Ron. Martin Dies, Jr.

Secretary of State State Capitol Austin, Texas 78711 Opinion No.M-840
Re: Whether Article 1434a, Vernon's Civil Statutes, providing for the creation ofwater supply corporations requires such corporations formed pursuant toArticle 1434a to operate as non-profit Dear Mr. Dies: corporations.
You have requested our opinion as to the proper construction of the statute relating to the organization of water supply corporations pursuant toArticle 1434a, Vernon's Civil Statutes, and the operation of said water supply corporations asnon-profit corporations. Your questions are as follows: "(1) Does Article 1434a, Vernon's Civil Statutes, providing for the creation ofwater supply corporations, require such corporations formed pursuant toArticle 1434a to operate as non-profit corporations? "(2) If the answer to question number one isyes, must theArticles of Incorporation set forth the statement required by Article 1396-3.02A (211" Article 1434a was passed in 1933 (Acts 43rd Leg., 1st C.S., 1933, ch..76,p. 2021, the caption of which Act reads:

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... to authorize the issuance of stock on which shallbe paid no dividends, and to provide for the distribution of the profits of such corporation to towns, cities and other political subdivisions of the State aswell asprivate corporations and individuals who shall be customers of such corporation in thepurchase of water, said dividends tobe issued in direct proportion to the amount of business transacted by such Contractees with said corporation;
..." (Emphasis added.)

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However, Section 1of theAct states:

"Onand after the passage of thisAct, three ormore persons who are citizens of the State of Texas, may form a corporation for the purpose of furnishing awater supply or sewer service, orboth, to towns, cities, private corporations, individuals, andmilitary camps andbases, andmay provide in the charter of such corporation that nodividends shall ever bepaid upon the stock and that allprofits arising from the operation of such business shall be annually paid out to cities, towns, corporations, and other persons who have during the past year transacted business with such corporation, indirect proportion to the amount of business so transacted, provided thatno such dividends shall ever be paid while any indebtedness of the corporation remains unpaid and, provided also, that theDirectors of such corporation may allocate to a sinking fund such amount of the annual profits as they deem necessary formaintenance, upkeep, operation, and replacements." (Emphasis added.)
We have concluded that there is no variance between the "shall" language in the caption of theAct and the "may" language in Section 1of theAct. In Southwestern Bell Telephone Co. v. Houston Independent School District, 397 S.W.2d 419 (Tex.Sup. 1966), t'>eCourt, atpages 421- 422, stated:

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...thepurpose stated in the body of an actmust conform to the notice-sivins purpose stated in the caption, and the courts have given controlling effect to thepurpose stated in the caption.
...II (Emphasisadded) Our opinion is that the "may" language of Section 1, read in light of the "shall" language of the caption, ismandatory rather thanmerely permissive. Corporations are authorized

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Hon. Martin Dies, Jr., page 3 (M-840)

to do only that permitted by statute, and interpreted in that light, "may"means "shall" when used in that context.
In 1941, the Secretary of State requested the opinion of theAttorney General as towhether a corporation formed pursuant toArticle 1434a could amend its charter so as to include sewage service on anon-profit basis. In that opinion is said:

"The typeof corporation contemplated under theprovisions ofArticle 1434a is in the nature of aquasi-public corporation with thepower of eminent domain and operating on anon-profit basis.

..." (Emphasis added) (Atty.Gen. Opin. O-3433 (1941)). The opinion was rendered in 1941 and in the thirty years since, the Legislature has met in fifteen regular sessions. In 1959 and in 1961, the Legislature amended Article 1434a, but neither of these amendments repeal or raise any question as to the correctness of this holding of the Attorney General.
In Burroughs v. Lyles, 142 Tex. 704, 181 S.W.2d 570 (1944), the Supreme Court had before itan election statute, some of the provisions of ,whichwere inquestion. The provisions of the statute had been construed in anAttorney General's Opinion. In upholding theAttorney General's interpretation of the statute, the court, atpage 573, said:

"This long-continued administrative construction isentitled to great weight, especially inview of the fact that the statute was amended as late as 1943, and the Legislature, -whichispresumed to have been aware of the interpretation, made no changes in the language thatwould indicate a contrary intent."
In accord, seeHumble Oil &Refining Co. v. Calvert, 414 S.W.2d 172 (Sup.Ct. 1967). Furthermore, it has long been the policy of this office to follow its earlier opinions on the same subject where not clearly erroneous. Attorney General Opinion No. O-1659 (1939). It appears appropriate to do sohere.

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Should the "may" language of Section 1,Article 1434a, be considered as ambiguous because of thepermissive versus mandatory interpretations ,wemay resort to the rule of agency construction. The Supreme Court in Calvert v. Kadane, 427 S.W.Zd 605 (Tex.Sup. 1968) stated the rule governing agency construction of a statute atpage 608:

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... if, on the other hand, themeaning of the provision be doubtful or ambiguous, the construction placed upon a statutory provision by the agency chargedwith its administration is entitled toweight..."
Inyour letter to our office, you state: "This office has continuously interpreted the provisions ofArticle 1434a as requiring corporations formed pursuant to said Act, tobe non-profit corporations. I can find no record of this office ever having issued a Certificate of Incorporation for a 1434a water supply corporation under any act other than the Non-Profit Corporation Act, since that Act became effective in 1959." Therefore, based onyourpast uniform departmental construction ofArticle 1434a, and the established rule of statutory construction of Calvert, supra, we hold that the use of "may" ismandatory rather than permissive.

In Board of Insurance Commissioner v. Great Southern Life Insurance Co., 150 Tex. 250, 239 S.W.2d 803 (1951), is presented the primary guide tobe followed in the construction of any statute. The court, atpage 808, said:

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...the cardinal rule in statutory interpretation and construction is to seek out the legislative intent from a general view of the enactment as awhole, and, once the intent has been ascertained, to construe the statute so as to give effect to thepurpose of the legislature..."

