OFFlCL OF THE ATTORNEV GENERAL. STATE OF TEXAS JOHN CORNYN

October 13, 1999

The Honorable Jeff Wentworth Chair, Nominations Committee Texas State Senate P.O. Box 12068 Austin, Texas 7871l-2068 Opinion No. JC-0126

Re: Whether astate license held by acorporation is automatically continued when the corporation converts to another type ofbusiness entity under article 5.17ofthe Texas Business Corporation Act (RQ-0074-JC)

Dear Senator Wentworth:

The Texas Business Corporation Act allows acorporation to change its organizational form and convert to another type ofbusiness entity. You askwhether astate license held by acorporation continues automatically with the new entity when the corporation converts to anew entity. You are concerned that different state agencies take different positions on whether a license automatically continues, and you tell us that “a uniform interpretation of the effect of a conversion from one business entity to another on alicense held bythe converting entity would behelpful tomany license holders.” Letter from Honorable Jeff Wentworth, Texas State Senate, to Honorable John Comyn, Texas Attorney General (June 10, 1999) (on tile with Opinion Committee).
The Business Corporation Act allows adomestic corporation to “adopt aplan ofconversion and convert to aforeign corporation or any other entity,” provided certain conditions aremet. TEX. Bus. CORP.

ACT ANN.art. 5.17 (Vernon Supp. 1999). The conversion provision was enacted by the Legislature in 1997 as part of a larger bill revising business organization laws. Supporters of the provision argued that it would create a more favorable business climate in the state by allowing corporations to convert easily from one type of organizational structure to another:

Texas law recognizes at least seven different forms of business orgamzations, in both domestic and foreign forms, each of which carries different benefits and drawbacks. However, once abusiness is organized in one form, it cannot change to another business form without dissolving in its current form andreforming in anew one. In
a healthy economy, businesses are dynamic, not static, and there should be flexibility to assume new forms. However, the expenses required to dissolve abusiness in one form and start up in another
now limit such conversions.The Honorable Jeff Wentworth - Page 2 (JC-0126)

To solve this problem, HB 1104would allow aprocess ofconversion and conversion merger. HOUSEF@SEARCHORG.,BILLANALYSIS, Tex. H.B. 1104,75thLeg., R.S. 5 (May 5,1997);seealso Tex. Att’y Gen. Op. No. JC-0015 (1999) at 4-6 (discussing legislative history of conversion provision).

In order for a corporation to convert to a new business form, it must comply with the requirements of the conversion statute. Among other things, the corporation must adopt aplan of conversion approved by its shareholders, draft articles of conversion, and deliver the articles of conversion to the Secretary of State. TEX.Bus. CORP. ACTANN.arts. 5.17, 5.18 (Vernon Supp. 1999). If the Secretary of State finds that the articles of conversion conform to law and that the corporation has complied with applicable conversion requirements, the Secretary of State issues a certificate of conversion and the conversion becomes effective. Id. arts. 5.18(C), 5.19.

The Act sets out the effects of a conversion. Generally speaking, upon conversion, the converting entity continues to exist and all ofthe assets and liabilities of the converting entity that exist at the time of conversion continue with the entity in its new form:

A. When aconversion of aconverting entity takes effect: (1) the converting entity shall continue to exist, without interruption, but in the organizational form of the converted entity rather than in its prior organizational form;
(2) all rights, title, and interests to all real estate and other property owned by the converting entity shall continue to be owned by the converted entity in its new organizational form without reversion orimpairment, without further actordeed, andwithout any transfer or assignment having occurred, but subject to any existing liens or other encumbrances thereon; (3) all liabilities and obligations of the converting entity shall continue tobe liabilities and obligations ofthe converted entity in its
neworganizational formwithout impairment ordiminution by reason of the conversion; (4) allrights ofcreditors orotherparties with respect toor against the prior interest holders or other owners of the converting entity in their capacities aa such in existence as of the effective time of the conversion will continue in existence as to those liabilities and obligations and may be pursued by such creditors and obligees aa if the conversion had not occurred,The Honorable Jeff Wentworth - Page 3 UC-0126)

