, in affirming the decision below,
expressed the relevant issue as "whether the proposed or chartered
bank was actually controlled or operated directly or indirectly by
another bank. . . ." 492 S.W.Zd at 459. The court further noted that
the aforementioned Attorney General's report stated that

          even after a charter is granted to a bank, the
          operation and control exercised over it by another
          bank may under certain fact situations constitute
          violations of the anti-trust laws and the prohibi-
          tion against branch banking.




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Eonorable Lloyd Criss - Page 6 (JM-630)




Id. at 459-60. Attorney General Opinion H-606 then concluded that
such stock ownership of one bank's stock by another bank or a bank
holding company is not a violation of the branch bauking prohibition
Per se, but that "[olne bank controlled by a bank holding company may
so dominate and control the operation of another bauk as to violate
these provisions in a particular case."

     Analogously, we conclude that the ownership. without more, of
bank stock by au out-of-state bank holding company does not violate
per se the article XVI, section 16, prohibition against a foreign
corporation exercising banking and discounting privileges.        If,
however, the holding company acts in a way to disregard the separate
corporate existence of individual bauks, then we think that courts
would conclude that article XVI, section 16, had in fact been
violated. See generally Lane v. Dickinson State Bank, 605 S.W.Zd 650
(Tex. Civ. App. - Houston [lst Dist.] 1980, no writ); American
Petrofiua Co. of Texas v. Grump Business Forms, Inc., 597 S.W.Zd 467
(Tex. Civ. App. - Dallas 1980,~State                       v. Nevitt,
595 S.W.Zd 140 (Tex. Civ. App. - Dallas 1980. writ ref’d n.r.e.1
(courts invoke "alter ego" doctrine to disregard separate corporate
existence). Each instance involving disregard of the corporate entity
must rest ou its ouu facts. Rosenthal v. Leaseway of Texas. Inc.. 544
S.W.2d 180 (Tex. Civ. App. - Tyler 1976. no writ).

     Your request next sets forth the folloving:

            I note that Senate Bill No. 11, iu section 3.
         which amends article 342-912, V.T.C.S., requires,
         in section 4(Z): .

               (2)  evidence that the out-of-state bank
            holding company and each state bank, uational
            bank in this state, and bank holding company
            being acquired will. after the acquisition,
            CornplY with     applicable   capital  adequacy
            guidelines,  and  that  the consolidated  equity
            capital condition of these banks iu this state
            during the first three years after being
            acquired will be maintained at least at the
            level existing immediately prior        to the
            acquisition less the consolidated net loss of
            these banks. if any;

             This   language treats the     equity capital
          condition of the banks to be acquired on a
          consolidated   basis.    By   referring   to   the
          'consolidated equity capital condition of these
          banks,' Senate Bill No. 11 places a requirement in
          the out-of-state bank holding company. As such,




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         it implies a condition wherein the out-of-state
         bank holding company will be directing the affairs
         of the acquired banks on a consolidated basis
         rather than on an individual bank basis.

Accordingly, you ask:

             Does this make the out-of-state holding compauy
          a bank?   Does the consolidated equity capital
          condition violate the constitutional prohibition
          on a foreign corporation exercising banking or
          discounting privileges in this state?

     We answer both of your questions in the negative. The provisions
of article 342-912, V.T.C.S.. were first enacted in 1977 and govern
the conditions under which a holding company may acquire Texas banks.
The amendment to article 342-912. V.T.C.S., contained in section 3 of
the Interstate Banking bill merely imposes an additional condition on
out-of-state bank holding companies not required of Texas holding
companies. This additional requirement does not eliminate or affect
any other regulatory requirements regarding the adequacy of bank
capital. See. e.g., 12 U.S.C. 5551, 3907(a). More important, this
additional requirement confers no authority on the holding company to
direct, either on a consolidated basis or on an individual basis, the
operations of Texas banks. It is still the case that the separate
corporate identity of the subsidiary banks must be respected, and the
requirements regarding equity capital of state banks and national
banks that are imposed, by state and federal law, respectively, must
be adhered to. Furthermore, the,act does not confer authority on the
holding company. even after the expiration of the three-year period,
to control the capital condition of the bank. Were the statute to
authorize such operational control, serious constitutional questions
might arise.

     You next ask:

             Does the treating of equity capital position on
          a consolidated basis allow for a holding company
          owning two or more banks to undercapitalize one of
          those banks so long as the capital condition of
          all of the acquired banks, when viewed on a
          consolidated basis, is adequate?

     We answer your question in the negative. As we noted above, the
equity capital requirements imposed upon individual state and national
banks by state and federal law are unaffected by the Interstate
Banking bill. Accordingly, if the applicable provisions are followed,
no individual bank should be undercapitalized.




