## THE ATTORNEY GESERAL OF TEXAS
April 8, 1987

Mr. PerryL. Adkisson Chancellor Texas A 6M UniversitySystem College Station,Texas 77843 OpinionNo. JM-671

Re: Validity of a proposed contract between Texas A 6M and a corporation which is a wholly owned subsidiary of a corporation owned inpartby amember of theuniversity'sboard of regents

DearMr. Adkisson:

You inquireabout the legality of a proposed transactionbetween the Texas Agricultural Experiment Station (TARS) and an agribusiness corporation in which a regent of Texas A b I4University is economically interested.

The Texas Agricultural Experiment Station is an agency of the Texas A h M University System. Educ. Code 188.001(Z). It is under the supervisionof the board of regents of theTexas A 6M University System. Educ. Code $88.202. An EducationCodeprovision specifically provides that theregents

shall generate revenues through agreements establishing equitable interists, royalties, and patentrights relating toreleasesof agricultural research products by the Texas agricultural experimentstationwhen economicallyfeasible.

Educ. Code 588.213.

The transaction about which you inquire involves an agreement between TARS end Granada Development Corporation (GDC), the entity in which the regent has an ownership interest. The Board of Regents would have to approveany contractbetween theAgriculturalExperimeut Station and GDC. See Educ. Code 0588.202. 88.203, 88.213. You describe the legal relationshipsbetween GDC. its parent corporation, of which the regent is one-half ovner. and other subsidiariesof that parent. We will summarize these complex corporate relationships to provide a factualsetting foryour conflictof interestquestion.

The regent owns one-half the stock of Granada Corporation,which engages in agribusiness. Granada Development Corporation. a wholly owned subsidiary.of Granada Corporation. carries out research and

p. 3072Mr. Perry L. Adkisson - Page 2 (JM-671)

development projects for its own account and for the account of its clients. Among its clients are affiliates of GUC. Pou describeGUC's affiliates as "principally publicly owned limited partnerships for whom Granada Management Corporation serves as General Partner: owning
uo more than a one percent interest." Granada Management is wholly owned by Granada Land & Cattle Company, which, in turn, is wholly ownedby Granada Corporation.
Thus, theuniversitywishes to contractwith GDC. a wholly owned subsidiary of Granada Corporation, in which a university regent owus half the stock. In addition. GUC does work for limited partnerships whose managing partner is wholly owned by another wholly owned subsidiary of Granada Corporation. You state that the limited partnerships cannot devote more than twenty percent of their capital to research and development, and it is presently anticipated that no more than fifteenpercent of any partnership research and development activities would be carried ou pursuant to the proposed agreement with Texas A hM University.

You state that the proposed agreement would take the form of a master agreement pursuant to which GDC's clients would totally fund specific research and development projects, to be identified in the future and to be carried on jointly by personnel **of** GUC and the AgriculturalExperiment Station. The clients of GDC forwhom specific projects were carried ou would receive a worldwide royalty-bearing exclusive license to market and sell the product of the research projects. The Texas Agricultural Experiment Station would receive royalties in amounts to be agreed upon between TAES and the partnership. Granada Management, as a one percent interest owner in the affiliate partnerships. would contribute a pro rata share of one percent of any cash contribution required and would be entitled to receive a pro rata one percent share of any research benefit. The regentwho owns a half interest inGranada Corporation is connected to all parties to the contract - the Unfversity. GUC, and the affiliate clients of GDC.

The Texas courts have established a strict rule prohibiting a public officer fromhaving apersonal financial interest in a contract entered into by the governmental body of which he is a member. The court in Meyers v. Walker, 276 S.W. 305 (Tex. Civ. App. - Eastland 1925,uo writ) stated this rule as follows:

If a public official directly or indirectlyhas a pecuniary interest in a contract, uo matter how honest he may be, and although he may not be influenced by the interest, such a contract so made isviolative of the spirit and letter **of** our law. and is againstpublicpolicy.
Meyers v. Walker, 276 S.W. at 307. The rule aunounced in Meyers v. Walker has been relied upou in numerous cases co invalidate contracts

p. 3073Mr. Perry L. Adkisson - Page 3 (JM-671)

made by public officials who were pecuniarily interested therein. See, e.g., City of Edinburg v. Ellis. 59 S.W.2d 99 (Tex.Comm'n App. 1933); Delta Electric Construction Co. v. City of San Antonio, 437 S.W.2d 602 (Tex. Civ. App. - San Antonio 1969, writ ref'd n.r.e.); Bexar County v. Wentworth. 378 S.W.2d 126 (Tex. Civ. App. - San Antonio 1964,writ ref'dn.r.e.); Attorney GeneralOpinionNos. JM-171 (1984); FW-179 (1980); E-1309 (1978); H-916 (1976); M-340 (1969); WW-1362 (1962);V-640 (1948);O-2929 (1942). The conflict of interest cannot be cured by the interested officer's recusing himself. Delta ElectricConstructionCo.v. City of SanAntonio, 437 S.W.2d at 609.

