EonorableLloyd Criss OpinionNo.JM-630 Chairman - Labor and Employment RelationsCommittee Texas Eouse of Representatives P. 0. Box 2910 Re: Constitutionalityof amendments to article 342-101. et -9 V.T.C.S., the Interstate BankingBill Austin,Texas 78769

Dear RepresentativeCriss:

You ask several questions about the Interstate Banking Bill enacted during the recent called session of the legislature. Acts 1986. 69th Leg., 2nd C.S.. ch. 14, at 71. Bank holding companies are regulatedpursuant to the federalBank Holding CompanyAct of 1956,as amended, 12 U.S.C. 551841 et seq. The act provides the following in pertinentpart:

Notwithstanding any other provision of this section, no application

. . . shall be approved under this section which till permit any bank holding company or any subsidiary thereof to acquire, directly or indirectly

. . . any additionalbank locatedoutside the state inwhich the operations of such bank holding company’s banking subsidiarieswere principallyconductedon July 1, 1966, or the date on which such company became abankholdinn comnanv,whichever is later. - . _- unless the acquisition

. . . is specifically authorized by the statute laws of the state in which such bank is located, by language to that effect and not merely by implication. (Emphasis added).

12 U.S.C. 91842(d). The second called session of the Sixty-ninth Legislature enactedamendmentsto articles 342-101.et seq..V.T.C.S., [hereinafter the Interstate Banking bill] that were intended to constitute such specific authorization. permitting out-of-state bank holding companies to acquire a state or national bank or bank holding companies owning or controlling a state or national bank located in Texas. Acts 1986.69thLeg., 2nd C.S.. ch. 14,at 71.

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Article XVI, section 16, of the Texas Constitution, however, provides inpertinentpart:

Sec. 16. (a) The Legislature shallby general laws, authorize the incorporation of state banks and savings and loan associations and shall provide for a system of state supervision. regulation and control of such bodies which will adequately protect and secure the depositors and creditors thereof.

. . . .
**No** foreign corporation, other than the national banks of the United States domiciled in this State, shall be permitted to exercise banking or discounting privileges in this State. (Emphasis added).

You are concerned that the recent bill may violate the underscored portion of articleXVI, section 16. Accordingly,you ask a series of questions regarding the proper construction and constitutionality of the recent statutory amendments. We will address each of your questions in turn.
With your first questionyou ask:

If a foreign corporation acquires a state or national bank domiciled in Texas, will that foreign corporation be in violation of article XVI. section 16, of the Texas Constitution by virtue of its direct exercise of banking or discountingprivileges in Texas? (Emphasisadded).

We answer your first question in the negative. The 'Interstate Banking Bill does not purport to authorize foreign corporations to **engage** in banking and discounting privileges. gather it merely authorizesout-of-statebankholding companies topurchase Texas state or national banks or bank holding companies. Section 5 of the bill amends the Texas Banking Code of 1943 by adding article 342-916, V.T.C.S.,which provides the following:

Section 1. Except as otherwise provided by this article, an out-of-statebank holding company -Y. directly or indirectly, acquire or acquire control of a state bank, national bank located in the state, or bank holding company owning **or** controlling, directly or indirectly, a state bank
or nationalbank located in the state.

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Acts 1986, 69thLeg., 2nd C.S., ch. 14, section 5, at 81. The bill in section 1defines "control"as

[t]he ability or power to vote, directly or iudirectly, 25 percent or more of any class of voting securitiesor the ability to control in any mauuer the election of a majority of the board of directors.

The BankingCode, as amended, stillrequires that any corporationthat exercisesbanking and discountingprivileges in the state of Texas be
a Texas corporation.

Your next question is:

Does the legislative history of article XVI, section 16, vhich was enacted prior to the institutional use of holding companies, indicate that the intent of this article was to prohibit foreign ownership of banks, as well as the exercise of banking and discounting privileges in Texas?

We answer your question in the negative. There is little legislativehistory extant regarding the adoption of the 1904 amendment to articleXVI. **section** 16. Thatwhich does exist indicatesno intention to forbid foreign ovnetshiR of banks in Texas; rather, foreign operation of banks was intended to be prohibited. The Eouse Journal entry for the proposed constitutional amendment to article XVI, section 16, recites among its purposes to be "prohibiting foreign corporationswith **such** powers [bankingand discountingprivileges]E do business In this State." H. J. of Tex., 28thLeg., Reg. Sess. 633 (1903).