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     You note that:

             The Texas Constitution presently provides, in
          part:

                Sec. 16(a) The Legislature shall by general
             laws, authorize the incorporation of corporate
             bodies with banking and discounting privileges.
             and shall provide for a system of State
             supervision, regulation and control of such
             bodies which will adequately protect and secure
             the depositors and creditors thereof.

              If the constitutional amendment set forth in
          S.J.R. 4 is passed, this section will be amended
          to read as follows:

                Sec. 16(a) The Legislature shall by general
             laws, authorize the incorporation of state
             banks and savings and loan associatious and
             shall provide for a system of State super-
             vision, regulation, and control of such bodies
             which vi11 adequately protect and secure the
             depositors and creditors thereof.

     You then ask:

             Does the ability of a foreign corporation under
          Senate Bill No. 11 to acquire and control a state
          bank in Texas violate the existing or the proposed
          constitutional provision that the legislature
          provide 'for a system of State supervision.
          regulation and control of such bodies which will
          adequately protect and secure depositors and
          creditors thereof?' Specifically, we would direct
          your attention at the ability of such foreign
          corporations to direct deposits in the state bank
          for use by the foreign corporation, especially
          through other financial institutions that it may
          own outside the state of Texas.

     We cannot answer this question because to do so would require
resolution of a matter of fact. Questions of fact are inappropriate
for consideration in the opinion process. We cannot say as a matter
of law that the state system of regulation imposed by the Banking Code
fails to "adequately protect and secure depositors and creditors" of
Texas banks.    We emphasize that the bill neither authorizes an
out-of-state holding company to disregard the independent corporate
existence of subsidiary state or national banks.(which, if it did so,




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Honorable Lloyd Criss - Page 9    (JM-630)




would violate the prohibition ou foreign corporations exercising
banking and discounting privileges), nor alters the applicable equity
capital requirements that were imposed prior to the enactment of the
Interstate Banking bill.

     Your request next sets forth the following:

            As noted above. Senate Bill No. 11 requires the
         out-of-state bank holding company to maintain at
         least the consolidated equity capital condition
         of the acquired banks at the existing level
         imediately prior to the acquisition for the first
         three years after acquisition. Does the fact that
         the foreign corporation, after it has acquired the
         bank, cau permit the equity capital condition of
         the bank to deteriorate after the first three
         years violate the constitutional provision that
         the legislature establish by general laws a system
         of state supervision which will adequately protect
         and secure the depositors and creditors of state
         banks in Texas?

     Again, we caunot say that, as a matter of law that the bill
violates article XVI. section 16. The act confers no operational
control to the holding company. And again, we note that the bill does
not alter the equity capital requirements that were applicable prior
to the enactment of the bill; individual state and national banks will
still have to adhere to the respective state and federal provisions.

     You note that article 14(b) of Senate Bill No. 11 states, in
part:

            The Comaissioner has jurisdiction over an
         out-of-state bank holding company to enforce an
         agreement filed with the Comissioner      under
         Article 12 of this Chapter.

In that regard, you ask:

            Will the commissioner have the legal authority
         to enforce all aspects of those agreements. or can
         the comuissioner be prohibited from doing so as a
         matter of federal law or the law of the state of
         the foreign corporation?

     Generallv.
             _  the validitv of contracts is controlled bv the law of
the place where the contract was made. King v. Bruce, 2Oi S.W.Zd 803
(Tex. 1947). cert. denied, 332 U.S. 769 (1947); Grace v. Orkin
Exterminating Co., 255 S.W.Zd 279 (Tex. Civ. App. - Beaumont 1953,




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Eonorable Lloyd Criss - Page 10    (JM-630)




writ ref'd n.r.e.1. Because the agreements entered into under the
bill will be made and performed in Texas, clearly the laws of the
foreign state would not pre-empt those of Texas. With respect to the
federal government, the bill specifically provides that any agreements
entered into pursuant to the bill are "subject to any contrary
provision of applicable federal law." Acts 1986, 69th Leg., 2nd C.S..
ch. 14, 53. at 78.    Accordingly, we conclude that the commissioner
would have the authority to enforce all aspects of any agreements
entered into pursuant to the bill except as would violate federal law.

                              SUMMARY

             The 1986 amendments to the Banking Code of
          1943, which authorize out-of-state bank holding
          companies to purchase control of Texas state and
          national banks pursuant to the federal Bank Eolding
          Company Act of 1956. does not violate article XVI,
          section 16, of the Texas Constitution.

                                          , Velzh



                                            JIM     MATTOX
                                            Attorney General of Texas

JACK EIGETOWRR
First Assistant Attorney General

MARYRFLLRR
Executive Assistant Attorney General

RICK GILPIN
Chairman, Opiniou Committee

Prepared by Jix Moellinger
Assistant Attorney General




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