     Hon. J. M. Falkner, Chairman         Opinion NO. ~-56.
     State Department of Banking
     Austin, Texas                       Re:    Applicability    of the
                                                requirement for col-
                                                lateralization    of
                                                obligations    payable
                                                only to stockholders
                                                of the debtor corpora-
                                                tion ma to banks,
                                                insurance companies
                                                and other financial
     Dear Sir:                                  institutions.
                 Pour request ana supplemental Information
     presents the question of whether a corporation     organ-
-.   ized under Article   13034 V.C.S., which now proposes
     to issue long-term notes or debentures to its own
     stockholders   &,     is required by Article  152&a, Sec-
     tion 7, V.C.S.,   to collateralize  such notes or deben-
     tures.
                 Among other things, your supplemental           in-
     formation   contains the following facts:
                llAllied Auto Finance, Inc, was organ-
          ized in 1950 pursuant to the provisions
          of Article    1303(b),    V.T.A.S.    Its present
          capital   structure    consists    of 805,000
          shares of common stock          each of the par
          value of $0.10 ana 15,600 shares of Pre-
          ferred Stock, without nominal or par value.
          It Is primarily     engaged in the business of
          lending money, secured by liens upon auto-
          mobiles.     Discounting     its commercial paper
          with financial     institutions     and pledging
          its commercial paper, as security           for bor-
          rowed money, with financial         institutions
          are its primary source of working capital.
                   *IIt is the desire of Allied Auto Fi-
          nence,      Inc. to issue long-term notes or
Hon. J. MOFalkner,    Page 2 (g-56)


     debentures,   to stockholders    only, under
     the terms of a trust indenture to be
     executed by end between the company and
     a state or national bank* The trust in-
     denture would contain provisions       usual
     in the circumstances      including   sinking
     fund provisions   for c he retirement of
     the notes or debentures.       Preferred
     stockholders   would be given an option to
     exchange preferred    stock for notes or
     debentures on a dollar for dollar basis.
     Any notes or debentures issued would
     have a maturity date of from ten to
     twenty years would be registrable         in
     all denomina 4ions as to principal       aa
     would be transferable     only on the books
     of the compauy or its appointed regis-
     trar.
           “Notes or debentures would be ls-
     sued only to common stockholders.      Pre-
     ferred stockholders   who exchanged pre-
     ferred stock for notes or debentures
     would be required to own at least one
     share of cormnon stock.   Additional   com-
     mon stock would be made available     for
     those persons who desire to become stock-
     holders in order to purchase the notes
     or debentures.    Any transfer of the notes
     or debentures would have to be on the
     books of the company, and before such
     transfer became effective     the company
     would ascertain   that the transferee    was
     also a stockholder.
           “The proceeds from the issuance of
     the notes or debentures would be used by
     the company in the usual course of busi-
     ness, i.e,,  lending money, secured by
     liens upon automobiles.n
             The legal question here is a matter of statutory
interpretation.      hoes Section 13 of Article    1524a, which
specifically    exempts from the examination features of the
statute those corporations      whose notes or other inst;Fk;ts
evidencing    debt are payable either to stockholders
insurance companfes or other financial      instltution~,   like:
wise operate to exempt long-term notes or debentures sold
Hon. J. M. Falkner,     Page 3    (~-56)


only to stockholders from the collateralization           require-
ments of Section 7 of Article lfi2b?

