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**  oftwo er mare **banks** be in vfolation ef Articla 341-903, **V.C.S., or**  **the provi**  l **iona** ofArticle 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 

### ABfollows: **“We** request your opinion regarding the legality of certain pl8ne, aummarined below, which have baen proposed by 

### a national bank doing busincro in Tsur.

“$Tbebank (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 

### sbareholdarr of tha parent **brink, with**  tha intaraat inthe trust company batnp automatically 

### tranafarrod withthe 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@**  ofthe paront bank, asl utkorinad 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), of**  the capttal l

teak of two or 

### more hanka.

### loaorabla J. M. Fdhrer, Page 1 **(WW-159)**

**“Under an**  alternative plan thetrurt comprny would own t@e

### intire crpttal dock of each of eaveral ‘1303bcorpr~tioae’, 

### l mch of**w&k** would in tuin **purclmee and**  **own**at least thirtyaeven per cent (37*), or more, ofthe capital **stock**of a **bank.** 

### Vndrr a **second**alternative plan, aaveral ‘1303bcorpora-’ 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 ofthe ‘1303b corpwattaaa’ would ba ownad and

### held in trust by 

### one or more individuala amtruateea for the rhareholdrrr for the 

### parent bank. 8tock in eitbar btrte **or** 

### Xational banke coold be purclmmed and

### held under 8~y one of.thetruet 

### 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&k**  **ta 8** )ro)ortion whtch the aamber **of** 

### ahares of rtoak in tlu paroat bank 

### owned **by** 

### each **mcb darholdrr-on**  **tba date**  ofths 

### declarattaa oftha dMdm+-karr to the total 

### number of ahares ofcapital 

### 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 ofthe **“ 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 

### l kareholdetr

of tba parent bank La**the** above-mentioned ratio. “fn connection with thesa propoeed plane we would appreciate an&m to tbe following qusrtione: (1) Would the plan bywblch the truat **company** purchases and owns at 

### lead thirty--seven per cant (37%) of the capital stock oftwo **or** more banka be in vioIatton of**Article** 343-903, V.C.S., or the proviatonr ofArticle XVI, Sectiea i6, of the Constitution oftb: State of Tozaa, even thoughno officer **0.~ dtrcctor**  of the

### parent bank would be a member of the **Board of**  

### &rector8 ofthe banks **in** which capital stock ia purchased? (2) Wow<ha

### 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%) oftha -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 ofArticle XVI, Section 16, of the Constitution of the State of Texas, **even**thoughno offic,er or director of the parent bank**would** be a member ofthe Board of Directors of the banks inwhich **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 bythe trust 

### company have one or more identical officers or directors, would such id,entityof officers or directors constitute such dominance or control by the parent bank as to violate the provisions ofArticle 342-903, V.C.S., or Article XVI, Section 16, **of**the Constitution ofthe 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.

‘1 o~. **Such**body corporate &#I not be authoriaed t0 eIyjrge in business at more than one place which shall be,desiptnatedin its charter.” (Emphasis througm is supplied.) **A** report from s study by the Attorney General of posstble violations ofArticle XVI, Section 16. ofthe Constitution, andArticle 349-903, V.C.S., andtke 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 thenAttorney Goneral **and**the Btate Benking Board (of which he was Rmember), 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 ofthe several State banka involvedXenorabla 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 

### ofwhether t&s hypothetical 

### l ituaiimu 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** 

### ofwhether a bonkin# corporation 1s ydohq btuineaa at more than ene p&a*“.



### A determination ofwhether 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 ofbuainese 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 much matters l**o (6)**  **ate& dtatributtm**  **amay tka**  **dstekolders,** (b)the amount of dock 

### voted by pro~r, and by rrlrosrtk pro&a lra bald, ,and(c) outside buatnaaa and personal rolattenabipa hatwaaa ,thalknra**holdera** 

### The ownership of more than 50 par cent ofthe l toek

### would 

### l

dab $iah, aa a mat#r of.law, the power to influenaa. Whethar owaerahtp of &mathan 