You next ask:

Does the legislative history of article XVI, section 16, further indicate that the intent of this article is to allow for major changes in bauking policy and procedures in this state, such
as thatproposedby SenateBill No. 11.tobe made only upon the passage of a constitutional amendmentduly enactedby thevoters? Again, there is little legislative history extant on the 1904 amendment. If the legislaturehad intended that foreign ownershiP,as opposed to foreign operation, of banks in Texas be prohibited, it would have specifically so stated. More important. it is a wellestablished priociple that the legislature, in the absence of an

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express constitutional prohibition or requirement, has the power to enact significant legislationwithout express **voter** approval of those changes.

The legislativedepartmentof the state government

may make any law **not** prohibited by the constitution of the state or that of the United States. Therefore, the rule is that, in order for the courts.to hold an act of the legislature unconstitutional,theymust be able to point out the specificprovisionwhich inhibits the legislation. If the limitation be not express, then it should be clearly implied.
Shepherd v. San Jacinto Junior CollegesDist., 363 S.W.Zd 742, 743 (Tex. 1962). quoting , 61 S.W. 114 (Tex. 1901). As the Texas Supreme Court declared iu Texas National Guard Armory Board
v. EfcCraw.126 S.W.Zd 627, 634 (Tex. 1939),quotingMiddleton v. Texas Power and Light Co., 249U.S. 152, 157 (1919).

There is a strong presumption that a Legislature understands and correctlyappreciates theneeds of its own people. that its laws are directed to problemsmade manifest by experience,and that its discriminationsarebased upon adequategrounds.
While the Interstate Banking bill undoubtedly effects a major change in theBanking Code, it does not permit anythingwhich is expressly **or** impliedlyprohibitedby theTexas Constitution.

You next ask:

On what basts is there a distinction between the institution of branch banking through a constitutional amendment (S.J.R. 4). and the institution of interstate banking through statutory legislation?

The distinction is simply that the limited form ofbranch banking authorizedby SenateBill No. 10 (Acts 1986, 69th Leg., 2nd C.S., ch. 13, at 63) was prohibited by article XVI, section 16; accordingly a constitutional amendment was required to permit it. On the other hand, ownership of Texas banks by out-of-state holding companies is not prohibitedby article XVI, section 16; only operation of banks by foreignholding companies in Texas is prohibited. And the Interstate Bankingbill authorizes foreignownership.not foreign operation.

You next ask:

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If the foreign corporation, on a direct basis. is not in violation of the above referenced article, will the foreign corporation's exercise of control over the state or national bank domiciled in this state result iu the foreign corporation exercising banking or discounting privileges in this state?

It is important to note the actual effect of the Interstate Banking bill. Prior to its passage, Texas banking was dominated by four "giant"holding companiesthat. in the aggregate,controlledover 200 banks in the state. Each of the four is a Delaware corporation. See generallyZamora,Regulating Foreign Bank Operations in Texas, 19 Hous. L. Rev. 427 (1982). The assets of each corporation consist of stock in Texas banks. The Interstate Banking bill merely permits out-of-state holding corporations whose assets consist of stock of banks in other states to acquire also the stock of Texas banks; it does not permit such holding companies to disregard the separate corporateexistenceof thebanks ownedby it inviolation of theTexas Constitution.

In Attorney General Opinion H-606 (1975). this office concluded that the ownershipby a bank holding company of more than 50 percent of the capital stock of two or more Texas banks did not violate the branch banking prohibitlou of article XVI, section 16, of the Texas Constitution. The opinion specifically focused on the distiuction between ownership of stock iu more than one bank by a bank holding company and theyeration of one bank by another. The opinion relied inpart on a report issuedby theAttorneyGeneral onAugust 18, 1952, to the State Banking Board, and in part on Bank of North America v. State Banking Board, 482 S.W.Zd 923 (Tex. Civ. App. - Austin 1972), aff'd per curiam, 492 S.W.Zd 458 (Tex. 1973), cases involving a challenge on the basis of an allegedviolation of the branch banking prohibition to the grantingof an applicationfor a bank charter. The court of appeals,whose opinionwas affirmedPer curiam,declared that "[t]he bare fact of ownership [of one bank's stock by another bank], without more, does not constitute a violation of section 16." 468 S.W.Zd 532. TheTexas SupremeCourt, in affirmingthe decisionbelow, expressed the relevant issue as "whether the proposed or chartered bank was actually controlled or operated directly or indirectly by anotherbank.

