OFFICE OFTHE ATTORNEY GENERAL. STATE OF TEXAS JOHN CORNYN

February 12,200l

The Honorable Jim Solis Opinion No. JC-0338 Chair, Committee on Economic Development Texas House of Representatives Re: Whether an Economic Development Board P.O. Box 2910 may vote to approve funding for abusiness owned Austin, Texas 78768-2910 by amember of the board (RQ-0279-JC)

Dear Representative Solis: You ask whether the board ofthe San Benito Economic Development Corporation, created under section 4B ofarticle 5190.6, Revised Civil Statutes, theDevelopment Corporation Act of 1979 (the “Act”),’ may vote to approve funding for abusiness owned by amember ofthat board. We do not know the nature of the proposed transaction, whether the funding is a loan, a grant subject to contractual restrictions, or some other transaction. Nor do we know the nature of the board member’s ownership interest in the business or what kind ofbusiness it is. Accordingly, we will address the conflict ofinterest standards generally applicable to transactions between an economic development corporation and amember of the board. We conclude that the board of an economic development corporation may not approve aloan to adirector ofthe corporation. See TEX.REV.CIV. STAT.ANN. art. 1396-2.25 (Vernon 1997). Otherwise, the corporation is not prohibited from entering into a contract or other transaction with a member of the board if it complies with the provisions of the Non-Profit Corporation Act governing transactions with directors. See id. art. 1396-2.30. The purpose of the Development Corporation Act is to provide “means and measures . . . especially with respect to financing,” to promote the economic welfare ofthe state by “the securing and retaining ofbusiness enterprises.” Id. art. 5190.6,§ 3(a)(4) (Vernon Supp. 2000). It authorizes acity, county, or conservation and reclamation district established under article XVI, section 59 of the Texas Constitution to create an industrial development corporation to act on its behalf in promoting economic development. See id. 3 4(a); see also id. $5 2(8), (13) (definitions), 3

*SAN BENITO INDUSTRIAL DEVELOPMENT AUTHORITY INC., IDA POLICIES, available at http://www.sbida.com/IDA (last visited Nov. 29, 2000). See also Tex. Att’y Gen. Op. No. JC-0118 (1999) at 1 (requesting on behalf of San Benito and McAllen advice about section 4B of article 5190.6, Revised Civil Statutes).The Honorable Jim Solis - Page 2 (JC-0338)

(findings); see generally Ray1 v. Borger Econ. Dev. Corp. 963 S.W.2d 109, 111 (Tex. App.-Amarillo 1998, no pet.). The corporation “shall have and exercise all of the rights, powers, privileges, authority, and functions given by the general laws ofthis state to nonprofit corporations incorporated under the Texas Non-Profit Corporation Act, as amended (Article 1396- 1.O1et seq., Vernon’s Texas Civil Statutes),” except tothe extent that itsprovisions arein conflict orinconsistent with the Act. TEX.REV.CIV.STAT.ANN. art. 5190.6, 8 23(a) (Vernon Supp. 2000). Additional powers ofthe corporation are set out inthe Act. See id. The unit ofgovernment that creates it “shall never delegate to acorporation any of such unit’s attributes of sovereignty, including the power to tax, the power of eminent domain, and the police power.” Id. 522 (Vernon 1987). Pursuant to an express provision, acorporation established under section 4B “may exercise the power of eminent domain only on approval of the action by the

. . .city” that created the corporation. Id. 5 4B(j) (Vernon Supp. 2000). A development corporation’s exercise ofpowers is subject “at all times tothe control ofthe governing body ofthe unit under whose auspices the corporation was created.” Id. 8 23(a)( 12). Section 4B of article 5190.6 authorizes certain cities, asdetermined by population and other factors, to establish adevelopment corporation to carry out projects as defined in section 4B(a)(2) of article 5190.6. See id. 9 4B. The city may levy a sales and use tax for the benefit of the corporation, subject to voter approval. See id. §4B(d). Corporations created under section 4B have the powers and are subject to the limitations ofacorporation created under other provisions ofarticle 5190.6, but to the extent of any conflict, section 4B prevails. See id. 54B(b). The governing body ofthe unit that created the corporation appoints its board of directors. See id. 5 11 (Vernon 1987); see also id. § 6(8) (number of directors and the names of original directors are stated inthe articles ofincorporation). The board ofacorporation created under section 4B consists of seven directors appointed by the governing body.of the city for two-year terms and subject to removal by the governing body at any time without cause. Id. $ 4B(c) (Vernon Supp. 2000). Article 5190.6, Revised Civil Statutes, does not expressly address transactions by a development corporation in which a director has apersonal financial interest. The directors of a development corporation are not subject to chapter 171 of the Local Government Code, which regulates conflicts ofinterest oflocal public officials. A “[llocal public official” within chapter 171 is amember of the governing body or another officer of “any district (including a school district), county, municipality, precinct, central appraisal district, transit authority or district, or other local governmental entity.” TEX.Lot. GOV’TCODEANN. 8 171.001(a) (Vernon 1999). A corporation established under article 5190.6 “is not intended to be and shall not be apolitical subdivision or a political corporation within the meaning of the constitution and the laws of the state.” TEX.REV. CIV.STAT.ANN.art 5190.6, 8 22 (Vernon 1987); see Tex. Att’y Gen. Op. Nos. JC-0109 (1999) at 2, JC-0032 (1999) at 2 (development corporations established under article 5190.6, Revised Civil Statutes, are not political subdivisions for purposes of the statute on sales of real property or the prevailing wage law). See Central Appraisal Dist. ofErath County v.Pecan Valley Facilities, Inc., 704 S.W.2d 86,89 (Tex. App.-Eastland 1985, writ ref. n.r.e.) (nonprofit corporation created to assistThe Honorable Jim Solis - Page 3 (JC-0338)

