Honorable Bert Ford, Administrator

Texas Liquor Control Board Austin, Texas

Dear Sir: Opinion No. O-4750

Re: The authority of the Texas Liquor Control Board to refuse apackage store permit to a subsidiary corporation because of aviolation by its parent corporation of the provisions ofArticle 

## 666-17(2), Vernon's Penal Code ofTexas.

Your request for opinion, dated July 27, 1942, has been received and considered by this department. We quote from your letter as follows:

“A group of drug stores commonly referred to @s 'Walgreen' Drug Stores operating inTexas are five separate domestic corporations which hold an aggregate of twenty-three package store permits to sell liquor at retail. They are as follows:

"Name of Company Number of'permits Held 'I 1. Walgreen Incorporated 

## "2. TheWalgreen Company of Texas i I,
i: TheWalgreen Texas Company 5 ,I* Walgreen Drugs Incorporated -5: Marvin Drug Company 54
"For"purposes of determining whether or not the Texas Liquor Control Act should so operate and should be so construed as to affect or limit thenumber ofpermits held by these combined companies, an inquiry has been made into the ownership, management, and control of the respective enterprises, and the facts in respect thereto
are probably more definitely reflected in the attached transcript of interrogatories propounded to and answered by Mr. P. J.Redford of Chicago, Assistant Secretary of the,Walgreen Company of Chicago, Illinois. .From the transcript oftestimony reflected by this inquiry, it may be observed that the five domestic corporations areHonorable Bert Ford, Page 2, O-4750

actually subsidiaries of theWalgreen Company of Chicago, a foreign corporation, with earnings or dividends accruing to eachrespectively for the benefit of theWalgreen'company of Chicago, andwith the general management of the subsidiary companies controlled by officers ofthe Walgreen Company of Chicago.

"In determining whether ornot the respective corporationsmay each obtain and use five package store permits, it appears necessary to first determine the legislative intent with reference to the limitations imposed upon any person as to the number of permits in which suchperson may have ownership or an interest.

"After reviewing the facts in connection with thismatter, will you kindly advise whether ornot inyour opinion each of the respective corporations is eligible for a full number of five permits, orwhether the limitation of five package~store permits would be applicable to theparent company, the beneficial holder of all of the stock of the various subsidiary companies. expire onAugust 31, 1942, All existing permits will and it is desired to resolve this question in advance of that date."

In the preparation of this opinion we have also considered the transcript of interrogatories propounded to and answered by Mr. P. J. Redford of Chicago, Assistant Secretary of theWalgreen Company of Chicago, Illinois, together with the exhibits attached thereto; however, in view of the conclusion herein expressed, this transcript and accompanying exhibits wi&l not be summarized herein.

Subsection (2)of Section 17, Article 

## 666, Vernon's Penal Code, provides: "It shall be unlawful for anyperson to hold or have an interest inmore than five (5)package stores or the business thereof. It shall further be unlawful for any person tohold orhave an interest inmore than five (5) package store permits."

BY Section 3-a of the sameArticle, 'person" is defined as:

. . .anynatural person or association of natural persona, trustee, receiver, partnership, corporation, organization, or themanager, agent, servant, or employee of any of them."

On the assumption that theWalgreen Company of Illinois (hereinafter called the Illinois Company) is the beneficialHonorable Bert Ford, Page 

## 3,O-4750

owner of all the stock in the five Texas companies, then, in
so far as these provisions are concerned, unless the Illinois Company holds orhas an "interest" in the package stores organized under the names of the Texas companies or in the business thereof or inthe package storepermits obtained by such stores, each of the five Texas companies is eligible to receive five package store permits.

We construe theword "interest" asused in the above Section according to its legal rather than itspopular usage, and interpret it asbeing synonymous with legal title or equitable title orboth. This interpretation is in accord with that previously placed upon the word by the courts of this and other jurisdictions. InAutomobile Mortgage Company v. Ayub, 

## 266 S.W. 134 (Corn.

App. 192/+),the Commissioner of Appeals held that
a sale of corporate shares was not a transfer of an interest in intoxicating liquor ownedby the corporation, because such sale conveyed neither legal nor equitable title to the liquor. A similar interpretation has been placed upon theword by the Supreme Court of the United States in applying the "commodities clause" of the Hepburn Act. This clause prohibits railroad companies from transporting any commodities inwhich such companies "may have any interest, direct or indirect." U.S.C., Title 

## 49, InUnited States v. Delaware & Hudson Co., 

## 213U.S. 

## 36’(!$3)

R atp. 413, the court held that themere fact,~thata railroad ownspart or all of the stock in a coal company does not mean that therailroad possesses 'an interest direct or indirect' in the property orproducts of.such company, since theword "interest" is synonymous with legal or equitable title or both. -This construction has often been reiterated by the court. United States v. Lehigh Valley Railroad Company, 220U.S. 257 (1910);United States v.Elgin,.J. & E. Railroad, 298 U.S. 492 (1935).