IU our opinion, the common lawrule announced in Meyers v. Walker provides the answer to your question. Under the proposed contract, the affiliate clients of Granada Development Corporationwill have a right to receive royalties on projects thatmay be developed from the research they fund. The legislaturerecognizedthepotential economic value of research conductedat TAPS when it enacted section 88.213 of theEducationCodedirecting the regents to generaterevenues "through agreements establishing equitable interests, royalties, and patent rights relating to releases of agricultural research products" by TAES

. See also GeneralAppropriationsAcr. Acts 1985. 69th Leg., ch. 980, art.V, 170.atbudget 510 (protectionof state'spropertyrights inpatentableproduct of research fundedunderAppropriationsAct).

The regent who owns half the stock in Granada Corporation has a pecuniary interest in Granada‘s subsidiaries and in their transactions. The economicwell-being of Granada till be affected by the business activitiesof its subsidiaries,includingwork doneunder the proposed contractwith Texas A hM University. Therefore,we believe the regent has a pecuniary interest in the contract between GDC and the university, arising out of his ownership interest in the subsidiary, even though GDC's clients, and not the subsidiary itself, will pay the costs and receive the benefit of projects undertaken by GDC and theuniversityagriculturalexperimentstation. The fact that GDC would uot receive any consideration from theuniversitywould not prevent the regent from having at least an indirect interest in that transaction. See generally Bexar County v. Wentworth, s. We believe the regent has a pecuniary interest through GDC's affiliate clients in theagreementwith theuuiversity.

Moreover, where the client for whom the Agricultural Experiment Station undertakes a project is an affiliate of GDC, the regent actually has a pecuniary interest in the transaction. Although you argue chat the regent's interest is "de minimis," the common law conflict of interest has been applied to small interests. See Attorney General Opinion H-624 (1975); see also Attorney Gene= OpinionJ'M-424(1986).

The general partner of a limited partnership has, with certain exceptions, all the rights and powers of a partner in a partnership without limited partners. V.T.C.S. art. 6132a. 510(a). Thus, the

p. 3074Mr. PerryL. Adkisson - Page 4 (JM-671)

general partner is "an agent of the partnership for the purpose of itsbusiness." V.T.C.S. art. 6132b. §9(1). He may contract for thepartnership. Boyd v. Leasing Associates, Inc., 516 S.W.2d 485. 489 (Tex.Civ. App. - Houston [lst Dist.] 1974, writ ref'd n.r.e.1. The general partner of a limited partnership moreover stands in a fiduciary capacity to the limitedpartners. Crenshaw v. Swenson, 611 S.W.2d 886. 890 (Tex. Civ. App. - Austin 1980. writ ref'd n.r.e.); Watson v. Limited Partners of WCXT, Led.. 570 S.W.2d 179. 182 (Tex. Civ. App. - Austin 1978. writ ref'd n.r.e.1. It is the general partner's duty to administer the partnership affairs solely for the benefit of the partnership. Creashaw v. Swenson, 611 S.W.Zd at 890. Granada Management Corporation is the general partner of Granada Development's affiliate client;. The individuals who own the parent corporation of Granada Management's parent may benefit economically from contracts which Granada Management Company may eater into on behalf of its clients.

You argue that the enactment of article 6252-9b. V.T.C.S.. changed the common law rule ofMeyers v. Walker and thus thatdoctrine does **not** govern this transaction. Section 6 of article 6252-9b. V.T.C.S.,provides inpart:

(a) This section applies only to an elected or appointed officer who is a **pember** of a board or commission having policy direction over a state agency. excluding officers subject to impeachment under Article XIV, [sic] Section 2, of the Texas Constitution. If such an officerhas apersonal or private interest in anymeasure, proposal, or decision pending before the board **or** commission. he shall publicly disclose the fact to the board or commission in a meeting called and held in compliance with the Open Meetings Law (Article 6252-17, Vernon's Texas Civil Statutes,)and shall not vote **or** otherwise participate in the decision. The disclosure shall be entered in the minutes of themeeting.
(b) For the purposes of this section, the term 'personalor private interest'has the samemeaning
as is given to it underArticle III. Section 22. of the Texas Constitution, governing the conduct of members of the legislature. For the purposes of this section,a person does not have a 'personalor private interest' in any measure, proposal, or decision if he is engaged in a profession, trade,
or occupation and his interest is the same as all others similarly engaged in the profession, trade,
or occupation.

p. 3075Mr. PerryL. Adkisson - Page 5 (JM-671)

(c) A person who violates this section is subject to removal from office on the petition of the attorney general on his own initiative or on the relation of any other member of the board or commissionor on therelation of any citizen.