a local mental health mental retardation region is not agovernmental entity or agency for purpose of exemption from ad valorem tax); see also TEX.GOV’T CODEANN. $92253.001(l), .021(a) (Vernon 2000) (quasi-governmental authority with authority to make a public work contract is subject to statute requiring performance and payment bonds); Transamerica Ins. Co. v. Housing Authority ofCity of Victoria, 669 S.W.2d 818,822 (Tex. App.-Corpus Christi 1984, writ ref. n.r.e.) (housing authority is aquasi-governmental entity subject to statute oflimitations inperformance and payment bond statute). We conclude that a development corporation created under the Act is not apolitical subdivision nor any other “local governmental entity” subject to chapter 171ofthe Local Government Code. However, article 5190.6 provides that corporations organized under the article “shall have and exercise all ofthe rights, powers, privileges, authority, and functions given by the general laws ofthis state to nonprofit corporations incorporated under the Texas Non-Profit Corporation Act, as amended (Article 1396-1 .Ol et seq., Vernon’s Texas Civil Statutes),” not inconsistent with article 5190.6. TEX.REV. CIV. STAT.ANN. art. 5190.6, 8 23(a) (Vernon Supp. 2000). Corporations incorporated under the Texas Non-Profit Corporation Act have certain rights and privileges in connection with transactions between the corporation and its directors. Article 1396-2.25 provides that “[n]o loans shall be made by a corporation to its directors.” Id. art. 1396-2.25(A) (Vernon 1997). If a loan is made to a director, the directors who vote for making the loan and any officers participating in making the loan, “shall be jointly and severally liable to the corporation for the amount of such loan until repayment thereof.” Id. art. 1396-2.25(B). Thus, the board of the San Benito Economic Development Corporation may not approve a loan for a business owned by a member of the board. A nonprofit corporation may enter into a transaction in which one of its directors has a financial interest subject to conditions designed toprotect the interest ofthe corporation. See id. art. 1396-2.30. The Texas Non-Profit Corporation Act provides that acontract or transaction between a corporation and a director, or a corporation and another organization in which a director has a financial interest “is not void or voidable solely for that reason, solely because the director, officer, or member is present at or participates in the meeting of the board

. . .that authorizes the contract or transaction, or solely because the director’s, officer’s, or member’s votes are counted for that purpose,” if one of the following provisions is satisfied: (1) the material facts as to the relationship or interest and as to the contract or transaction are disclosed or areknown to the board of directors,

. . . and the board

. . .in good faith and with ordinary care authorizes the contract or transaction by the affirmative vote of amajority ofthe disinterested directors ormembers, even though the disinterested directors or members are less than aquorum; (2) the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the members entitled to vote on the contract or transaction, and theThe Honorable Jim Solis - Page 4 (JC-0338)

contract ortransaction is specifically approved in good faith and with ordinary care by vote of the disinterested members; or

it is (3) the contract or transaction is fair to the corporation authorized, approved, or ratified by the board of directors when

TEX.REV.CIV.STAT.ANN.art. 1396-2.30(A) (Vernon 1997). Interested directors may be counted in determining the presence of a quorum at ameeting of the board of directors that authorizes the contract or transaction. Id. art. 1396-2.30(B). Ifthe corporation has adopted bylaws limiting its power to enter into atransaction in which a director is interested, the corporation must comply with its bylaws. See id. art. 1396-2.09 (authority to adopt bylaws). In the absence of such bylaws or if such bylaws are less strict, the corporation must comply with the standards set out in the Texas Non-Profit Corporation Act. A development corporation’s exercise ofpowers is subject “at all times to the control ofthe governing body of the unit under whose auspices the corporation was created.” Id. art. 5190.6 5 2WW) (Vemon Supp. 2000). The governing body is required to “approve all programs and expenditures of the corporation and annually review any financial statements of the corporation.” Id. 521. The corporation may not issue bonds without the approval ofthe governing body. See id. 825. Thus, the governing body is in aposition to review the corporation’s decision to enter into a transaction in which aboard member is financially interested and to determine whether it complies with the provisions ofthe Texas Non-Profit Corporation Act orwith the corporation’s bylaws, ifthey impose a stricter rule for conflicts of interest. In summary, we conclude that the Texas Non-Profit Corporation Act prohibits the board of an economic development corporation from approving aloan to adirector ofthe corporation. See id. art. 1396-2.25 (Vernon 1997). The board isnot prohibited from entering into acontract or other transaction in which a member of the board is interested if it complies with the provisions of the Texas Non-Profit Corporation Act governing transactions between corporations and directors, see id. art. 1396-2.30, or, ifthe corporation’s bylaws impose astricter standard, with the latter standard. Inreaching this conclusion on the conflict ofinterest issue, we do not address other legal issues that may be raised by the proposed transaction, nor do we express an opinion on the validity of the transaction.The Honorable Jim Solis - Page 5 (JC-0338)

SUMMARY The board of an economic development corporation may not approve a loan to adirector ofthe corporation. An economic development corporation is not prohibited by law from entering into other transactions with amember of the board or with an entity in which aboard member is interested if it complies with the provisions of the Texas Non-Profit Corporation Act governing transactions between corporations and directors, or, in the event the corporation bylaws impose a stricter standard, with the bylaws. Yo ve truly,

# 4J-cJOtiN CORNYN Attorney General of Texas

ANDY TAYLOR First Assistant Attorney General CLARK KENT ERWIN Deputy Attorney General - General Counsel SUSAN D. GUSKY Chair, Opinion Committee Susan L. Garrison Assistant Attorney General - Opinion Committee