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 of water supply 

corporations requires 

such corporations formed 

pursuant to Article 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 to Article 1434a, Vernon's Civil Statutes, and the operation of said water supply corporations as non-profit corporations. Your questions are as follows: 

"(1) Does Article 1434a, Vernon's Civil Statutes, 

providing for the creation of water supply 

corporations, require such corporations 

formed pursuant to Article 1434a to operate as non-profit corporations? 

"(2) If the answer to question number one is yes, 

must the Articles 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: 

II . . . to authorize the issuance of stock on 

which shall be 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 as well as private corporations and 

individuals who shall be customers of such 

corporation in the purchase of water, said 

dividends to be issued in direct proportion 

to the amount of business transacted by such 

Contractees with said corporation; . .." 

(Emphasis added.) 

-4070- 
Hon. Martin Dies, Jr., page 2 -(M-840) 

However, Section 1 of the Act states: 

"On and after the passage of this Act, 

three or more persons who are citizens 

of the State of Texas, may form a corporation for the purpose of furnishing 

a water supply or sewer service, or both, 

to towns, cities, private corporations, 

individuals, and military camps and bases, 

and may provide in the charter of such 

corporation that no dividends shall ever 

be paid upon the stock and that all profits 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, 

in direct proportion to the amount of 

business so transacted, provided that no 

such dividends shall ever be paid while 

any indebtedness of the corporation remains unpaid and, provided also, that 

the Directors of such corporation may 

allocate to a sinking fund such amount 

of the annual profits as they deem necessary for maintenance, upkeep, operation, 

and replacements." (Emphasis added.) 

We have concluded that there is no variance between 

the "shall" language in the caption of the Act and the 

"may" language in Section 1 of the Act. In Southwestern 

Bell Telephone Co. v. Houston Independent School District, 

397 S.W.2d 419 (Tex.Sup. 1966), t'>e Court, at pages 421- 

422, stated: 

II . ..the purpose stated in the body of an 

act must conform to the notice-sivins 

purpose stated in the caption, and the 

courts have given controlling effect to 

the purpose stated in the caption. . ..II 

(Emphasis added) 

Our opinion is that the "may" language of Section 1, read in 

light of the "shall" language of the caption, is mandatory 

rather than merely permissive. Corporations are authorized 

-4071- 
. 

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 the Attorney General as to whether a corporation formed 

pursuant to Article 1434a could amend its charter so as to 

include sewage service on a non-profit basis. In that 

opinion is said: 

"The type of corporation contemplated under 

the provisions of Article 1434a is in the 

nature of a quasi-public corporation with 

the power of eminent domain and operating 

on a non-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 it an election statute, 

some of the provisions of ,which were in question. The provisions of the statute had been construed in an Attorney 

General's Opinion. In upholding the Attorney General's 

interpretation of the statute, the court, at page 573, said: 

"This long-continued administrative construction is entitled to great weight, especially 

in view of the fact that the statute was 

amended as late as 1943, and the Legislature, 

-which is presumed to have been aware of the 

interpretation, made no changes in the language that would indicate a contrary intent." 

In accord, see Humble 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 so here. 

-4072- 
Hon. Martin Dies, Jr., page 4 (M-840) 

Should the "may" language of Section 1, Article 1434a, 

be considered as ambiguous because of the permissive versus 

mandatory interpretations , we may 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 at page 608: 

11 . . . if, on the other hand, the meaning of the 

provision be doubtful or ambiguous, the construction placed upon a statutory provision 

by the agency charged with its administration 

is entitled to weight..." 

In your letter to our office, you state: 

"This office has continuously interpreted the 

provisions of Article 1434a as requiring corporations formed pursuant to said Act, to be 

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 on your past uniform departmental construction of Article 1434a, and the established rule of 

statutory construction of Calvert, supra, we hold that the 

use of "may" is mandatory 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 to be followed in the construction of any statute. The court, at page 808, said: 

9, . . . the cardinal rule in statutory interpretation and construction is to seek out the 

legislative intent from a general view of 

the enactment as a whole, and, once the intent has been ascertained, to construe the 

statute so as to give effect to the purpose 

of the legislature..." 

