Eonorable Lloyd Criss Opinion No.JM-630 

Chairman - 

Labor and Employment 

Relations Committee 

Texas Eouse of Representatives 

P. 0. Box 2910 

Re: Constitutionality of amendments to article 342-101. et 

-9 V.T.C.S., the Interstate 

Banking Bill 

Austin, Texas 78769 

Dear Representative Criss: 

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 

regulated pursuant to the federal Bank Holding Company Act of 1956, as 

amended, 12 U.S.C. 551841 et seq. The act provides the following in 

pertinent part: 

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 

additional bank located outside the state in which 

the operations of such bank holding company’s 

banking subsidiaries were principally conducted on 

July 1, 1966, or the date on which such company 

became a bank holdinn - 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 enacted amendments to 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. 69th Leg., 2nd C.S.. ch. 14, at 71. 

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Honorable Lloyd Criss - Page 2 (JM-630) 

Article XVI, section 16, of the Texas Constitution, however, 

provides in pertinent part: 

Sec. 16. (a) The Legislature shall by 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 article XVI, 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 question you 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 discounting privileges in Texas? (Emphasis added). 

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 

authorizes out-of-state bank holding companies to purchase 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-state bank 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 national bank located in the state. 

p. 2843 
Honorable Lloyd Criss - Page 3 (JM-630) 

Acts 1986, 69th Leg., 2nd C.S., ch. 14, section 5, at 81. The bill in 

section 1 defines "control" as 

[t]he ability or power to vote, directly or iudirectly, 25 percent or more of any class of 

voting securities or the ability to control in any 

mauuer the election of a majority of the board of 

directors. 

The Banking Code, as amended, still requires that any corporation that 

exercises banking and discounting privileges 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 legislative history extant regarding the adoption of the 1904 amendment to 

article XVI. section 16. That which does exist indicates no 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 

corporations with such powers [banking and discounting privileges] E 

do business In this State." H. J. of Tex., 28th Leg., 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 that proposed by Senate Bill No. 11. to be made 

only upon the passage of a constitutional 

amendment duly enacted by the voters? 

Again, there is little legislative history extant on the 1904 

amendment. If the legislature had 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 

p. 2844 
Honorable Lloyd Crlss - Page 4 (~~-630) 

express constitutional prohibition or requirement, has the power to 

enact significant legislation without express voter approval of those 

changes. 

The legislative department of 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, they must be able to point out the 

specific provision which inhibits the legislation. 

If the limitation be not express, then it should 

be clearly implied. 

Shepherd v. San Jacinto Junior Colleges Dist., 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), quoting Middleton v. Texas 

Power and Light Co., 249 U.S. 152, 157 (1919). 

There is a strong presumption that a Legislature 

understands and correctly appreciates the needs of 

its own people. that its laws are directed to 

problems made manifest by experience, and that its 

discriminations are based upon adequate grounds. 

While the Interstate Banking bill undoubtedly effects a major change 

in the Banking Code, it does not permit anything which is expressly or 

impliedly prohibited by the Texas 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 of branch banking 

authorized by Senate Bill 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 prohibited by article XVI, section 16; only operation of banks by 

foreign holding companies in Texas is prohibited. And the Interstate 

Banking bill authorizes foreign ownership. not foreign operation. 

You next ask: 

p. 2845 
Honorable Lloyd Criss - Page 5 (JM-630) 

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 companies that. in the aggregate, controlled over 

200 banks in the state. Each of the four is a Delaware corporation. 

See generally Zamora, 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 

corporate existence of the banks owned by it in violation of the Texas 

Constitution. 

In Attorney General Opinion H-606 (1975). this office concluded 

that the ownership by 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 the yeration of one bank by another. The opinion relied 

in part on a report issued by the Attorney General on August 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 alleged violation of the branch banking 

prohibition to the granting of an application for a bank charter. The 

court of appeals, whose opinion was affirmed Per 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. The Texas Supreme Court, in affirming the decision below, 

expressed the relevant issue as "whether the proposed or chartered 

bank was actually controlled or operated directly or indirectly by 

another bank. . . ." 492 S.W.Zd at 459. The court further noted that 

the aforementioned Attorney General's report stated that 

even after a charter is granted to a bank, the 

operation and control exercised over it by another 

bank may under certain fact situations constitute 

violations of the anti-trust laws and the prohibition against branch banking. 

p. 2846 
Eonorable Lloyd Criss - Page 6 (JM-630) 

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 "[olne bank controlled by a bank holding company may 

so dominate and control the operation of another bauk as to violate 

these provisions in a particular 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 generally Lane 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 involving disregard of the corporate entity 

must rest ou its ouu facts. Rosenthal v. Leaseway of Texas. Inc.. 544 

S.W.2d 180 (Tex. Civ. App. - Tyler 1976. no writ). 

