Court Opinion

ID: 4141588
Source: CourtListenerOpinion
Date Created: 2017-02-18 03:12:21.579043+00
Date Added: 2024-06-11T14:34:38.353599
License: Public Domain

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 a package store permit
                                      to a subsidiary corporation
                                      because of a violation by its
                                      parent corporation of the
                                      provisions of Article 666-17(2),
                                      Vernon's Penal Code of Texas.

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 in Texas 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. The Walgreen Company of Texas
            I,
                                                    i
                 The Walgreen Texas Company         5
            ,I * Walgreen Drugs Incorporated
             i:
            -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 the number of permits
      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 of testimony reflected by this inquiry, it
      may be observed that the five domestic corporations are
Honorable Bert Ford, Page 2, O-4750

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

   "In determining whether or not the respective corpora-
   tions may 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 such person may have ownership or an interest.

   "After reviewing the facts in connection with this matter,
   will you kindly advise whether or not in your opinion
   each of the respective corporations is eligible for a full
   number of five permits, or whether the limitation of five
   package~store permits would be applicable to the parent
   company, the beneficial holder of all of the stock of the
   various subsidiary companies. All existing permits will
   expire on August 31, 1942, 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 the Walgreen
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 any person to hold or have an
   interest in more than five (5) package stores or the
   business thereof. It shall further be unlawful for any
   person to hold or have an interest in more than five (5)
   package store permits."

BY Section 3-a of the same Article, 'person" is defined as:
     . . . any natural person or association of natural
    persona, trustee, receiver, partnership, corporation,
    organization, or the manager, agent, servant, or
    employee of any of them."

On the assumption that the Walgreen Company of Illinois
(hereinafter called the Illinois Company) is the beneficial
Honorable 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 or has an "interest" in the package stores
organized under the names of the Texas companies or in the
business thereof or in the package store permits obtained by
such stores, each of the five Texas companies is eligible to
receive five package store permits.

We construe the word "interest" as used in the above Section
according to its legal rather than its popular usage, and
interpret it as being synonymous with legal title or equitable
title or both. This interpretation is in accord with that
previously placed upon the word by the courts of this and other
jurisdictions.   In Automobile 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 owned by the corporation, because such sale
conveyed neither legal nor equitable title to the liquor. A
similar interpretation has been placed upon the word 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 in which such
companies "may have any interest, direct or indirect." U.S.C.,
Title 49,            In United States v. Delaware & Hudson Co.,
213 U.S. 3R 6’(!$3) at p. 413, th e court held that the mere
fact,~that a railroad owns part or all of the stock in a coal
company does not mean that the railroad possesses 'an interest
direct or indirect ' in the property or products of.such company,
since the word "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,
220 U.S. 257 (1910); United States v.Elgin,.J. & E. Railroad,
298 U.S. 492   (1935).

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

     "In harmony with the concept that a corporation is a legal
     entity distinct from its members, the ownership of the
     corporate assets is held to be vested in the corporation,
     not in the stockholders."

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

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

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

Although a stockholder does possess substantial rights to the
surplus of a corporation, once dividends are properly declared,
and although he is entitled to a pro 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 as no
specific property has been appropriated for the payment of divi-
dends. McAllister v. Eclipse Oil Company, 98 s.W. (2d) 171, 176
(Sup. Ct.); 10 Tex. 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 the package stores or in the
businesses thereof, or in the package store permits of the Texas
companies; however, while concentration of stock ownership in the
hands of the Illinois Company is not in itself determinative of
the question under consideration, it may 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 a violation
of Article h66-17(2) even though the three companies might, in
the aggregate, possess more than five package 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 of facts submitted to this department and that
such facts touched solely upon the question of whether stock
owner'ship is coupled with other facts, hereinafter to be mentioned,
concerning the motives and interrelations of the persons 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 to possess such an interest through the application of
other well known and widely accepted principles of corporation
law. Along with the courts of virtually every other jurisdiction,
the Texas courts have long recognized that there are certain well
Honorable Bert Ford,   Page 5, O-4750

defined instances in which 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 the subsidiary.   As has been said, the concept of
corporate entity is "but a lenal
                              ,_, fiction adopted for convenience;
it is not a sacrosanct principle granting exemption from liabi-
lity in circumstances wherein the fiction of corporate entity~is
opposed to the facts."   10 Tex.Jur. 640-641, sec. 45. Where the
fiction is so disregarded, the parent possesses an "interest" in
the subsidiary since the fictional dichotomy between the twos
organizations disappears and they are treated as a unity.

