HE L% IRNEY GENEWAL EXAS



### May 29, 1969

Rep. Jack Blanton OpinionNo. M-407 House of Representa.tives State Capitol Re: Whether House Bill 700, Austin, Texas 61st Legislature,can legallyprohibit a corporation from engaging in the business of farming, livestock feeding Dear Mr. Blanton: or ranching.
Inyour recent request for an opinion from this office you stated:

"I am enclosing a copy of House Bill 700 of which I am chairman of the sub-committee. The point has been raised that it may be illegal for us to prohibit a corporation from farming in the State of Texas. We requestyour opinion on thismatter."
House Bill 700 is an act to amend Article 2.01, Subsection B of the Texas Business CorporationAct and to add provisions to that Article. Pertinentprovisions of House Bill 700 read as follows:

"BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: Section 1. BUSINESSES IN WHICH CORPORATIONSMAY NOT ENGAGE. No corporation, foreign or domestic, except as provided in this Act, may engage in the business of farming, livestock feeding, or ranching.
Sec. 2. DISPOSING OF OPERATIONSAND LAND. (a) All corporationsexcept those falling under theprovisions of Section 4

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of thisAct which are engaged in farming, livestock feeding, or ranching operations at the effective date of this Act shall dispose of all such interestsand withdraw from those operationswithin twoyears after the effective date of this Act. (b) All corporationsexcept those fallingunder the provisions of Section 4 of this Act which are engaged in farming, livestock feeding, or ranching operations which own or hold real estate which was acquired prior to the effective date of this Act and which is used or usable for farming, livestock feeding, or ranching purposes,but which Is not reasonablynecessary to the conduct of the other business of the corporation, shall dispose of the real estatewithin 10 years after the effective date of this Act. A corporation holding real estate subject to the provisions of this sectionmay use the land for farming, livestock feeding, or ranching purposes until the date by which it must be sold. (c) The ownership limitationprovided in this section shall be deemed a covenant runningwith the title to the land against any grantee, successor, or assignee of a corporationwhich is also a corporation.
Sec. 3. DISPOSINGOF AFTER-ACQYIRED LAND. (a) A corporationwhich after the effective date of this Act, acquires real estateused or usable for farming, livestock feeding,dairylng or ranchingpurposes by judicialprocess, operation of law, or otherwise, shall dispose of all such real estate, except thatwhich is reasonablynecessary in the conduct of its other business,within 10 years after the real estate was acquired.

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(b) The lo-year limitationprovided by this section shall be deemed a covenant running with the title to the land against any grantee, successor, or assignee of a corporationwhich is also a corporation.
Sec. 4. CORPORATIONSWHICH MAY ENGAGE IN FARMING. LIVESTOCK FEEDING, AND RANCHING OPERATIONS. (a) Farming, livestock feeding, or ranching operationsmay be conductedby a corporation in which (1) all shareholdersare actively engaged in themanagement or operation of the corporationand at least 80 percent of the gross income of the corporation comes from farming, livestock feeding, or ranching operations:and (2) there are no shareholdersother than trusts or estateswho are not natural persons. (b) The Secretary of State of the State of Texas shall accept articles of incorporatlonwith a purpose clause or clauses authorizing it to conduct farming, livestock feeding, or ranching operations,provided such articles of incorporation conta~inthe limitations set forth in Subsection (a) of this section.
Sec. 5. VIOLATIONS AND PENALTIES. Violations of the provisions of this Act are subject to the provisions of Articles 4.06 and 4.07, Texas MiscellaneousCorporation Laws Act (Articles 1302-4.06and l3O2- 4.07,Vernon's Texas Civil Statutes).

sec. 6. Subsection B, Article 2.01, TexasBusiness CorporationAct, is amended to read as follows:

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### (M-407)

"B. No Corporationmay adopt this Act or be orga~nized

under this Act or obtain authority to transactbusiness in this State under thisAct: "(1) If any one or more of itspurposes for the transactionof business in this State is expresslyprohibitedby any law of this State. "(2) If any one or more of its purposes for the transactionof business in this State is to engage in any activity which cannot lawfullybe engaged in without first obtaininga licenseunder the authority of the laws of this State to engage in such activity and such a license cannot lawfullybe granted to a corporation. 