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Inviewing Article 1434a as awhole toglean the Legislative intent, several provisions indicate that corporations formed pursuant to this Article were tobe operated on anonprofit basis. Section 9of Article 1434a reads: "Theprovisions of the Texas Securities Act shall not apply to any note, bond, or other evidence of indebtedness issued by any corporation doing business in this State pursuant to thisAct, to the United States ofAmerica or any agency or instrumentality thereof, or to anymortgage, deed of trust or other instrument executed to

The language of Section 9makes clear that none of the provisions of the Texas Securities Act, Article 581-1, Vernon's Civil Statutes, et seq., apply to 3 corporation formed pursuant toArticle 1434a. There isno distinction in the application of the Securities Act exemption in Section 9, Article 1434a,between profit and non-profit corporations formed pursuant to the water supply corporation law. In addition, there is no merit in the argument thatArticle 581-6, Subdivision D, exempts water supply corporations from the Securities Act the same as Section 9 ofArticle 1434a. Article 581-6, Subdivision D states:

"Except as hereinafter in thisAct expressly provided, the provisions of thisAct shall not apply to any of the following securities when offered for sale, or sold, or dealt in by a registered dealer or salesman of a registered dealer: I,

... "D
. Any security issued or guaranteed either as to principal, interest, or dividend, by a

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corporation owning or operating a railroad or any other public service utility; provided, that such corporation is subject to regulation or supervision either as to its rates and charges or as to the issue of its own securities by theRailroad Commission of Texas, orby apublic commission, agency, board or officers of the Government of the United States, or of any territory or insularpossession thereof, or of any state or municipal corporation, or of the District of Columbia, or of the Dominion of Canada, or any province thereof;
...'I Section 6of the Securities Act exempts the securities of the corporations enumerated therein from the registration provisions of theAct: however, it does not exempt the corporations it applies to from the remaining provisions of the Securities Act, as does Section 9ofArticle 1434a. Indeed, Article 581-23, Subdivision A states:

"Anything in thisAct to the contrary notwithstanding.
"A. If it appears to the Commissioner at any time that the sale or proposed sale or method of sale of any securities, whethe~r exempt ornot, except the sale of secur: as defined in subsection A of Section 6, Eies would not be in compliance with thisAct or would tend towork a fraud on anypurchaser thereof...theCommissioner may,...issue a written cease and desist order, prohibiting or suspending the sale of such securities II

... (Emphasis added.) Thus, the Legislature, through the exclusion granted in 1434a towater supply corporations, did not contemplate that profit corporations would be formed which were not subject toArticle 581-23, subdivision A, andArticle 581-33, which provide for fair dealings in securities transactions.
InVernon's Civil Statutes, Title 32,Corporations, Chapter 10 is entitled "Public Utilities". The Public Utilities chapter includes telegraph, telephone and telegraph,

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water, gas and light and sewerage companies. Of all of the public utilities listed in Chapter 10, onlyArticle 1434a, providing forwater supply corporations, makes specific provisions for the formation and operation of the corporation. The formation of thewater supply corporation is as anonprofit corporation, aprovision not applicable to any of the other public utilities. In addition to thenon-profit status granted towater supply corporations inArticle 1434a, the statute also specifies the banks inwhich funds of the corporation are tobe deposited, the investment of funds, and themaximum salaries payable to the officers of the corporation.

In view of the foregoing authorities and the long continued and consistent interpretation, enforcement and administration ofArticle 1434a, we conclude thatArticle 1434a requires corporations formed pursuant to it to operate as non-profit corporations. The answer toyour first question isyes.
Article 1434a, Section 3, "Application forCharter to Secretary of State: Board of Directors", states:

"(a) Thepersons applying for acharter for such corporation shall make application to the Secretary of State in themanner now provided by law for private corporations and in thename designated for such corporations shall use the words 'Water Supply Corporation' II

... However, Section lO.O4G, Article 1396,V.C.S., NonProfit Corporation Act, states:

"G. This Act shall not apply to those corporations excepted under Article 2.01 B, subsections (31, (41,and (5)of thisAct; provided however, that if any of said excepted domestic corporations were heretofore or are hereafter organized not for profit under special statutes which contain noprovisions in regard to some of thematters provided for in thisAct, or

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Ron. Martin Dies, Jr., Page 8 (M-840)

if such special statutes specifically applicable provide that the general laws for incorporation shall supplement the provisions of such statutes, then the provisions of thisAct shall apply to the extent that they are not inconsistent with the provisions of such special statutes." Since Article 1434a corporations are organized not for profit, under a special statute which does not provide for the contents of theArticles of Incorporation, then theprovisions of theNon-Profit Corporation Act apply and Section 3.02A states what theArticles of Incorporation Act shall include. Section 3.02A(2) provides that the articlesmust have "
...astatement that the corporation is anon-profit corporation..." Therefore, the answer toyour second question isyes. SUM **M**AIR Y ------_ A water supply corporation organized pursuant toArticle 1434a,V.C.S., is required to operate as anon-profit corporation and such corporation must affirmatively show in itsArticles of Incorporation the statement required byArticle 1396-3.0214(2), V.C.S. Yours very truly,
CRAWFORD C.MARTIN Attorney General of Texas

NOLA WRITE FirstAssistant Prepared byA. J. Gallerano Assistant Attorney General

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APPROVED OPINION COMMITTEE
Kerns Taylor, Chairman W. E.Allen, Co-Chairman Wardlow Lane Harold Kennedy Pat Bailey Gordon Cass
MEADE F. GRIFFIN Staff Legal Assistant
ALFRED WALKER Executive Assistant

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