The application of this principle is well 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
it was carrying.~ On demurrer, it was 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 this blow, the government presented an amended
petition in which it alleged additional facts of the nature
hereinafter to be discussed and requested that the two cor-
porations be treated as a unity. 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 Co. v. Forrest E. Gilmore Co.,
55 S.W: (2d) 622 (Civ. App. 19323 , writ dismissed, at p. 628, the
Amarillo court thus classified the situations in which the fiction
of corporate entity will be disregarded:

     "Where the fiction (1) is used as a means of perpetrating
     fraud; (2) where a corporation is organized and operated
     as a mere tool or business conduit of another corporation;
     (3) where the corporate fiction is resorted to as a means
     of evading an existing legal obligation; (4) where the
     corporate fiction is employed to achieve orperpetrate
     monopoly; (5) where the car orate fiction is used to
     circumventa,statute;       f: where the corporate fiction
                           and (,)
     is relied upon as a protection of crime or to justify
     wrong."

This classification was adopted in Pacific American Gas Company
of Texas v. Miller, 76 S.W. (2d) 833, 851, writ refused, and was
cited with approval by the ,Commission of Appeals in First
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 and will not be con-
sidered further. Since the remaining items may well be relevent
Honorable Bert Ford, Page 6, 04750

to the solution of the matter at hand, they will be discussed
individually.

(a) Where a corporation is organized and operated as a mere
tool or business conduit of another corporation: We quote from
10 Tex.Jur. lOl9-1020, sec. 354:

      “Formerly, it was held by the Texas courts
      that:   'Where one corporation makes use of an-
      other as its instrument through which to perform
      its business, the principal corporation is really
      represented by the agents of the ,subcorporation, and
      its liability is just the same as if the principal
      corporation had done the business in its own name.'
      The authorities so holding have, however, been in
      effect overruled so far as they assert a rigid con-
      clusion of law in the circumstances stated. But
      although the doctrine that the two corporations are
      separate legal entities forbids the legal conclusion
      that one corporation is the agent or partner of another
      without facts to warrant 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 or where a partnership in fact exists between the
      two organizations;   Moreover, the fiction of separate
      entities is not maintained where a subsidiary is not
      conducted bona fide as a separate organization. . . ."