With theword "interest" thus construed, it ispatent that a stockholder in a corporation does not, by themere fact of his stock ownershipk have orhold an interest instores operated by the corporation, in the businesses thereof, or in any permits which these stores might possess. We quote from 10Texas Jurisprudence 781, sec. 153:

"In harmony with the concept that a corporation is a legal entity distinct from itsmembers, the ownership of the corporate assets isheld tobe vested in the corporation, not in the stockholders."

InAutomobile Mortgage Company v. Ayub, supra, the court quoted with approval the following statement:

"A share of capital stock isproperty 0f.a peculiar kind.Honorable Bert Ford, Page 4, O-4750

Accurately speaking, it does not consist in an interest either legal orequitable, in theproperty of the company." N.E. 65 Herbert v. Simpson, 220 Mass. 480, 108

Although a stockholder does possess substantial rights to the surplus of a corporation, once dividends are properly declared, and although he is entitled to apro rata share of the corporate assets upon dissolution, these rights are of an inchoate nature
so long as the organization is a going concern and so long asno specific property hasbeen appropriated for the payment of dividends. McAllister v. Eclipse Oil Company, 98 s.W. (2d) 171, 176 (Sup. Ct.); 10Tex. Jur. 780-781, sec. 152.

_ Moreover,~these principles are equally applicable in cases where all of the stock of one corporation or of several corporations is owned by a parent organization; even in these situations, the parent corporation possesses no interest in the property or the business of the subsidiary corporations. Moroney v. Moroney, 286 S.W. 167, 169 (Corn. App. 1926). Consequently, in,,the situation under discussion, the fact that the Illinois Company is the beneficial owner of all the stock of the five Texas companies does not, ipso facto, make the Illinois Company the possessor of an interest in thepackage stores or in the businesses thereof, or in thepackage storepermits of theTexas companies; however, while concentration of stock ownership in the hands of the Illinois Company isnot in itself determinative of the question under consideration, itmay well be an important evidentiary factor in connection with matters hereafter discussed.

In an opinion approved by Attorney General McGraw (Opinion No. 3004, September 1, 1937), this department ruled that ownership by one,peraon ofstock in three of the five Texas Balgreen companies now under consideration did not constitute aviolation ofArticle h66-17(2) even though the three companies might, in the aggregate, possess more than fivepackage store permits. We adhere to the opinion therein expressed, but call especial attention to the fact that this opinion was expressly predicated upon the statement offacts submitted to this department and that such facts touched solely upon the question ofwhether stock owner'shipis coupled with other facts, hereinafter to bementioned, concerning themotives and interrelations of thepersons and organizations involved.

But, although stock ownership alone does not give the Illinois Company an interest in the Texas companies, the company may well be deemed topossess such an interest through the application of other well known andwidely accepted principles of corporation law. Along with the courts of virtually every other jurisdiction, the Texas courts have long recognized that there are certain wellHonorable Bert Ford, 

### Page5, O-4750

defined instances inwhich courts will disregard the fiction of corporate entity and will find that parent and subsidiary companies are one for the purpose of charging the parent with the acts of thesubsidiary. As has been said, the concept of corporate entity is "but a lenal fiction adopted for convenience;

,_, it isnot a sacrosanct principle granting exemption from liability in circumstances wherein the fiction of corporate entity~is opposed to the facts." 10 Tex.Jur. 640-641, sec. 45. Where the fiction is sodisregarded, the parent possesses an "interest" in the subsidiary since the fictional dichotomy between the twos organizations disappears and they are treated as aunity.

The application of this principle iswell illustrated by the Supreme Court cases,cited supra, construing the commodities clause. The government in the first suit alleged only that the Lehigh Valley Railroad Company owned stock in a coal company whose goods itwas carrying.~ On demurrer, itwas held that no violation of the clause was thereby shown since stock ownership alone was not tantamount to an "interest, direct or indirect" in the coal company. After thisblow, the government presented an amended petition inwhich it alleged additional facts of thenature hereinafter tobe discussed and requested that the two corporations betreated as aunity. The court disregarded the corporate concept, and, looking atthe substance and reality of the relations between the parent and subsidiary, held that the former
was directly interested in the coal produced by the latter.

