OFFICE OF THE AlTORNEY GENERAL OF TEXAE 

AUSTIN 

Dssr 8lr: 

opinion x0. o-u389 

Be: coartmat:on 0f Art 

Ravfsed Civl 

x0 El-e in rscsipt of 

.lon ca tts foltowln& :;uastl 

oh lnatsnos orrning 

two oor~ora$ lonr ( 

atian and the 

sarano~ c or*raseeb where It appw8 

af each 3oard is lCe~tioa1, 

ooatrolllnrp latarest 

"iis a conowte flleetr?itioa of the question ~~h3k 00nrr0aa u&; tbr farlo~ing 18 

tjr3foal: 
l Tha controlling stook of &auance Qorporation A is orned by B.C. and D, mo ocmstitaate 

1 ts Board OS ~ir eo to r s. 2%. o o ntr o llirstlook & 

OS oorpor a g io a It, l finance oorjioratlon, $8 

owned by B,C, and D, thsy being U ldentioal 

~arsciis who own the oontrolllng stock la Inmrsaoa Cmpsny A, 

*Tim itines oorpxatios 1 sol18 to Imaursnoe 

Cor?oratbm A orrtaia socurltles owned b7 it. 

3%~ quwtion uhioh eonSzoat8 nm is whaOhor or 

not uuder suoh obwaritstanoes an6 la rim d 

Artfal. 412’1, notBfthstanding said Artiole 1s 

a prohibition agsinst SOW JS the directors, 

offioiels, agents do., should thr Board oS 

IasurMoe c4xaui*sjonars reoogniza the saourities so guraka8ed as adnlsslbla asset&P 

%I propounding the ioregolng puastions, 

I am laborirg under the izapraasion that the 

mubuss of t?m 3owd of the 8ellfng Corporatto%E have a ;eouniary interest in the amourities sold to Inmranos Corporation A, the Directors oS rhich are either ldontlcal with the 

Direotors cd the S4vLUng Corporatfcis or owzt 

and aoatrol ths maJorffq stook. 

'CT- will note that In at9 lettsar to yaa 

of October l?th, I requested that you oonsld~~ 

whether or not a distlaotlon OM? or should be 

nmde where the oirlcars and diraetors OS tko 

two oorgoretions are identical, and whether or 

not the ofriosrs and directors am not identioal, and to aomider IS there 1~ a distinction 

to be drawn between Inatanms where th* ofticer 

or director of both oorporatlonn 3p1ls the eontrolling intereeat in both coryorotiozs or oua8 

ths a~ntrolU.ng interest in the borrow& ooxporstion. 

l * * I .* 

R sfetec c e is mdd to h r ti01 0 4VE7, Uti8e6 

Civil StatPlieS, 1925. I.i tsve given nost oamical con- 
8fdsntica end analysis to thf 8 eftll statut8. II 18 

OwT utudied a.$nion that the prohibition contained 

th8roin do48 not agply to tha oircmt8nara you hare 

d48crlbsd. S84 in this uonnsction Cbnferenoe G&x.ion 

X0. 5097 or t%i8 departrent. 

Art1ole 4727 and Artlale 577, Penal C&4, 1925, 

Eave a8 their aceibinsd obfsative the prohiblthm an8 

psnalitlng of II director and offioer or dlreatorr end 

otiksr8 of aor~oratlon8 in re8prat to oertaio per8ana1 aot8. Both the prohlbltion and the p8tmlty apply 

to indirldualr. They do not embrace tha oorporation 

itaslt 68 an entity. The language ir alerr, umablgu0128 an6 not 8Ubj44t to aoatruotfon. 

Th4 lneetiion ot th8 prwirion8 aoncarning 

polio loa!m WQS undolabtedlp for the xrpoae of anablfng d I TO4tOr8 md OfffO8rs of fwiurance oo~paxi48 to 

take e&vantage af tr:lr xell-rcocg~-.lzed class .ztf loaae., 

It camot be cocaluded that it f.?dic&tsr a legislative 

intent thet bXt~ranCCi CO2pa?ii48, ~8 aSu 48 th8h &- 

dltidual dlreotors and officers, mre within the atatutmy inhibition. 

Artlole 577, eapra, 4XpT4881l 8tate8 that *4~ 

habrlloll VfOlati,w any proti8ioIl oi thi8 article 8ha l-d. 

not le8.8 than thres huMred nor more than one 

thousand Qo11ems'r (t3nber8corlng Our8) * 

The raat tbut irticlo 4727 and brticlo 577 are 

not a.?pUoable d,aea not amen that the kerd of Insurance 

tkd88iOZWr8 18 pOwerlsBS to OOntrOl the 8dsi84ibllity 

oi asset8 of life lnsuranas co.:paniel aaquired under 

the oirewnstence8 outlined in your letter. 