(5) aproceeding pending by oragainst the converting entity orby
or against any ofthe converting entity’s interest holders or owners in their capacities as such may becontinued by oragainst the converted entity in its new organizational form and by or against the prior interest holders or owners, asthe case may be, without any need for substitution ofparties; (6) the shares and other evidences ofownership inthe converting entity that are tobeconverted into shares, evidences ofownership, or other securities in the converted entity as provided in the plan of conversion shall be so converted, and if the converting entity is a domestic corporation, the former holders of shares in the domestic corporation shall be entitled only to therights provided in the plan of conversion or to their rights under Article 5.11 of this Act; (7) if, after the effectiveness of the conversion, a shareholder, partner, member, or other owner of the converted entity would be liable under applicable law, in such capacity, for the debts or obligations of the converted entity, such shareholder, partner, member, or other owner ofthe converted entity shall be liable for the debts and obligations ofthe converting entity that existed before the conversion takes effect only to the extent that such shareholder, partner, member, orother owner: (a)agreed inwriting tobe liable for such debts or obligations, (b) was liable under applicable law, prior to the effectiveness of the conversion, for such debts or obligations, or(c) by becoming ashareholder, partner, member, orother owner of the converted entity, becomes liableunder applicable law forexisting debts and obligations of the converted entity; (8) ifthe converted entity is aforeign corporation or other entity, such converted entity shall be deemed to: (a) appoint the Secretary of State inthis state asits agent for service ofprocess in aproceeding to enforce any obligation or the rights of dissenting shareholders of the converting domestic corporation, and (b) agree that it will promptly pay the dissenting shareholders ofthe converting domestic corporation the amount, if any, to which they are entitled under Article 5.11 of this Act; and (9) if the converting corporation is a domestic corporation, the provisions ofArticles 5.11, 5.12, and 5.13 ofthis Act shall apply as if the converted entity were the survivor of a merger with the converting entity.The Honorable Jeff Wentworth - Page 4 (~~-0126)

TEX.BUS.CORP.

ACTANN.art. 5.20 (Vernon Supp. 1999). While the Act generally speaks ofthe continuation of the converting entity and its continued ownership of all “rights, title, and interests to allreal estate and otherproperty,“no specific mention ismade ofthe continuation ofstate licenses held by the converting entity.

As agenera) rule, the authority granted inanofficial license cannot betransferred orassigned without the consent of the licensing authority, unless a pertinent statute provides otherwise. John B. Barbour Trucking Co. Y.State, 758 S.W.2d 684,691 (Tex.App.-Austin 1988,writ denied). Some licensing statutes and regulations specifically allow transfer, and others forbid it. For example, a pawnshop license may be transferred or assigned with the approval of the Consumer Credit Commissioner, TEX. FIN.CODEANN.

5371.070 (Vernon 1998),but apharmacy license issued by the State Board ofPharmacy “isnot transferable or assignable,” TEX.REV.CIV.STAT. ANN.art. 4542a-1 5 30(d) (Vernon Supp. 1999).
However, inthe caseofaconversion ofabusiness entity undertheBusiness Corporation Act,
no transfers take place. Instead, the converted entity “continue[s] to exist, without interruption,” TEX.BUS.CORP.

ACTANN.art. 5.20(A)(l) (Vernon Supp. 1999),and “all rights, title, and interests to all real estate and other property owned by the converting entity” continue to be owned by the converted entity in its,neworganizational form “without further actordeed, andwithout any transfer
or assignment having occurred,” id. art. 5.20(A)(2). All assets and liabilities, allrights of creditors, all pending causes of action, and all shares and evidences ofownership, all stay with the converted entity in itsnew form. Id. art. 5.20(A)(l)-(9). These automatic continuations areconsistent with the purpose of the conversion provision: to facilitate the transition from one type ofbusiness form to another.

In our view, the continuation of the converting entity encompasses the continuation of state licences held by it. The essential feature ofthe conversion statute isthat the converting corporation continues to exist, uninterrupted, asit assumes its newbusiness form. As wehave said, no transfers takeplace when there is aconversion. Instead, everything thatthe corporation has simply stays with it. Although state licenses arenot specifically mentioned among the those things that automatically make the transition, we think that the statute asawhole, viewed in light ofitspurpose, contemplates that astate license doesnot dieupon acorporation’s conversion, butcontinues with it. Accordingly,
we conclude that, as a general rule, when acorporation converts to another type ofbusiness entity pursuant to article 5.17ofthe Business Corporation Act, alicense heldbythe converting corporation continues to be held by the converted entity in its new form.
However, asyour question implies, a specific licensing statute orregulation might conflict with this general rule by prohibiting the continuation of a license, by imposing conditions or requirements on its continuation, or by restricting the issuance of a license to certain types of business entities. For example, the Alcoholic Beverage Code allows conversion of a business holding apermit or license only ifthe ownership ofthe newly created business entity is identical to the ownership of the former business entity. See TEX.ALCO. BEV.CODE