### "(3)

. . . .n Determinationof the legality of House Bill 700 necessari requires an examination of the Texas lawpertaining to regulation of statutoryentities,vested property rights and constitutionalprohibitionsagainst impairment of contractual obligations.
Article 1, Section 

### 17,Constitutionof Texas, expressly provides that "allprivilegesand franchisesgranted by the Legislature,or created under its authority shall be subject to the control thereof." Article 9.12, Texas Business Corporation Act, which superseded old Article 

### 1318,Vernon's Civil Statutes, states: "The legislature shall at all times have power -- to prescribe such regulations,provisions and limitationsas it may deem advisable,which regulations,provislons and limitations shall be binding u on any a~nd all corporations subject -5 to the prov sions ofms Act, and the ,Legislature shall have power to amend, re eal or modify this Act." (Emphasisadded+ lY

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### 5 (M-401)

It is, therefore, clear that in Texas the legislature has reserved the power to alter, suspend or repeal all laws, providing for organizationof corporations,and that such reservationbecomes a part of the charter of the corporation. 

### 18Am.Jur.2d 

### 631-632,Corporations,Sec. 92, wherein it is said: 11

. . .Corporationsare the creations of the state, endowed with such faculties as the state bestows and subject to such conditionsas the state imposes; and if the power to modify their cha~rters is reserved, that reservation is a part of the contract, and no change within the legitimateexercise of the power, whether directly or by an independent general regulation, Cain be said to impair its obligations. "Generalconstitutionalor statutoryprovisions in force at the time of incorporationreserving power in the legislature to amend, annul, or repeal any such corporation,are a part of the corporate charter, so much so, in fact, that it has been held that the right to repeal the charter will not be affected by the repeal of the general law

. . .'
In accord, Jefferson County Title Guaranty Co. v. Tarver, 119 Tex. 410. 29 S.W.2d 

### 3lb,318 (1930).
Texas authorities likewise recognize that a corporation is a creature of the state and it is therefore subject to its dominion and control. Zerr v. Lawlor, 300 S.W. 112 (;_'ex.Civ. App. 1927, no writ): McCutcheonv. Wazencraft, 230 S.W. 733, rev. on other grounds 255 S.W. 71 eters-Pierce Oil Co. v. Texas, 

### 177U.S.28 (1900).
House Bill 700, if enacted,would not terminate the existence of corporationsnow engaging in the sole business of farming and ranching, but would require such corporations to dispose of their interests in such activitieswithin twoyears from the effective date of the Act. All real estate acquired prior to such date, used or usable for farming, livestock feeding, or ranching, not reasonablynecessary to the conduct of the otherbusiness of the corporation, is required to be disposed of within tenyears after the effective date of the



### 2015-Rep. Jack Blanton, .page

### 6 (M-

### 407)

Act. Article 2.02 of the TexasBusiness CorporationAct, and Article 1302-4.01,Vernon's Civil Statutes, Miscellaneous Corporation LawsAct, require that land owned by a corporation must be held as a necessary part of thebusiness of the corporation. Consequently,we must determinewhether such provisions would violate the provision found inArticle 1, Section 

### 16 of the Constitutionof Texas, prohibiting retroactive laws or laws impairing the obligations of contracts. In addition, the question of violation of due process and equal protection of the laws, in contraventionof the FourteenthAmendment of the U. S. Constitution, is raised for consideration.
It should be observed in this connection that unless "vestedrights" are actually destroyed or impaired,an act is not invalideven when retroactive in its operation. Paschal v. Perez, 

### 7 Tex. 

### 348 (1851);City of Ft. Worth v. know, 284 S W 274 (Tex.Civ.App.192b, error ref.) Th -ion thui presents itself, does House Bill 700 impa:r any property rights which may be deemed "vested"so that it amounts to an arbitrary exercise of power in denial of the equal protection of the laws, constitutinga deprivation of propertywithout due process of law? Does the legislature have thepower to pass a lawwhich has the effect of 'erminating the corporate existence of such farming and ranching corporations; that is,by eliminating the corporatepurposes of farming, ranching, etc.?
We find the law on these questions to be pertinently stated in 

### 18Am.Jur.2d 

### 633,Corporations,Sec. 

### 33,as follows:

"A reservation

. . . in a general law of power to amend, alter, or repeal affects the entire relation between the state and the corporationand places under legislativecontrol all rights,privileges,and immunitiesderivedby its charter directly from the state, including its very existence.

. . !I

. .Under the reservedpower of repeal the legislaturemay terminate the corporateexistence

. . ."