‘Ilrk8I.8 aZl in0Ur~Ce OO%~ell~ >Ur4h4888 88OtSitie8 

from a aor>oration whose 3mrd of ikectorr haa a member8hlp identical with thst of the ,inzreharin8 Insurance 

th~~p~~y~ th8 Board Of ~8UmUX?~ Ca.BSLiSlrianOr8 i8 entitled 

to b8 g~l&~d by asrtain itlndaaS?.t?id m148 of hW in &Otwaiofng th0 adaLi88ibility Of 8uch 88WritLa8 a8 elreet8 

of the in8urance ecxpany. 

It 18 toa ~.a11 sstablfshcd to requim citation 
of out::ority thct ciilmrr und especially diXMtOr8 

of 0or~orat:onr are riduclsrier. SO, kO01OVer, 8 

yyv3s*tJ cz X", . . . .K . . ..~i&iS. IntP Ch. 49, p. 777 *DutIe8 and 

Tower8 ot DIreotor8 a8 Piduoiarie8ng 2 COW3 OX XYemotive 1451 B 5094 on *Dlreotorrr~ 25 BAWARD LAW 

iUXBU 427 gInterloeklng tireotoratea, The Problem 

Mid it8 sOh.Oll -; TRmrTr-mBsAL nsmw3 caxrA?a 

XT AI, 1. HS?XLL 22’ AL 101 S.W. (2d) 607. 

??hO ia4t that 8 QUt OT 811 Of the dlnO%‘X8 

of 054 ooatreating oorporatfon 8re dirclotz-nt of the 

other oontraatl.ng oorporatioa afford8 a ground ior subjeoting the oontzwat Into r!xioh they enter to the 8triot88t sarutiap by courts of e uity. 

.?TI@XS 841; 10' TSX. JUR. 3 

a lFSXQ%ox C34 Co&OR95 . 

?ho true rule in Texa8 with relrpeat to colttract8 betaeen wrporation8 having intarlooking alrsctoretea or dricers lb cownon poerally nap :33 round 

enunaiatod in CITY H:,T?&%L %XGi WJ. %lSXJTS* QiD 

xii33RS XxX.%. SMX. 105 s.3. 336 (c&i 1907). to 

the 0rfe0t thfet 

‘1% 18 nOti fnhW4Xitly Wona; fW tW0 OOrporatIon8, hrrvlng all or a part of their aoatrolling oriicrers In aasao5, +AB aont?a& with 

eaah other. Xven when a majority or 811 of 

the aontiscting 0rsicers of two cor~osationa 

8zO memm to b!th, that raot alom bow 2ot 

mke e eontreat between th8 tW0 COrgarationU, 

entered into by euah oontraotiq oiiioar8, 

ab8olntely void and incagable of refificafion. 

TS4 current of modern autkmitY 5oldr that 

funfi silt ii it * ld awear, upn 

;,,e&&;:%.i' that the aoi%::ot 18 ialT md 

thoro has bee; no abuse of the trust relation, 

.q~.crrn bythe sdjudiontod cfis48. de;.Ond8 in a 

-of- , 
Son. ‘#alter C. L’oo4ward, Chairman, pa+y 5 

lor case. 

llehed.* 

20 lnflaribis rtlla has b;on sstnbThe ale wae ateted rtth remarkable clarity 

by Xr. Justice Clark, apeaklng ror the 3tited States 

salprama court in GsT&s TS. j&,fJ;xDj, CC;;';;,3 ',cI;:x:G CC& 

PAST, 254 U.S. 590, 599, 41 9. ct. 2G9, 65 L. 3d. 425, 

when he eaidr 

Y?ie relation 0r Clreator8 to oorpratlonr 

is of such a tidueiars nature that traa%eation% 

between board8 her&g acanon ms.bers are reqrded as jealously by the lsa ae arc ;ersonal dealingo b&mm 6 direotor and &i8 corFretion, 

and where the raimes8 Or meh transaction% i% 

ahallengsd tha burden 1% upon those who wcxlld 

maintain them to show their entire rabies6 an8 

wkeere a sale :s ictolved the full cd%quacy of 

the cmr;i4er:&io~. 33,waially is this true 

whore e common director is do5inetlni; in i,*luexe or in ohsraoter. T::iri court has been consletently emphatic in the appllcetlon 0i this 