. . ." 492 S.W.Zdat 459. The court furthernoted that the aforementionedAttorneyGeneral'sreport stated that

even after a charter is granted to a bank, the operationand controlexercisedover itby another bank may under certain fact situations constitute violationsof theanti-trust laws and theprohibition againstbranchbanking.

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Id. at 459-60. Attorney General Opinion H-606 then concluded that such stock ownership of one bank's stock by another bank or a bank holding company is not a violation of the branch bauking prohibition Per se, but that "[olnebank controlledby a bank holding companymay so dominate and control the operation of another bauk as to violate theseprovisions in aparticular case."
Analogously, we conclude that the ownership. without more, of bank stock by au out-of-state bank holding company does not violate per se the article XVI, section 16, prohibition against a foreign corporation exercising banking and discounting privileges. If, however, the holding company acts in a way to disregard the separate corporate existence of individual bauks, then we think that courts would conclude that article XVI, section 16, had in fact been violated. See generallyLane v. Dickinson State Bank, 605 S.W.Zd 650 (Tex. Civ. App. - Houston [lst Dist.] 1980, no writ); American Petrofiua Co. of Texas v. Grump Business Forms, Inc., 597 S.W.Zd 467 (Tex. Civ. App. - Dallas 1980,~State v. Nevitt, 595 S.W.Zd 140 (Tex. Civ. App. - Dallas 1980. writ ref’d n.r.e.1 (courts invoke "alter ego" doctrine to disregard separate corporate existence). Each instance involvingdisregard of the corporate entity must rest ou its ouu facts. Rosenthalv. Leaseway of Texas. Inc.. 544 S.W.2d 180 (Tex.Civ. App. - Tyler 1976.no writ).

Your requestnext sets forth the folloving:

I note that Senate Bill No. 11, iu section 3. which amends article 342-912,V.T.C.S., requires, in section 4(Z):

.

(2) evidence that the out-of-state bank holding company and each state bank, uational bank in this state, and bank holding company being acquired will. after the acquisition, CornplY with applicable capital adequacy guidelines, and that the consolidated equity capital condition of thesebanks iu this state during the first three years after being acquired will be maintained at least at the level existing immediately prior to the acquisition less the consolidated net loss of thesebanks. if any;

This language treats the equity capital condition of the banks to be acquired on a consolidated basis. By referring to the 'consolidated equity capital condition of these banks,' SenateBillNo. 11places a requirement in the out-of-state bank holding company. As such,

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it implies a condition wherein the out-of-state bank holding companywill be directing the affairs of the acquired banks on a consolidated basis rather than on an individualbank basis. Accordingly,you ask:

Does thismake the out-of-stateholding compauy a bank? Does the consolidated equity capital condition violate the constitutional prohibition
on a foreign corporation exercising banking or discountingprivileges in this state?

We answerboth ofyour questions in thenegative. The provisions of article 342-912, V.T.C.S.. were first enacted in 1977 and govern the conditionsunder which a holding companymay acquire Texas banks. The amendment to article 342-912.V.T.C.S., contained in section 3 of the InterstateBanking bill merely imposes an additional condition on out-of-state bank holding companies not required of Texas holding companies. This additional requirement does not eliminate or affect any other regulatory requirements regarding the adequacy of bank capital. See. e.g., 12 U.S.C. 5551, 3907(a). More important, this additional requirement confersno authority on the holding company to direct, either on a consolidatedbasis or on an individualbasis, the operations of Texas banks. It is still the case that the separate corporate identity of the subsidiarybanks must be respected, and the requirements regarding equity capital of state banks and national banks that are imposed, by state and federal law, respectively,must be adhered to. Furthermore, the,act does not confer authority on the holding company. even after the expiration of the three-year period, to control the capital condition of the bank. Were the statute to authorize such operational control, serious constitutional questions might arise.

You next ask:

Does the treatingof equity capitalposition on a consolidatedbasis allow for a holding company owning two ormore banks toundercapitalizeone of those banks so long as the capital condition of all of the acquired banks, when viewed on a consolidatedbasis, is adequate?

We answer your question in thenegative. As we noted above, the equity capitalrequirements imposedupon individualstate andnational banks by state and federal law are unaffected by the Interstate Bankingbill. Accordingly, if the applicableprovisions are followed,
no individualbank shouldbe undercapitalized.