               "Piercin the Veil of Corporate Entity," 12 Columbia
 ~~~~~%~'496      (1912?, at pp. 504-505, it is said: -

      "It cannot be too strongly emphasized that mere identity
      of stockholders per se does not operate to destroy the
      distinct corporate existence of two corporations.  So much
      is clear. It must further appear by clear and convincing
      evidence that the corporation created is only an adjunct
      of the business of its creator - a mere agency or instru-
      mentality, through which it acts - a mere business depart-
      ment, or bureau, 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."

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

      "In the c ase just cited (State v. Lone Star Gas Co., 86
      S.W. (2d) 484, 491, writ refused) the rule of law here
      involved is thus stated:   'The cases are legion which
Honorable Bert Ford, Page 7, O-4750

    deal with the relationship of two or more corporations
    from the standpoint of ownership of the capital stock
    in one by another, and from the standpoint of associa-
    tion together for the purpose of carrying on a single
    or common business enterprise. The rule is well settled
    that courts will look through the forms to the realities
    of the relationship between two or more corporations in
    order to determine whether each is a separate entity or
    corporation: or whether their commingled affairs are such
    as to constitute them one integrated and sinale business
    enterprise; or whether, through IntercorporaFe set-up,
    affiliation, or stock ownership, the purpose is to con-
    trol the subsidiary corporation or corporations so that
    they are used as the mere instrumentalities or agents of
    the owning corporation or corporations.    In discussing
    the rule, it has been held that while "ownership, alone,
    of capital stock in one corporation by-another, does not
    create an identity of corporate interest . . . or create
    the relation of principal and agent or representative
    between the two"; still it has been repeatedly held that
    such rule is not applicable "where stock ownership has
    been resorted to, not for the purpose of participating in
    the affairs of a corporation in the normal and~usual
    manner, but for the purpose . e . of controlling a
    subsidiary company so that it may be used as a mere
    agency or instrumentality of the owning company or
    companies."   Chicago, M. & St. P. Ry. v0 Minneapolis
    ,Civic & Commerce Ass'n, 247 U.S. 490,38 s. Ct. 553,557,
    62 L. Ed. 1229; United States v. Lehigh Valley R. Co.,
    220 U.S. 257, 31 S. Ct. 387, 5 L. led. 458; United States
    v. Reading Co., 253 U.S. 26, 0 s. ct. 425, 64 L. Ed.
760; United States v.             L. & W. R. c0.,~238 U.S.
    516, 34 S. Ct. 873, 59 L. Ed. 1438. Also, in discussing
    the rule, the fact that the same persons are directors
    and managers of two corporations has been given con-
    sideration (McCaskill Co. v. United State;.sd2;6 U.~S.
    9i,ses; s. Ct. 386,391,54 L. Ed. 5901,            growing
            y is therefore exhibited in the,courts_?o look
    beyond the corporate form to the purpose of it, and to
    the officers who are identified with that purpose."
    See, also, Gallatin natural Gas ,Co. v. Public Seruice
    co., 79 Mont. 269,256 P. 373. 'Where one corporation
    owns or dominates another, it has been often held that
    "the independent entity of the two companies is so far
    disregarded that each is considered as but a part of the
    indivisible whole." Kimberly Coal Co. v. Douglas (6 Cir.),
     (C.C.A.( 45 F.2d 25,~ 27; In re Kentucky Wagon Mfg. Co.,
            3 F. Supp. 958; Law.v. McLaughlin, D.C.,,,2F Supp.
           And.."t,herule which appears to be established by
    theie cases is that, where the corporate organization and
Honorable Bert Ford, Page 8, O-4750

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

     "A somewhat analogous question was decided by this
     court in A.T. & S.F. R     Co. v. R.R. Corn., 77 S.W.2d
773, 775 (w-1.t refused 7: 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, as regards the jurisdiction of the
     Railroad Commission; and wherein it was held as follows;
     "To permit railroads to perform such steps in the process
     of transportation through other separate legal entities
     created and owned by them would enable them to defeat
     the jurisdiction of the commission over such transpor-
     tation. And in such case where the stock of such
     separate corporation is owned by the railroad company, and
     itz.zole function is merely to help conduct the business
     of the parent corporation under whose complete control it
     operates, and in the instant case largely, if not wholly,
     through the same employees, the subsidiary corporation
     will be treated as if it were a mere 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
     (304 U.S. 224, 58 S. Ct. 883, 82 L. Ed. 1304), but the
     rule of law above announced was not questioned. 'We
     here and now 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 of what facts of
ownership, control, and management in a common enterprise are
necessary to justify the characterization of a subsidiary as
an "adjunct," "agency," instrumentality," or "creature" of the
parent.  In Ballantine-on Private Corporations (1927) at p. 37,
we find the statement:

     "It is submitted that no mechanical rule based on objective
     facts of control or connection which will furnish a
     certain test is possible of formulation.  Identity of
     stockholders, identity of officers, the manner of keeping
     books and records, the methods of conducting the corporate
     business as a separate concern or as a mere department of
     the other concern, may be evidential facts to be conzider-