. . .
You suggest that a stateboard may contractwith a company inwhich a board member is interested as long as the interestedperson publicly discloses the fact and recuseshimself.

We have held that article 988b.V.T.C.S., a 1983 enactment pertaining to conflict of interest by local public officials, repealed the Meyers v. Walker doctrine at the local level. SeeAttorney General Opinion .R4-424(1985). Article 988b. V.T.C.S.,provides in part:

Sec. 3. (a) Except asprovidedby Section 5 of

this Act, a local public official commits an offense ifhe knowingly:
(1) participates in a vote or decision on a matter involving a business entite in which the localpublic officialhas a substantialinterest if it is reasonably foreseeable that an action on the matter would confer an economic benefit to the business entity involved;

. . . .
Sec. 4. If a local public official or a person related to that official in the first or second degree by either affinity or consanguinity has a substantial interest in a business entity that wouldbe peculiarlyaffectedby any officialaction taken by the governing body. the local public official,before a vote **or** decision on the matter. shall file an affidavit stating the nature and extent of the interest and shall abstain from further participation in the matter. The affidavit must be filed with the officialrecordkeeperof the governmentalentity.

Sec. 5. (a) The governing 'body**of** a governmental entity may contract for the purchase of services or personal property with a business entity in which a member of the governingbody has
a substantial interest if the business entity is the only business entity that provides the needed service or product within the jurisdiction of the governmentalentityand is theonlybusiness entity thatbids on thecontract.

P- 3076Mr. PerryL. Adkisson - Page 6 (JM-671)

. . . .
Sec. 6.

. . . The finding by a court of a violation under this article does not render an action of the governing body voidable unless the measure that~wasthe subject of an action involving conflict of interest would not have passed the governing body without the vote of the person who violated this article. (Emphasisadded).

The language and legislativehistory of article 988b demonstrate that it applies to contract formation and that ic changes the common law rule invalidating a public contract in which even one member of the contractinggovernmentalbodyhas aprivatepecuniary interest.
Section 6 of article 6252-9b,V.T.C.S.. prohibitsvoting or other participation ina decisionby an officerwho has

a personal or private interest in any measure, proposal, or decision pending before the board.

. . .
V.T.C.S. art. 6252-9b. 06(a). Article 988b prohibitsparticipation

in a vote or decision on a matter involving a business entity inwhich the localpublic official has a substantial interest.

. . .
V.T.C.S. art. 988b. 53(a)(l).

These two prohibitionsare expressed in similar language.Article 6252-9b does not, however. include any language indicating that section 6was intended to apply to contracts,nordoes its legislative history suggestan intent to modify theMeyers v. Walker rule.Article 6252-9b was adopted in 1973 as Rouse Bill No. 1. Acts 1973, 63rd Leg., ch. 421. at 1086. It was described as "The Ethics Bill" and imulemented its ournoses throuuh financial disclosure bv state officers. Id.; "Background Repott on Local Officers' Conflict of Interest Problems" at 17 in Final Report of the Public Servant Standards of Conduct Advisory Committee, August 1983. Section 6 was added only when House Bill No. 1 was discussed by the conference committee. Texas Legislative Council. "Ethics and Financial Disclosure," at 31 in Selected Public InterestLegislation,May 1978. Some conferees expressed the opinion that therestriction onvoting by members of the legislature in article III, section 22 of the Texas Constitution should also apply to members of boards and commissions. Id. Article III. follows: section 22 of the Texas Constitution provides as

A memberwho has a personal orprivate interest in any measure or bill, proposed, or pending

p. 3077n
Mr. PerryL. Adkisson - Page 7 (JM-671)

before theLegislature, shalldisclose the fact to theHouse, of which he is amember, and shall not vote thereon.