rule, uhlah, It has dealarea, is fMlnded in 

soundest morality, and wa mm add ln the soundest busln4s% policy.* 

In oorrinenting on thi% rile, the United State% 

Suprome Court in TCmz-LrCE EL CG.;ZY V%. x.zG3mY, 91 

U.S. SQ7, 23 i. 3id. 322. said, 

8 * * + when the lendsr is a direator, 

aharged rlth others, with the oontrol and managxzxmt 0r.m alfairs 0r the corporation, representing, in this regctrd, the aggrorjats intereat 

of all the etockkoldere, hia obiigetloc, if he 

beeme a 2srty to a oontract -sith the CCI ,+Cy, 

to cozxior and tfiir des:lq, ir: lncreorod in 

the precise degr;rao t:w*t tis raixesa3tiitive 

oharacter hii% given tin gower and confrsl derived rra the coidlJence repwed in him by the 

atockholdara ah0 aoyointe4 h.ka ttelr aGent.* 

In England, the ~11s is that c;rgzations 

having dirsotore Ln ccmzon izeg xot cozArc.ct. i-c8 2 Tkmg6x1 Corj2orstions 846. s: :;T T. F::,TL3 jto. IL‘,;,~,s~#g cc., 

Hon. Ifalter C. :&xlward, Chalrsan, pit* 7 

l wality of o p ;o r tua itto y all entitled tkers80 abuaa a nd violate the flduaiary relation 

a aa trust obli~etioa of dlTeef&ra. 3aw treatment must be rtow to an-e o~dsstro~ the 

evil .a 

A8 utstrd another rag ia EnBYE WI. 3RO+?S, ?30 

583, 635 (1380): 

artlola 

QOllCiSO 

Wo take the liberty to quote a&z' from the 

in 39 3 .L.R. (this tlzrie at p. 4741, w3ich is a 

rtatmrieat cf our ~osl.tionr 

Th@ the2 great might 0r autmrity 

supgorta the ~onoluaioa that oontreotr made 

by corporations, in wclch ita directors are 

interested either individually, or through 

theeir arfiiiatfons -irfth other eorpretlms, 

are aot void ab fnftlo, but asr8ly voidable, 

yet th6 rule 0r law in this respect is such 

that a11 praotlcal plrpose8, if tha CQxtraot 

or transaotlaa be attacked, It will be archled 

ahoat a6 a matter 0r cow86, ‘booause the 

puastlon or tha ixtegity or ?a @od rolth 

oi the treneaotion will -:ot be irr;uked into. 

The uourt.8 will not contidbr wbther or xot 

the traxtztion Lair been 5xjurious. Zxclaad, 

they have g&a so far zs to hold tb.et even 

whiHI0 It CQUld be smZUeitiVsIy CLapm that 
Eon, 34lter C. Xocdwnrd, Zhalmse, pgr 9 
Eon. Xalter C. Gxduard, Cbairaan, pa,ge 9 

CSt0b 

say refuse adtisaibillty ar asset8 of the lnsuranaa 

ooz?any aaourltisa obteimd by purobaus frrua a aorporation hating an Identical Board of Diraotore. 

TJi0 861~10 na605ing spglle~ ia thor0 0as48 where 

tba Board of Xreotorr of the pmoha&.ng insurance ccanpw and the sslliag aorporatioa have an identloal majority oontrolll.llg l 14lu4nt.. 

Iho refusal of tha Board of fnaunnoe Oaamis8ioaer8 to admit aertein 840uritlar a8 a804ts of ths 

nt of ?.ho aagital atook of an in-oe oompeny 

pnq;rrr hrtiola 4748, llarlsed CiTil St4tflto8, 19e5. 

Whdhar impalrnwrnt 18 brought abou4 a~ not bfthlm l efirra, tbs authority of tha Boerd of Imurancs Cmdssloaers is the aamm whem the transaotion between the 

insurance aar;.jaay and the oprporatioa having OO~KMS 

dlraotorfi doe8 oat -84 the tar4 of fairnee8 or 18 a 

riolatioa of the trust rabtlon8hip. 

In thf8 opinioa ws ars not passing u;ron ths 

4uertion of whether or no4 tha individual dlraotoz6ia 

the sl4untion do8orikd are guilty of rfolating ktiolrs 

47Bt utd 6t7, mapre. 

Truathg that we hare 8eti8faotorll~ answered 

your in@ry, wo are 

Your8 ~4ry truly 

ATTOR!EW C-AS, OI TEXAS 

BY 9 I L\< s3?x$ Dick stixlt 

RsaiRt4nt 

App~ovEcMAy 16, 1940 

ATTORHEY GENERAL OF TEXAS