            It is the opinion of this office   that Section
13 of titicle   1524a cannot be properly construed to ex-
empt long-term notes or debentures sold only to stock-
holders from the collateralization    requirements of Sec-
tion 7.
              The plain meaning of the words used in Section
13 will    yield but one interpretation.         They refer to and
make the exemption given in Section 13 applicable              only
to nthe provisions      of this Act requiring      or authorizing
an gxamination by the Banking Commissioner of Texas."
The collateralization       provisions    of the Act contained
in Section 7, obviously       deal with an entire4       different
subject than the examination provisions.            Both the exami-
nation end collateralization         provisions   have been in the
Act since Its original       passage in 1931. If the Legisla-
ture in 1945 had intended by the passage of what is the
present Section 13 that corporations           whose only written
obligation     consisted of debts payable to the stockhold-
ers or to banks, Insurance companies or other financial
institutions     should be exempt from the collateraliza-
tion provisions      as well as the examination provisions,
we think the Legislature       would have included language
to express such an intent.
             Nor does a consideration     of the general pur-
pose of Article      1524a require a different     conclusion.
That general purpose was to furnish protection           to the
investing    public.    Att'y Gen. Op. No. O-5858 (1944).
The several provisions       of the Act authorizing     and re-
quiring examination        reporting of financial    statements,
publication     and/or h iling of statements of condition,
collateralization,      and bonding of certain personnel,
together with the sanctions provided against non-compli-
ance, Including remedies against any impairment of capi-
tal or any ultra vires activity,        were all intended to
serve the main purpose of protecting        the investing      pub-
lic.    The several provisions      were separately described
by the Legislature.       Each in its own way will tend to
carry out the general purpose of the Act.
           General exemption from these several provi-
sions have been in Section 12 of the Act from the be-
ginning.   Section 12 by way of reiteration  of the terms
of the regulatory  sections provides that "none" of these
Hon. J. M. Falkner,   Page 4    (s-56)


provisions,          the filing     of statements of condition
under Secti          all apply to sales by a subject cor-
poration    (a         ation organized under Article      1302
(48)(49)(50            cle 1303b) unless it offers for sale
or sells "bonds, notes      certificates,    debentures and
other obligationsg   whfb it has issued and which are its
own direct obligations.      We have construed the second
sentence of Section 12 to likewise generally         exempt a
subject corporation    from all of the above provisions,
except the one requiring the filing        of statements of con-
dition   if the corporation’s      notes or other obligations
in whaiever form constitute        the borrowing of money froth
banks or other financial     institutions    to be used Bin the
usual course of business.”       Att “y Gen. Op. No. 1489
(1952)a
            If a subject corporation      is exempt under either
of the sentences in Section 12 then neither collaterali-
zation or examination or any o4her provision        of the Act,
except the filing     of financial   statements,  is applicable.
But if a subject corporation       is not exempt under Section
32, collateralization      and the several other requirements
of the Act are applicable.        As was stated by us in Opinion
O-5858 (1944) in reference       to the situation where no ex-
emption under Section 12 is proper:
      “Again, if the obligations     of such company
      come within the class of obligation     re-
      quired to be collateralized,     it would make
      no difference     that such issue in whole or
      in part had been sold to banks or other
      financial    institutions,  for they are part
      of the public to whom such obligations      may
      not be sold except they be properly col-
      lateralized.    n
            In 1945, when the Legislature   enacted what is
the present Section 13 a special exemption was added
which (as we construe it) removed from the scope of the
examination provisions   those corporations   whose otherwise
non-exempt obligations   were sold to its own stockholders,
or to banks, insurance companies OP other financial      in-
stitutions.    The emergency clause to this special exemp-
tion recites   that “no good purpose could be served by re-
quiring examinatioq of such corporations     in such instances.”
Apparently it was the Legislature’s     view that examinations
by the Banking Commissioner could serve no purpose because
Hon. J. M. Falkner,   Page 5   (S-56)


stockholders    would be familiar with the true condition
of their corporation     at all times and because banks, in-
surance companies and other financial     institutions  are
quits able to examine and appraise for themselves the
condition    of an issuing corporation.


           Section 13 of Article 1524a does not
     exempt long-term notes or debentures sold
     only to stockholders  from the collaterali-
     zation requirements of Section 7.
APPROVED:                        Yours very truly,

C. K. Richards                   JOHNBEN SHELPPERD
Appellate Division               Attorney General

Willis E. Gresham
neviewing Assistant
                                 ,,lQytm-
Burnell Waldrep                      Phil ip Robinson
Reviewing Assistant                         Assistant
John Ben Sheppera
Attorney General
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