"It is an ancientrule thatmembers of a lawmakingbody shallnot vote onmatters inwhich theyhave apersonal interest." Lute, Legislative Procedure, 366 (1922) (quoted in Texas Legislative Council, "Ethics and FinancialDisclosure"at 32).
Article 6252-9b,V.T.C.S.. was thereforemodeled on a provision applicfble to legislators, who do not enter into contracts for the state. The state agencies whose offices are subject to section 6 exercise regulatory and other executive functions. They may also enter into contracts necessary to carry out their executive responsibilities,but it is reasonable to conclude that section 6 pertains to the agencies' primary functions: rule making and the application of the statute and rules to individual cases. Section 6 does not prohibit an officer from participating in a measure, proposal or decision "if he is engaged in a profession, trade, or occupation and his interest is the same as all others similarly engaged in the profession, trade, or occupation." V.T.C.S. art. 6252-9b, 56(b). This proviso suggests that the legislaturehad regulatory actions in mind when it added section 6 to article 625%9b. Section 6 was moreover seenby the legislatureas placing an additionalrestriction
on stateofficesand.notas removingan existingrestriction.

When article 6252-9b, V.T.C.S.. became effective on January 1, 1974, the following rule of statutory construction applied to all civil statutes:

The rule of common law that statutes in derogation thereof shall be strictly construed shall have no application to the Revised Statutes; but the said statutes shall constitutethe law of this State respecting the subjects to which they relate: and the provisions thereof shall be liberally construed with a view to effect their objectsand topromote justice.

Act of Feb. 21. 1879, 16thLeg. R.S.. adoptingTex. Civ. Stat., Final Title 53 (formerly codified as V.T.C.S. art. lO(8) repealed 1985). See Government Code 5312.006(b). m.C.S., is statedas follows: The object of article 6252-9b.

1. Article III. section 18, of theTexas Constitution forbids a legislator from being interested in contracts with the state or a countyauthorizedby any lawduring a term forwhich hewas elected.

p. 3078Mr. Perry L. Adkisson - Page 8 (m-671)

It is the policy of the State of Texas thatno state officer or state employee shall have any interest, financial or otherwise, direct or indirect, or engage in any business transaction or professional activity or incur any obligation of any nature which is in substantial conflict with the proper discharge of his duties in the public interest. To implement this policy and to strengthen the faith and confidence of the people of Texas in their state government, there are provided standards of conduct and disclosure requirements to be observed by persons owing a responsibility to the people of Texas and the government of the State of Texas in the performaaceof theirofficialduties.

V.T.C.S. art. 6252-9b, Il. This objectivewould be poorly servedby a construction of section 6 which weakens the common law conflict of interestrule applicable to state officers.
Attorney General Opinions issuedsince article 6252-9b,V.T.C.S., became effective have applied the Mayars v. Walker rule to state agencies. See Attorney General Opinion Nos. MW-179 (1980); H-1309 (1978). Section 6 of article 6252-9b.V.T.C.S., has been applied to an agency.in its capacity as a regulatorybody. Ser Attorney General Opinion Nos. JM-126 (1984); E-1319 (1978). In our opinion, article 6252-9b.V.T.C.S., did not modify the common law conflict of interest rule stated inMeyers v. Walker. Accordingly, the Board of Regents of A h H University may not approve a contract between the Texas Agricultural Experiment Station and a corporation ia which a regent of Texas A h H University has a financial Interest. Under the common law rule, the board is barred from approving the contract; racusal of the interestedregentwill not permit the board to approve it. See Delta Electric Construction Co.
v. City of San Antonio, supra. Thepublic policy of the state strictly opposes such contractseven ifallparties act in good faith and fully believe that the coatractwill benefit the state. A prior opinion of this office determined that the board of regents of a state college could not contractwith a bank of which a regearwas an officer. The opinion made the following observation about the absolute nature of thepublicpolicy against conflict of interest in contractmatters:

It is not a question of whether or not the public interestwill actually suffer inpermitting theparticular contract.but it is rather one of a sound policy as to official conductwhere the law will not speculate upon the actualities following itsviolation.

p. 3079Mr. PerryL. Adkisson - Page 9 (JM-671)

AttorneyGeneralOpinionV-640 (1948)at 2.

The Regents of A h M University may not approve the contract aboutwhich you inquire.

SUMMARY

The Texas Agricultural Experiment Station, an agency of theTexasA hM UniversitySystem.may not contract with a private agricultural development corporation lawhich a regent of the universityhas
apecuniary interest.

AttorneyGeneral ofTexas

JACXHIGHTOWER FirstAssistant Attorney General

MARYXRLLRR ExecutiveAssistantAttorneyGeneral

JUDGE ZOLLIE STgARLRY SpecialAssistantAttorney General

RICK GILPIN Chairman,OpinionCommittee
Preparedby SusanL. Garrison AssistantAttorneyGeneral

p. 3080