In the case of Continental Suppl 55 S.W: (2d) 622 (Civ.App. Co. v.Forrest E. Gilmore Co., 1932 , 3 writ dismissed, atp. 628, the Amarillo court thus classified the situations inwhich the fiction of corporate entity will be disregarded:

"Where the fiction (1) isused as ameans ofperpetrating fraud; (2)where a corporation is organized and operated
as amere tool orbusiness conduit of another corporation; (3) where the corporate fiction isresorted to as ameans of evading an existing legal obligation; (4)where the corporate fiction is employed to achieve orperpetrate monopoly; (5)where the car orate fiction isused to circumventa,statute; and (,)where the corporate fiction f: isrelied upon as aprotection of crime or to justify wrong."

This classification was adopted inPacific American Gas Company ofTexas v.Miller, 76 S.W. (2d) 833, 851, writ refused, and was cited with approval by the ,CommissionofAppeals inFirst National Bank in Canyon v. Gamble, 132 S.W. (2) 100 (1939), at p. 103. Items (l), (3), (4)and (6) in the above classification
are inapplicable to the instant situation andwill notbe considered further. Since the remaining itemsmay well be releventHonorable Bert Ford, Page 6, 04750

to the solution of thematter athand, they willbe discussed individually.

(a) Where a corporation is organized and operated as amere tool orbusiness conduit of another corporation: We quote from 10Tex.Jur. lOl9-1020, sec. 354:
“Formerly, itwas held by the Texas courts that: 'Where one corporation makes use of another as its instrument through which toperform itsbusiness, theprincipal corporation is really represented by the agents of the ,subcorporation,and its liability is justthe same as if the principal corporation had done thebusiness in its ownname.' The authorities soholding have, however, been in effect overruled so far as they assert a rigid conclusion of law in the circumstances stated. But although the doctrine that thetwo corporations are separate legal entities forbids the legal conclusion that one corporation is the agent orpartner of another without facts towarrant that conclusion, the one' corporation may be liable for the transactions and acts of the other where one is in fact the agent of the other orwhere apartnership in fact exists between the two organizations; Moreover, the fiction of separate entities isnot maintained where a subsidiary isnot conducted bona fide as a separate organization.

. . ."

"Piercin theVeil of Corporate Entity," 12 Columbia ~~~~~%~'496 (1912?, atpp. 504-505, it is said: -

"It cannot betoo strongly emphasized thatmere identity of stockholders per se does not operate to destroy the distinct corporate existence of two corporations. Somuch is clear. Itmust further appear by clear and convincing evidence that the corporation created is only an adjunct of thebusiness of its creator - amere agency or instrumentality, through which it acts -amere business department, orbureau, so to speak. Once, however, these facts appear, a court

. . . should look through the thin guise of corporhte entity to the actual substance of things and should not hesitate to cast aside the entity concept in order to achieve justice."

InHumble Oil & Refining Company v.Railroad Commission, 128 S.W. (2d) 9 (19391, at P. 11-12, the Supreme Court stated:

"In thecase just cited (Statev. Lone Star Gas Co., 86 S.W. (2d)

### 484, 

### 491, writ refused) therule of lawhere involved is thus stated: 'Thecases are legion whichHonorable Bert Ford, Page 7, O-4750

deal with the relationship of two ormore corporations from the standpoint of ownership of the capital stock in oneby another, and from the standpoint of association together for the purpose of carrying on a single
or common business enterprise. The rule iswell settled that courts will look through the forms to the realities of the relationship between two ormore corporations in order to determine whether each is a separate entity or corporation: orwhether their commingled affairs are such
as to constitute them one integrated and sinale business enterprise; orwhether, through IntercorporaFe set-up, affiliation, or stock ownership, the purpose is to control the subsidiary corporation or corporations so that they are used as themere instrumentalities or agents of the owning corporation or corporations. In discussing the rule, ithas been held that while "ownership, alone, of capital stock in one corporation by-another, does not create an identity of corporate interest

. . .or create therelation ofprincipal and agent orrepresentative between the two"; still ithas been repeatedly held that such rule isnot applicable "where stock ownership has been resorted to, not for the purpose ofparticipating in the affairs of a corporation in the normal and~usual manner, but for the purpose
. e
.of controlling a subsidiary company so that itmay beused as amere agency or instrumentality of the owning company or companies." Chicago, M. & St. P. Ry. v0 Minneapolis ,Civic& Commerce Ass'n, 247U.S.

## 490,38s. Ct.

## 553,557, 62L. Ed. 1229;United States 220U.S. 257, 31 S. Ct. 387, v. Lehigh Valley R. Co.,

v. Reading Co., 253U.S. 26, 5 L.led.458; United States

760; United States v. 0 s. ct.