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Rep. Jack Blanton,page 7 (M-407)

Among the cases cited in support of the latter statementare Erie R. Co. v. Williams, 233 U.S. 685 1914 ; SpringValley Waterworksv. I 1

Schottler, 110 U.S. 347 18@4 ; State v. Louisville& N.R. Co., 97 Miss. 35, 51 so. 918, 53 so. 454 (1910);People v. O'Brien, 111 N.Y. 1, 18 N.E. 692 (1888).
In 18 Am.Jur.2d 636-637, Corporations,Sec. 94, we find this statement:

I,

. . . it has been held that the reserved power of a state to amend a corporate charter is not limited to changes or alterations solely between the state and the corporation,but authorizes amendments and alterations,within certain limitations,directly affecting stockholders in their relations to the state, to the corporation,and to each other, and that such power may be invoked to sustain charter alterations justifiedby the advancement of public interest, even though they a~ffectcontractual rights between the corporation and its stockholdersand between stockholders inter se. . .I'
It is held, however, that the reservedpower to amend or repeal corporate charters does not give the legislature the power to impair or destroy the "executed"contracts of third persons with the corporations,as distinguished from "executory" contractsat the time the statute takes effect. Consequently, as to the latter, it is held that

11

. . . The fact that a repealing statute destroys the right of a corporation to continue in existence under the statute repealed does not make such repealing statuteunconstitutional even as against bondholders of the corporation. The execution of themortgage and the issuing of bonds securedby the property of the corporationdoes not affect the right of the legislature to repeal the statute." 18 Am.Jur.2d 638, Corporations,Sec. 95; People v. Calder, 153 Mich. SUP. 724, 117 N.W. 314 (1908).

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We do not perceive any attempt in House Bill 700 to impair or destroy the contracts of thirdpersons with the affected corporations. If such legislation should unconstitutionallythreaten such am impairment,as applied to the specific facts of the case, and the legislaturehas not provided some special remedy, the courtswill enforce suchproperty rights by themeans within theirpower. 18 Am.Jur.2d 636, Corporations,Sec. 94.
We a~gree

with the Supreme Court of Illinois in its observation that

11 to be'sno corporationhas a constitutionalright

corporationand it is fundamental tha~t corporatepowers and charters are taken subject to the prerogative of the state to modify or amend the enabling legislationat any time. Kreicker v. Naylor Pipe Co., 374 Ill. 364, 29 N.E.2d 502. And thismatter is removed from the sphere of constitutional considerationby reason of the express language of the Business CorporationAct
. . . which reserves to the GeneralAssembly thepower to repea~l, amend or modify the act and to impose limitations or restrictionsat the pleasure of the GeneralAssembly." Braeburn Securities Corp. v. Smith, 15 Ill.Sup.2d 55> 153 N.E.2d 806, 811-812 (1956) upholding an amendment to a statute limiting the general power; of corporations in respect to ownership and control of stock in banks and overruling the contention that such legislation impaired obligation of contract and was a denial of equalprotection under the,law.
In Asbury Hospitalv. Cass County, 7 N.W.2d 438 (N.D.%p. 1943), the court had before it a challenge to the constitutionality of an act, requiringany corporation, domestic or foreign, owning farm land, except that reasonably necessary to the conduct of its b,lsiness,to dispose of the landwithin ten years from the date the Act took effect. It also prohibited such corporations from engaging in farming or agriculture in the future. In upholding the constitutionalityof the statute against the contentionby the plaintiff corporation that it operated to deprive the corporation of property without due process, the court said,beginning at page 452:

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Rep. Jack Blanton, page 9 (M-407)

"Ashas been pointed out, there are constitutionalor statutoryprovisions in many states restricting the right of corporations to acquire and hold real estate and requiring that such corporationsdispose of real estate which they have acquired, within a fixed period of time.
"No instancehas been called to our attention,and none has been found,where such legislationwas predicated upon theproposition that the Statewas without power to require a corporation to dispose of real property that it had acquired before the statute or constitutionalprovision became effective: and in some of the states, the legislation restricting the right of corporations to hold real property is specificallymade applicable as well to property that had been acquired before the legislationbecame effective as to property subsequentlyacquired

. . . [citing numerous authorities] In Commonwealthv. Clark County National Bank, supra, It was contended that Inasmuch as the land sought to be escheatedhad been acquired by the corporation before the adoption of the constitutionalprovision,'the corporationhad a vested right which was unaffectedby the adoption' of the new constitution containing the provision as 'therecould be no impairmentof the obliga~- tion of contract or rights acquired and vested before themaking of the law.'" [x37 Ky.sup. 151, 219 S.W. 1821 "The Court of Appeals of Kentuckyheld that

. . . (the) enactment of the statute did not result in 'unconstitutionally'impairing the 'contractor vested rights' of the corporation.
"We think it clearly follows from the principle announcedby the Supreme Court of the United States in ConnecticutMutual Life Insurance Company v. Spratley, supra (172U.S. 602) and Phillips

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Rep. Jack Blanton,

### page 10 (M-407)

Petroleum Companyv. Jenkins, supra (297 U.S. 