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You note that:

The Texas Constitution presently provides, in part:

Sec. 16(a) The Legislature shallby general laws, authorize the incorporation of corporate bodieswith banking and discountingprivileges. and shall provide for a system of State supervision, regulation and control of such bodieswhich will adequatelyprotect and secure thedepositors and creditors thereof.

If the constitutional amendment set forth in S.J.R. 4 is passed, this section will be amended to read as follows:

Sec. 16(a) The Legislature shallby general laws, authorize the incorporation of state banks and savings and loan associatious and shall provide for a system of State supervision, regulation, and control of such bodies which vi11 adequately protect and secure the depositorsand creditors thereof.

You then ask:

Does the ability of a foreign corporationunder Senate Bill No. 11 to acquire and control a state bank inTexas violate the existingor theproposed constitutional provision that the legislature provide 'for a system of State supervision. regulation and control of such bodies which will adequately protect and secure depositors and creditors thereof?' Specifically,we would direct your attention at the ability of such foreign corporations to direct deposits in the statebank for use by the foreign corporation, especially through other financial institutions that it may own outside the state of Texas.

We cannot answer this question because to do so would require resolution of a matter of fact. Questions of fact are inappropriate for consideration in the opinion process. We cannot say as a matter of law that the state systemof regulation imposedby theBanking Code fails to "adequately protect and secure depositors and creditors" of Texas banks. We emphasize that the bill neither authorizes an out-of-state holding company to disregard the independent corporate existence of subsidiary state or national banks.(which, if it did so,

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would violate the prohibition ou foreign corporations exercising banking and discountingprivileges), nor alters the applicable equity capital requirements thatwere imposedprior to the enactment of the InterstateBankingbill.

Your requestnext sets forth the following:

As noted above. SenateBillNo. 11requires the out-of-state bank holding company to maintain at least the consolidated equity capital condition of the acquired banks at the existing level imediately prior to the acquisitionfor the first threeyears afteracquisition. Does the fact that the foreigncorporation,after ithas acquired the bank, cau permit the equity capital condition of the bank to deteriorate after the first three years violate the constitutional provision that the legislatureestablishby general laws a system of state supervisionwhichwill adequatelyprotect and secure the depositors and creditors of state banks inTexas? Again, we caunot say that, as a matter of law that the bill violates article XVI. section 16. The act confers no operational control to theholding company. And again,we note that thebill does not alter the equity capital requirements that were applicable prior to the enactmentof thebill; individualstateandnationalbankswill stillhave to adhere to the respective stateand federalprovisions.

You note that article 14(b) of Senate Bill No. 11 states, in part:

The Comaissioner has jurisdiction over an

out-of-state bank holding company to enforce an agreement filed with the Comissioner under Article 12of thisChapter.

In thatregard,you ask:

Will the commissionerhave the legal authority to enforceall aspectsof those agreements.or can the comuissionerbe prohibited from doing so as a matter of federal law or the law of the state of the foreigncorporation?

Generallv. thevaliditv of contracts is controlledbv the law of

_ theplacewhere the contractwas made. (Tex. 1947). King v. Bruce, 2Oi S.W.Zd 803

cert. denied, 332 U.S. 769 (1947); Grace v. Orkin Exterminating Co., 255 S.W.Zd 279 (Tex. Civ. App. - Beaumont 1953,

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writ ref'd n.r.e.1. Because the agreements entered into under the bill will be made and performed in Texas, clearly the laws of the foreign statewould not pre-empt those of Texas. With respect to the federal government, thebill specificallyprovides that any agreements entered into pursuant to the bill are "subject to any contrary provision of applicable federal law." Acts 1986, 69th Leg., 2nd C.S.. ch. 14, 53. at 78. Accordingly, we conclude that the commissioner would have the authority to enforce all aspects of any agreements entered intopursuant to thebill except aswouldviolate federal law.

SUMMARY

The 1986 amendments to the Banking Code of 1943, which authorize out-of-state bank holding companies to purchase control of Texas state and nationalbanks pursuant to the federalBank Eolding CompanyAct of 1956.does notviolate articleXVI, section 16, of theTexas Constitution.

Velzh ,

JIM MATTOX AttorneyGeneral of Texas
JACKEIGETOWRR FirstAssistantAttorney General

MARYRFLLRR ExecutiveAssistantAttorney General

RICK GILPIN Chairman,Opiniou Committee
Prepared by JixMoellinger AssistantAttorney General

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