### 425, 64L. Ed. L. &W. R. c0.,~238 U.S. 

### 516, 

## 34S. Ct. 873, 59 L.Ed. 1438. Also, in discussing the rule, the fact that the same persons are directors andmanagers oftwo corporations has been given consideration (McCaskill Co. v.United State;.sd2;6U.~S. 9i,ses; s. Ct.

## 386,391,54L. Ed. 5901, the,courts_?ogrowing y is therefore exhibited in look beyond the corporate form to thepurpose of it, and to the officers who are identified with that purpose." See, also, Gallatin natural Gas ,Co.v. Public Seruice
co.,

## 79Mont. 

## 269,256 P. 373. 'Whereone corporation

owns or dominates another, ithas been often held that "the independent entity of the two companies is so far disregarded that each is considered asbut apart of the indivisible whole." Kimberly Coal Co. v.Douglas (6Cir.), (C.C.A.( 45 F. 2d 25,~27; Inre Kentucky Wagon Mfg. Co., 

## 3F. Supp. 958; Law.v. McLaughlin, D.C.,,,2FSupp. And.."t,he

rule which appears tobe established by theie cases is that, where the corporate organization andHonorable Bert Ford, Page 8, O-4750

affairs of one railroad company are controlled and dominated by another railroad company through ownership ofstock or lease, the roadsmust be regarded as identical for the purpose of ratemaking." Pontiac, 0. & N.Ry'.Co. v. Michigan R.R. Corn.,203 Mich. 258, 168 N.w. 927, 929.

"A somewhat court in A.T.analogous question was decided by this

& S.F. R 773, 775 (w-1 7: Co. v.R.R. Corn.,77 S.W. 2d

.trefused whereinit was held that subsidiary corporations, owned, controlled, and operated by railroads to carry on pick-up and delivery service, did not possess separate legal individuality from the parent corporation, Railroad Commission;asregards the jurisdiction of the andwherein itwas held as follows; "Topermit railroads toperform suchsteps in the process of transportation through other separate legal entities created and owned by themwould enable them to defeat the jurisdiction of the commission over such transportation. And in such casewhere thestock of such separate corporation is owned by the railroad company, and itz.zole function ismerely tohelp conduct thebusiness of theparent corporation under whose complete control it operates, and in the instant case largely, ifnot wholly, through the same employees, the subsidiary corporation will be treated as if itwere amere department of the railroad itself."'

*The judgment in the Lone Star Gas Company case, zupra,
was reversed by the Supreme Court of the United States (304U.S. 

### 224, 58 S. Ct. 883, 82 L. Ed. 1304),but the rule of law above announced was not questioned. 'We here andnow approve and adopt as the holding of this Court the above-quoted holding of the Court of Civil Appeals." (Emphasis ours)

The difficult'problem is the ascertainment ofwhat facts of ownership, control, andmanagement in a common enterprise are necessary to justify the characterization of a subsidiary as an "adjunct," "agency," instrumentality," or "creature" of the parent. InBallantine-on Private Corporations (1927) atp. 37,
we find the statement:

"It is submitted thatno mechanical rule based on objective facts of control or connection which willfurnish a certain test ispossible of formulation. Identity of stockholders, identity of officers, the manner of keeping books and records, themethods of conducting the corporate business as a separate concern or as amere department of the other concern, maybe evidential facts tobe conzider-.

Honorable Bert Ford, Page 9, O-4750

ed asbearing on the question of juggling of separate capacities andwhether the subsidiary isbeing managed in such away as tomake the controlling corporation justlyresponsible. (citing cases) But after all it
comes down to a question ofgood fai~thandhonesty in the use of the corporation for legitimate ends. If a corporation is owned and controlled by another and is manipulated by the owner for its own purpose and in its
own interests to the vreltidiceof innocent third vartiez.
or the public welfare; iimay be necessary to limit zuch abuse of the corporate capacity or shield." (Emphasis ours)

In Anderson, Limitations of the Corporate Entity (1931) 334-335, 1345, the criteria are stated thus:

"Some of the controlling circumstances sustaining liability of the parent corporation are sometimes asserted tobe ownership of all of the stock of the subsidiary or even
amajority of the stock, coupled with control or ownership by the same persons of the stock ofboth theparent and subsidiary corporation , . . Of course consideration is given to the degree that the subsidiary is financed by thenparent, coupled with which is themaintaining of such financing. Likewise, consideration is given where a common directorate is found functioning both corporations,
as also is the case where there are common officers and employees. Decisions are influenced by the extent of the commingling of stockholders' and directors' meetings and also the extent towhich both the parent and zubzidiery have common transactions ofbusiness. Thedegree townich interests between the two are favorable~one to another has
an influencing effect upon holding the entities the same. The manner ofbookkeeping will be looked to,but this is not a controlling circumstance. Of course, consideration will begiven to the extent towhich an officer or director of one corporation ispermitted to dictate thepolicies of the other. Ithardly need be said that in such decisions willbe involved the character ofbusiness that such corporations are engaged in and the extent towhich the trade orpublic generally regards the two as separate or one."