### 629),that the provisions of the statute in questionhere restricting thepower of the plaintiff to hold real estate, used or usable for farming or agriculture and requiring it to dispose of the samewithin tenyears from the date the act took effect, do not impair the obligationsof any plaintiff, or impair any vested property right of the plaintiff. "The questionnext presents itself whether such provisions operate to deprive theplaintiff corporationof its propertywithout due process of law. This questionmust be answered in the negative. The State having the right to restrict the power of the plaintiff and corporations similarly situated as to the acquisitionand ownership of real estate within the State, it naturally follows that any legislationwhich it might enact to carry such polic E into effectmust have a beginning, and 'the 1 th Amendment does not forbid statutes and statutory changes to have a beginning.' Sperry & Hutchinson Co. v. Rhodes, 220 U.S. 502, 

### 31 S.Ct. 490, 491, 

### 55 L.Ed. 

### 561. Of course, the State could not put its new policy into effect in such sudden and arbitrarymanner as to practically sacrifice and confiscate the interest of the corporation In the property that it had been permitted to acquire within the State. In making the change it must give the corporation reasonable time in which to dispose of its property. 

### 17 Fletcher, Cyc. Corps.,p. 799. See also, State v. Crescent Cotton Oil CO., 

### 116Miss. 

### 398, 77 So. 

### 185;Crescent Cotton Oil Co. v. State, 121 Miss. 

### 615,83 So. 

### 680;Crescent Cotton Oil Co. v. Mississippi, 257 U.S. 129, 42 S.Ct. 42, 

### 66 L.Ed. 

### 166. The statute gives

. . . ten years in which to dispose of it before such propertybecomes subject to theprovisions of the statuteproviding for disposal of the property under the procedureprovided by the statute. Clearly the period of time

. . . cannot be said to be so unreasonable or arbitrary as to operate



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Rep. Jack Blanton,page 11 (M-407)

to deprive corporationsholding land subject to the statute of property without due process of law

. . . [citingauthorities] Such period is considerably longer than thatprescribed in analogous laws in other states. Thus, Oklahoma prescribes sevenyears, and Kentucky five years . . .' With respect to the discretion of the legislaturein exercising its reservedpower to repeal or alter the corporations charter, It is the general rule that no notice need be given to a corporation of such exercise. Jefferson County Title Guaranty Co. v. Tarver, supra, 119 Tex. 410, (1930); 18 Am.Jur. 638, Corporations, Sec. 95. House Bill 700, however, does allow twoyears from the effective date of the Act within which the subject corporationmay withdraw from its farming and ranching operationsand dispose of its interests. The tenyear timeperiod applies to real estate acquired prior to the effective date of the act. Such periods appear reasonable, and our research fails to reveal any suchperiods as having been held to be unreasonable.
Texas laws recognize limitationsu on the right of corporations to hold property. Article l3O2- E*OlV.C.S., the Miscellaneous CorporationsLaws Act prohibits a corporation from acquiring land except such as may be necessary to conduct the type of business for which it is incorporated. Article 

### 1302- 4.05 of the Miscellaneous CorporationLaws Act accords relief only to the extent of permitting corporations to acquire urban land, such entitiesbeing known as Town Lot Corporations. Articles 8.19 and 3.40 of the Texas InsuranceCode require disposition of certain realty of Casualty and Life Insurance Companies within a five year period. No. O-1470 (1939). See Attorney General Opinion Article 4.02 Miscellaneous Corporation Laws Act, (oldArticle 1360, prior to 1961)Vernon's Civil Statutes, gives a fifteenyear time period to corporationsto dispose of lands deemed unnecessary to, or In excess of theirbusiness needs. All of these laws have remained unchallenged to this date and are presumably valid.
In view of all of the foregoing considerationsrwe conclude that House Bill 700, if enacted,would be constitutional.

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Rep. Jack Blanton, Page 12 

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SUMMARY
House Bill 700, prohibiting corporations from engaging in the business of farming, livestock feeding, or ranching, and allowing a twoyear period for such corporations to withdraw from operationsand to dispose of their interestsand a tenyear period to dispose of their real estate, if enacted,would be constitutional. Veryely yours,

Preparedby Neil Williams AssistantAttorney General
APPROVED: OPINION COMMITTEE
Kerns Taylor, Chairman George Kelton,Vice-Chalrman Ralph Rash Terry Goodman Malcolm Quick Bill Allen
W. V. GEPPERT Staff Legal Assistant
HAWTHORNE PHILLIPS ExecutiveAssistant

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