-4073- 
Hon. Martin Dies, Jr., page 5 (M-840) 

In viewing Article 1434a as a whole to glean the Legislative intent, several provisions indicate that corporations 

formed pursuant to this Article were to be operated on a nonprofit basis. 

Section 9 of Article 1434a reads: 

"The provisions 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 this Act, to the United 

States of America or any agency or instrumentality thereof, or to any mortgage, deed 

of trust or other instrument executed to 

The language of Section 9 makes 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 to Article 1434a. There is no 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 that Article 581-6, 

Subdivision D, exempts water supply corporations from the 

Securities Act the same as Section 9 of Article 1434a. Article 581-6, Subdivision D states: 

"Except as hereinafter in this Act expressly 

provided, the provisions of this Act 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 

-4074- 
Hon. Martin Dies, Jr., page 6 (M-840) 

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 the Railroad Commission 

of Texas, or by a public commission, agency, 

board or officers of the Government of the 

United States, or of any territory or insular possession 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 6 of the Securities Act exempts the securities of the corporations enumerated therein from the registration provisions of the Act: however, it does not exempt 

the corporations it applies to from the remaining provisions 

of the Securities Act, as does Section 9 of Article 1434a. 

Indeed, Article 581-23, Subdivision A states: 

"Anything in this Act 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 or not, except the sale of secur: 

as defined in subsection A of Section 6, 

Eies 

would not be in compliance with this Act or 

would tend to work a fraud on any purchaser 

thereof.. .the Commissioner 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 to water supply corporations, did not contemplate that 

profit corporations would be formed which were not subject 

to Article 581-23, subdivision A, and Article 581-33, which 

provide for fair dealings in securities transactions. 

In Vernon's Civil Statutes, Title 32, Corporations, 

Chapter 10 is entitled "Public Utilities". The Public Utilities chapter includes telegraph, telephone and telegraph, 

-4075- 
Hon. Martin Dies, Jr., page 7 (M-840) 

water, gas and light and sewerage companies. Of all of the 

public utilities listed in Chapter 10, only Article 1434a, 

providing for water supply corporations, makes specific 

provisions for the formation and operation of the corporation. 

The formation of the water supply corporation is as a nonprofit corporation, a provision not applicable to any of the 

other public utilities. In addition to the non-profit status granted to water supply corporations in Article 1434a, 

the statute also specifies the banks in which funds of the 

corporation are to be deposited, the investment of funds, 

and the maximum salaries payable to the officers of the corporation. 

In view of the foregoing authorities and the long continued and consistent interpretation, enforcement and administration of Article 1434a, we conclude that Article 1434a 

requires corporations formed pursuant to it to operate as 

non-profit corporations. The answer to your first question 

is yes. 

Article 1434a, Section 3, "Application for Charter to 

Secretary of State: Board of Directors", states: 

"(a) The persons applying for a charter for 

such corporation shall make application to 

the Secretary of State in the manner now 

provided by law for private corporations and 

in the name 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 this Act; 

provided however, that if any of said excepted domestic corporations were heretofore or are hereafter organized not for 

profit under special statutes which contain no provisions in regard to some of 

the matters provided for in this Act, or 

-4076- 
. . . 

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 this Act 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 the Articles of Incorporation, then the provisions of the Non-Profit Corporation Act apply and Section 

3.02A states what the Articles of Incorporation Act shall 

include. Section 3.02A(2) provides that the articles must 

have " . ..a statement that the corporation is a non-profit 

corporation..." Therefore, the answer to your second question is yes. 

S U M M AIR Y 

------_ 

A water supply corporation organized pursuant to Article 1434a, V.C.S., is required 

to operate as a non-profit corporation and 

such corporation must affirmatively show 

in its Articles of Incorporation the statement required by Article 1396-3.0214(2), 

V.C.S. 

Yours very truly, 

CRAWFORD C. MARTIN 

Attorney General of Texas 

NOLA WRITE 

First Assistant 

Prepared by A. J. Gallerano 

Assistant Attorney General 

-4077- 
Hon. Martin Dies, Jr:, page 9 (M-840) 

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 

-4078.