### .Wper e&H of 

### tba stock 

### wouId eeteblieh thimparer **would depurd**  **011 th**  

### l**lfga** 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**  

### l aMtically classifier the banke l o

### held am aubsidiariea, and defines the company holding much

### ehartr ama bank holding company. When a bank holding company daairaa to 

### l aqutre lddtttoaal 

### corporate abarea, it must comply wtth tha Act 

### if it purcbaser more 

### tb8n 5per 

### ,cent of lch stock, this parcenhge baing considered 

### l igatfieant for parpoaea of

### tnf ’iuanca. (U. 8. Code 

### Coapoaat-1 &&ice and Admiaiatrativa Mewma84th Co~reae, **lad Seemion** **1956, at**  **mw a%**  Compare also a recent decision ofthe 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 ofthe 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 RUSXF3E85 FLOW 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**  **‘ 110s**  it made **for** the **purpose** of ckennelhg bueiheee intothe 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 &tmore then one,place. An *inaoton” of one bbnk’e innor smacr@r myt eenctorium throu@ **&tack purchaer**  **by amtlwr**  **bank** 4utomaticalIy **dia** rupts an 4rms lenqth relrtionbhip. Tht4 *ght ultiuaataIptortit in tnjury to tb, Utatr Daak.by the loss of its 

### brrgainltq power ia do&q w4a-r knL, cdl cdl4bs a vioh&n arfthe dodtttutim. If en cmmfshir d m f&w Oc *utaeB between tb&fnke before mnd**after** tlu aquteition of roU& ranala **4** siqnifiant inar*ree intke flow ofburtneu to tke **purcbsing** b4nk or its **8ffil.Wes,** the purebssing bmk io doing buain~ss at more than oaa plaeo through m 

### l ueretse 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 

### l toeke, **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~ , eeProvided thetthe 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** “‘notcompeting 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** holdir((r by 4 **1Nt3b**corporation of **stock** in twobanks under the facts submitted tid clearly be unauthoriaed **by** thie 

### l tatuta. In our opinion, with reference to **your** second alternative plan, tbe ~eonrto**rould** not permit the de&ice of 

### severs& 1202bcorporetionr. each owning u-rata dock.h rep8rrt.e banks competing with **each** other tnthe eame line of **bueiuu** to circumvent the pl4in intent of the statute. This legirlative **purpoee** 1~furtkor eaprawed bythe concludtng **provieo** ofArticle 1%3b, V.C.6. : ?rovidod that the power and authority **hereIn ctmferred**  

### l ball in **no way**  **affect 4ny**  **of** tha provieions of the anti-trust lawe ofthis mte. )I Courts will disregard **mdtare** of form **end laok**  to matters **of** substance **on** inquiring late alleged uahwful acts **of** affiliated, parent-subsidiary, tnterlocking **ownership** 

### or **otker** cloeely **associated** corporate 

### arrangements when the subject 

### ofiaqoiry 1,stha 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 

### l mbrece 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 ofArticle 1503, Revised Civil **Statutei of**  **Texu (1.921),** and 

### harakfore or hereafter **created having**  **in** who10or **in part**  

### any purpou **09 purporea**  **am** 

### l uthorisod in Ckapter 275, #aabta Bill No. 232 **of the**  General **and**Special Laws of the **Regu** Iar geseion 

### ofthe 40thLegislature, No euch corporation 

### l hall 

### 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 onthe business of another,

. . “’ This statute providing for certain regulations of such corporations further evidences the legislative intent expressed inArticle 1303b that is, that 1303b corporations shall not be used for combining asse,ts of corporations

“competing with **each**other tnthe 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 ofthe act or charter or derived therefrom by necessary impltcatioa tnview 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 doubtmust 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, 17S.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 

### corporationnI’, it should be mentioned that a recent opinion ofthe Attorney General dated April 1, 1957, to the Honorable Zollie Steakley, **Secretary** of State, GpinionNo. 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 therefore 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 U 1303b” 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 ofthe stock of ono **bankiq** corporation by **another** banking corporation may or 

### may not present a violation ofArticle XVI, Section 16, ofthe Constitution

### licmorahle 3. M. Folknor, 

### Page 8 (WW-159)

#I):tiw. of Texas, 

### and the statutes enacted 

### pursuant **thereto,**

depending uponthe factors ckti&ed ia the body ai tb dpinion. We express no opinion as towhather the hypotbctical situations 

### embraced in your 

### let+ would viola6 the Texas Anti-truat Laws. 

### V*r$ tiuly yowl,

AmOVED: 

### &‘JNIGN COMMITTEE: Houghton brownlee, Jr. Assistant

H. Grady Cbandlar, Chairman

. **d**

**. ‘** **Lt.**

### Richards

Ti-3iqwruncc Jaws 

### Jamea .N.tudlum

REVIEWED FOR THE ATTORNEY Q-AL 

### .BY: Geo. P. 

### blackburn

:
.‘,

.