ANN.@ 11.12, 61.14 (Vernon Supp. 1999). It also requires aconverting license holder to file anotice ofthe conversionThe Honorable Jeff Wentwortb - Page 5 (X-0126)

and pay a $100 fee for each licensed premises affected by the conversion. Id. And the Consumer Credit Commissioner requires apawnshop licensee to tile an application to alter its organizational form of business. See 7 TEX.ADMIN. CODE$ 85.2 (1999). Similarly, the Railroad Commission requires a licensed gas dealer to apply for a license when converting to anew business form. See 16TEX.ADMIN.

CODE§§ 9.16, 13.67 (1999).

Such conditions and restrictions are normally part of a licensing entity’s authority, and the conversion statute does not take away that authority. A license is generally aprivilege, and once a license or permit has been granted, “the holder may be subject to certain requirements in order to keep it.” Exparte Mata, 925 S.W.2d 292, 292 (Tex. App.Corpus Christi 1996, no pet.). The requirements “vary with the nature ofthe activity and the goals ofthe regulating government.” Id. at 294. Texas has a diverse array of licensing entities, and each might have particular reasons for imposing conditions orrequirements on aconverting license holder. As wehave said, the particular requirements of a licensing statute or regulation might conflict with the general provisions in the Business Corporation Act that the converting entity continues to exist in its new form with all that it had in its previous form. Normally, when a general statute conflicts with amore specific statute, the statutes should be construed to give effect toboth, ifpossible. TEX. Gov’TCODEANN.5311.026(a) (Vernon 1998). However, ifthe conflict between the general provision and the specific provision is irreconcilable, the specific provision prevails as an exception to the general provision, unless the general provision isthe later enactment and the manifest intent is that the general provision prevail. Id. 5 311.026(b).

We find nothing inthe conversion provision oritslegislative history that manifests an intent that it prevail over more specific, previously enacted licensing provisions. In fact, the statute may be read to express an intent to yield to laws with which it is inconsistent:

A domestic corporation may adopt aplan ofconversion and convert to a foreign corporation or any other entity if. the conversion (a) is permitted by, or not inconsistent with, the laws of the state or country in which the converted entity is to be incorporated, formed,
ororganized, and(b) the incorporation, formation, ororganization of the converted entity is effected in compliance with such laws

. TEX.Bus. CORP.ACTANN.art. 5.17(A) (Vernon Supp. 1999). Since the legislature requires a conversion to be consistent with and in compliance with other laws, we doubt that the legislature intended it to prevail over more specific laws. Thus, if a state licensing law or regulation imposes additional requirements or restrictions on a converting entity, the entity must comply with those requirements or restrictions.

Whether a specific licensing statute or regulation conflicts with the general conversion provisions of the Business Corporation Act, and whether the Act or a conflicting statute or rule controls in such event, depends upon the particular statute orregulation atissue. Consequently, weThe Honorable Jeff Wentworth - Page 6 (~~-0126)

areunable to say that all state agencies must treat all state licenses the same when aconversion takes place. It is within the discretion ofthe legislature to implement auniform treatment of licenses by all state agencies upon the conversion of acorporation holding a license. In the absence of such a law, we conclude that while the general rule isthat licenses convert automatically, this rule may be subject to the specific statutory requirements or regulations ofparticular licensing entities.

SUMMARY

When a corporation converts to another type of business entity in accordance with the Texas Business Corporation Act, aa a general rule a state license held by the converting corporation continues to be held by the new business entity. This rule may be subject to the particular statutory requirements or regulations of the specific state entity that issued the license.

JOHN CORNYN Attorney General of Texas

ANDY TAYLOR First Assistant Attorney General

CLARK RENT ERVIN Deputy Attorney General - General Counsel

ELIZABETH ROBINSON Chair, Opinion Committee

Barbara Griffin Assistant Attorney General - Opinion Committee