.

    Honorable Bert Ford, Page 9, O-4750

         ed as bearing on the question of juggling of separate
         capacities and whether the subsidiary is being managed
         in such a way as to make the controlling corporation
         justly responsible.   (citing cases) But after all it
         comes down to a question of good fai~th and honesty 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 vreltidice of innocent third vartiez.
         or the public welfare; ii may be necessary to limit zuch
         abuse of the corporate capacity or shield."   (Emphasis
         ours)

    In Anderson, Limitations of the Corporate Entity   (1931) 334-335,
    1 345, the criteria are stated thus:

        "Some of the controlling circumstances sustaining liability
        of the parent corporation are sometimes asserted to be
        ownership of all of the stock of the subsidiary or even
        a majority of the stock, coupled with control or ownership
        by the same persons of the stock of both the parent and
        subsidiary corporation , . . Of course consideration is
        given to the degree that the subsidiary is financed by
        thenparent, coupled with which is the maintaining 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 to which both the parent and zubzidiery
        have common transactions of business.  The degree to wnich
        interests between the two are favorable~one to another has
        an influencing effect upon holding the entities the same.
        The manner of bookkeeping will be looked to, but this is
        not a controlling circumstance.  Of course, consideration
        will be given to the extent to which an officer or director
        of one corporation is permitted to dictate the policies of
        the other. It hardly need be said that in such decisions
        will be involved the character of business that such
        corporations are engaged in and the extent to which the
        trade or public generally regards the two as separate or
        one. "

    These excerpts are but suggestive; any evidence tending to show
    that the subsidiary exists merely as the shadow and the creature
    of the parent will be relevant in determining whether the two
    should be treated as one for the purpose at hand, and such
    evidence is found in the actualities of the transactions among
    the corporations rather than in the carefulness with which the
    identity of each corporation is preserved on paper.
Honorable Bert Ford, Page 10, O-4750

(b) Where the corporation is used to circumvent a statute:
Courts are not so myopic as to allow the fiction of corporate
identity to be used to circumvent a statute. Thus in Northern
Securities Company v. United States, 193 U.S. 197 (1903) the
court struck down an attempt to avoid the intent and purport of
the Sherman anti-trust statute by recourse to the fiction of
corporate identity. Likewise, in United States v. Milwaukee
Refrigerator Transit Company, 142 Fed. 247 (1905), the identity
of a subsidiary was disregarded when its recognition would have
resulted in the evasion of provisions 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 of the exce.rptz quoted above have stressed the fact that
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 is common
knowled,ge that the legislature included Article 666-17(2) of the
Penal Code of Texas in the Liquor Control Act because of the
detrimental effect upon the,public,of the prior operation of
chain liquor stores and because of a belief that the interests
and welfare of the people of this State would best be furthered
by confining the ownership and operation of package stores to
relatively small and independent units. Moreover, the article
expressly makes the violation of its provisions an unlawful act.
In view of the langauge~ contained in the Gilmore case, zupra,
and approved in the Gamble case, zupra, the separate identity of
a zubzidia~ry controlled by its parent when to do so will be to
sanction an evasion of this article, to ignore the public policy
expressed by the legislature, and to point an easy way for future
evasions by the simple act of incorporation.

While the facts submitted in and with your letter of July 27,
1942, are not sufficiently detailed and sufficiently compre-
hensive to allow this department to say as a matter of law
whether or not the Walgreen parent-subsidiary organization fall8
within the two categories above discussed, you are respectfully
advised that:
(1) If you determine that the factual inter-relationship (a8
distinguished from the paper interrelationship) existing between
the Illinois Company and the five Texas companies is such a8 to
constitute the latter mere "adjunctzV or "business conduits" of
the former, accordi~ng to the criteria above discussed, then-the
Illinois Corn any will be guilty of a violation of the provisions
            $:
of Article h.h-17(2)  of the Texas Penal Code; and, under Article
666-~(2)  and the definition, contained in Article 666-11(9),
none of the five Texas companies will be eligible to receive a
package store permit.
Honorable Bert Ford, Page 11, O-4750       '

(2) If you determine that the five Texas companies were
organized by the Illinois Company or"%hat they were acquired
by the Illinoiz Company or that they are maintained by the
Illinoiz Company as ostensibly separate organizations primarily
for the purpose of evading the provisions of Article 666-1712)
of the Texas 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 will be 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 for the permit
period from September 1, 1942, to August 31, 19E 3.

                                  Very truly yours

                             ATTORNN    GENERAL OF TEXAS

                             zi R. 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
By BWB, Chairman