These excerpts arebut suggestive; any evidence tending to show that the subsidiary existsmerely as the shadow and the creature of theparent willbe relevant in determining whether the two should be treated as one for the purpose athand, and such evidence is found in the actualities of the transactions among the corporations rather than in thecarefulness with which the identity of each corporation ispreserved onpaper.Honorable Bert Ford, Page 10, O-4750

(b) Where the corporation isused tocircumvent a statute: Courts arenot somyopic as to allow the fiction of corporate identity tobe used to circumvent a statute. Thus inNorthern Securities Company v.United States, 193U.S. 197 (1903) the court struck down an attempt to avoid the intent andpurport of the Sherman anti-trust statute by recourse to the fiction of corporate identity. Likewise, inUnited States v. Milwaukee Refrigerator Transit Company, 142Fed. 247 (1905), the identity of a subsidiary was disregarded when its recognition would have resulted in the evasion ofprovisions of the Interstate Commerce Act and the Elkinz Act of 1903. The same kind of action was taken in the commodities clause cases cited zupra.

Several ofthe exce.rptzquoted above have stressed the factthat the fiction of the corporate entity of a subzidiarywillbe disregarded when the recognition of this fiction would be against the vublic interest or the public welfare. It iscommon knowled,gethat the legislature included Article 666-17(2) of the Penal Code ofTexas in the Liquor Control Act because of the detrimental effect upon the,public,of the prior operation of chain liquor stores andbecause of abelief that the interests and welfare of the people of this State would best be furthered by confining the ownership and operation ofpackage stores to relatively small and independent units. Moreover, the article expressly makes the violation of itsprovisions anunlawful act. In view of the langauge~contained in theGilmore case, zupra, and approved in the Gamble case, zupra, the separate identity of

a zubzidia~rycontrolled by itsparent when to do sowill be to sanction an evasion of this article, to ignore the public policy expressed by the legislature, and topoint an easy way for future evasions by the simple act of incorporation.

While the facts submitted in andwith your letter of July 27, 1942, are not sufficiently detailed and sufficiently comprehensive to allow this department to say as amatter of law whether or not the Walgreen parent-subsidiary organization fall8 within the two categories above discussed, you are respectfully advised that:
(1) Ifyou determine that the factual inter-relationship (a8 distinguished from the paper interrelationship) existing between the Illinois Company and the fiveTexas companies is such a8 to constitute the latter mere "adjunctzV or "business conduits" of the former, accordi~ngto the criteria above discussed, then-the Illinois Cornanywill be guilty of aviolation of the provisions ofArticle h.h-17(2) of the Texas Penal Code; and, under Article

$: 666-~(2) and the definition,contained inArticle 666-11(9),
none of the five Texas companies willbe eligible to receive a package store permit.Honorable Bert Ford, Page 11, O-4750 '

(2) Ifyou determine that the five Texas companies were organized by the Illinois Company or"%hat theywere acquired by the Illinoiz Company or that they aremaintained by the Illinoiz Company as ostensibly separate organizations primarily for the purpose of evading theprovisions of Article 666-1712) of theTexas Penal Code or of subverting the public policy therein embodied, then the Illinoiz Company will be guilty of a violation of the provlzionz of this article; and, under Article hhh-ll(2) and the definition contained in Article 666-11(q)
none of the five Texas companies willbe eligible to receive a package store permit.

You are further respectfully advised that should your findings fall within either of the above mentioned categories, the provisions of Article 666-1.1(2) will prevent the issuance of any package store permit to the~Illinoiz Compan period from September 1, 1942, toAugust 31, 19 3. E for the permit

Very truly yours

ATTORNN GENERAL OF TEXAS

ziR.Dean moorhead

By R. Dean Moorhead

A,zoiatant

RDM;QO/cge

APPROVED AUGUST 26, 1942 d GERALD C. MANN ATTORNEY GENERAL OF TEXAS

APPROVED OPINION COMMITTEE ByBWB, Chairman