Your request next 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 these banks 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 

these banks. 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,' Senate Bill No. 11 places a requirement in 

the out-of-state bank holding company. As such, 

p. 2847 
Honorable Lloyd Criss - Page 7 (~~-630) 

it implies a condition wherein the out-of-state 

bank holding company will be directing the affairs 

of the acquired banks on a consolidated basis 

rather than on an individual bank basis. 

Accordingly, you ask: 

Does this make the out-of-state holding compauy 

a bank? Does the consolidated equity capital 

condition violate the constitutional prohibition 

on a foreign corporation exercising banking or 

discounting privileges in this state? 

We answer both of your questions in the negative. The provisions 

of article 342-912, V.T.C.S.. were first enacted in 1977 and govern 

the conditions under which a holding company may acquire Texas banks. 

The amendment to article 342-912. V.T.C.S., contained in section 3 of 

the Interstate Banking 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 confers no authority on the holding company to 

direct, either on a consolidated basis or on an individual basis, the 

operations of Texas banks. It is still the case that the separate 

corporate identity of the subsidiary banks 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 treating of equity capital position on 

a consolidated basis allow for a holding company 

owning two or more banks to undercapitalize one of 

those banks so long as the capital condition of 

all of the acquired banks, when viewed on a 

consolidated basis, is adequate? 

We answer your question in the negative. As we noted above, the 

equity capital requirements imposed upon individual state and national 

banks by state and federal law are unaffected by the Interstate 

Banking bill. Accordingly, if the applicable provisions are followed, 

no individual bank should be undercapitalized. 

p. 2848 
Honorable Lloyd Criss - Page 8 (a-630) 

You note that: 

The Texas Constitution presently provides, in 

part: 

Sec. 16(a) The Legislature shall by general 

laws, authorize the incorporation of corporate 

bodies with banking and discounting privileges. 

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. 

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 shall by 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 

depositors and creditors thereof. 

You then ask: 

Does the ability of a foreign corporation under 

Senate Bill No. 11 to acquire and control a state 

bank in Texas violate the existing or the proposed 

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 state bank 

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 system of regulation imposed by the Banking 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, 

p. 2849 
Honorable Lloyd Criss - Page 9 (JM-630) 

would violate the prohibition ou foreign corporations exercising 

banking and discounting privileges) , nor alters the applicable equity 

capital requirements that were imposed prior to the enactment of the 

Interstate Banking bill. 

Your request next sets forth the following: 

As noted above. Senate Bill No. 11 requires 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 acquisition for the first 

three years after acquisition. Does the fact that 

the foreign corporation, after it has 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 legislature establish by general laws a system 

of state supervision which will adequately protect 

and secure the depositors and creditors of state 

banks in Texas? 

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 the holding company. And again, we note that the bill does 

not alter the equity capital requirements that were applicable prior 

to the enactment of the bill; individual state and national banks will 

still have to adhere to the respective state and federal provisions. 

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 12 of this Chapter. 

In that regard, you ask: 

Will the commissioner have the legal authority 

to enforce all aspects of those agreements. or can 

the comuissioner be prohibited from doing so as a 

matter of federal law or the law of the state of 

the foreign corporation? 

Generallv. _ the validitv of contracts is controlled bv the law of 

the place where the contract was 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, 

p. 2850 
Eonorable Lloyd Criss - Page 10 (JM-630) 

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 state would not pre-empt those of Texas. With respect to the 

federal government, the bill specifically provides 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 into pursuant to the bill except as would violate 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 

national banks pursuant to the federal Bank Eolding 

Company Act of 1956. does not violate article XVI, 

section 16, of the Texas Constitution. 

, Velzh 

JIM MATTOX 

Attorney General of Texas 

JACK EIGETOWRR 

First Assistant Attorney General 

MARYRFLLRR 

Executive Assistant Attorney General 

RICK GILPIN 

Chairman, Opiniou Committee 

Prepared by Jix Moellinger 

Assistant Attorney General 

p. 2851 

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