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 provil iona 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 sbareholdarr 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 s l 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 tea of k two or more hanka. 
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’, 

l mc h of w&k would in tuin purclmee and own at least thirtyaeven 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 corpwattaaa’ 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&k ta 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 

l k a r eho lof detba tr 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 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. 

‘1 o ~ . 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 violations 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 member), 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 daduckd to wrtve at the figure of 37.03 per cent. 

,We need not here consider the queation of whether 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 of whether a bonkin# corporation 1s ydohq btuineaa at more 

than ene p&a*“. 

A determination of whether oae bankin@ corporation is doiag buatMO* at more than one plum through ite relationahip to other ban- corporationa 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 h matters l o (6) ate& dtatributtm amay tka 

dstekolders, (b) the amount of dock voted by pro~r, and by rrlrosr tk pro&a 

l ra bald, ,and (c) outside buatnaaa and personal rolattenabipa hatwaaa ,tha l knraholdera 

The ownership of more than 50 par cent of the l toek would l da 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 011 th l lfgamet& 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 am a bank holding company. When a bank holding 

company daairaa to l aqutre l ddtttoaal corporate abarea, it must comply wtth 

tha Act if it purcbaser more tb8n 5 per ,cent of l ch stock, this parcenhge 

baing considered l igatfieant for parpoaea of tnf’iuanca. (U. 8. Code Coapoaat-1 &&ice and Admiaiatrativa Mewma 84th 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 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 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@ &tack purchaer by amtlwr bank 4utomaticalIy diarupts 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 mnd after 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 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~ , 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 antitrurt 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 holdir((r by 4 1Nt3b corporation of stock in two banks 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& 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. : ?rovidod that the power and authority hereIn ctmferred l ball 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 uahwful 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 l mbrece corporations beretofore 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 l uthorisod in Ckapter 275, 

#aabta Bill No. 232 of the General and Special Laws of the ReguIar geseion of the 40th Legislature, No euch corporation l hall 

act l e 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 impltcatioa tn view of the object of the grant. Another cardinal rule applying particularly 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 corporationn 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, Gpinion 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 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 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) 

#I):tiw. 

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, 

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 

: .‘, 

.