Court Opinion

ID: 4133828
Source: CourtListenerOpinion
Date Created: 2017-02-18 01:42:39.465637+00
Date Added: 2024-06-11T14:37:40.236216
License: Public Domain

Ron. Martin Dies, Jr.      Opinion No. M-840
Secretary of State
State Capitol              Re:   Whether Article 1434a,
Austin, Texas   78711            Vernon's Civil Statutes,
                                 providing for the crea-
                                 tion of water supply
                                 corporations requires
                                 such corporations formed
                                 pursuant to Article 1434a
                                 to operate as non-profit
Dear Mr. Dies:                   corporations.

     You have requested our opinion as to the proper con-
struction of the statute relating to the organization of
water supply corporations pursuant to Article 1434a, Ver-
non's Civil Statutes, and the operation of said water sup-
ply corporations as non-profit corporations.  Your ques-
tions are as follows:

     "(1)   Does Article 1434a, Vernon's Civil Statutes,
            providing for the creation of water supply
            corporations, require such corporations
            formed pursuant to Article 1434a to oper-
            ate as non-profit corporations?

     "(2)   If the answer to question number one is yes,
            must the Articles of Incorporation set forth
            the statement required by Article 1396-3.02A
             (211"

     Article 1434a was passed in 1933 (Acts 43rd Leg., 1st
C.S., 1933, ch.. 76, p. 2021, the caption of which Act reads:
            II.. .to authorize the issuance of stock on
            which shall be paid no dividends, and to
            provide for the distribution of the pro-
            fits of such corporation to towns, cities
            and other political subdivisions of the
            State as well as private corporations and
            individuals who shall be customers of such
            corporation in the purchase of water, said
            dividends to be issued in direct proportion
            to the amount of business transacted by such
            Contractees with said corporation; ..."
             (Emphasis added.)

                              -4070-
Hon. Martin Dies, Jr., page 2 -(M-840)

However, Section 1 of the Act states:

           "On and after the passage of this Act,
           three or more persons who are citizens
           of the State of Texas, may form a cor-
           poration for the purpose of furnishing
           a water supply or sewer service, or both,
           to towns, cities, private corporations,
           individuals, and military camps and bases,
           and may provide in the charter of such
           corporation that no dividends shall ever
           be paid upon the stock and that all pro-
           fits arising from the operation of such
           business shall be annually paid out to
           cities, towns, corporations, and other
           persons who have during the past year
           transacted business with such corporation,
           in direct proportion to the amount of
           business so transacted, provided that no
           such dividends shall ever be paid while
           any indebtedness of the corporation re-
           mains unpaid and, provided also, that
           the Directors of such corporation may
           allocate to a sinking fund such amount
           of the annual profits as they deem neces-
           sary for maintenance, upkeep, operation,
           and replacements."   (Emphasis added.)

     We have concluded that there is no variance between
the "shall" language in the caption of the Act and the
"may" language in Section 1 of the Act. In Southwestern
Bell Telephone Co. v. Houston Independent School District,
397 S.W.2d 419 (Tex.Sup. 1966), t'>e Court, at pages 421-
422, stated:
           II
            ...the purpose stated in the body of an
           act must conform to the notice-sivins
           purpose stated in the caption, and the
           courts have given controlling effect to
           the purpose stated in the caption.   ...II
           (Emphasis added)

Our opinion is that the "may" language of Section 1, read in
light of the "shall" language of the caption, is mandatory
rather than merely permissive.  Corporations are authorized

                             -4071-
           .

Hon. Martin Dies, Jr., page 3       (M-840)

to do only that permitted by statute, and interpreted in
that light, "may" means "shall" when used in that context.

     In 1941, the Secretary of State requested the opinion
of the Attorney General as to whether a corporation formed
pursuant to Article 1434a could amend its charter so as to
include sewage service on a non-profit basis.  In that
opinion is said:

           "The type of corporation contemplated under
           the provisions of Article 1434a is in the
           nature of a quasi-public corporation with
           the power of eminent domain and operating
           on a non-profit basis.   . .." (Emphasis
           added)   (Atty. Gen. Opin. O-3433 (1941)).

     The opinion was rendered in 1941 and in the thirty years
since, the Legislature has met in fifteen regular sessions.
In 1959 and in 1961, the Legislature amended Article 1434a,
but neither of these amendments repeal or raise any ques-
tion as to the correctness of this holding of the Attorney
General.

     In Burroughs v. Lyles, 142 Tex. 704, 181 S.W.2d 570
(1944), the Supreme Court had before it an election statute,
some of the provisions of ,which were in question. The pro-
visions of the statute had been construed in an Attorney
General's Opinion.  In upholding the Attorney General's
interpretation of the statute, the court, at page 573, said:

           "This long-continued administrative construc-
           tion is entitled to great weight, especially
           in view of the fact that the statute was
           amended as late as 1943, and the Legislature,
           -which is presumed to have been aware of the
           interpretation, made no changes in the langu-
           age that would indicate a contrary intent."

     In accord, see Humble Oil & Refining Co. v. Calvert,
414 S.W.2d 172 (Sup.Ct. 1967). Furthermore, it has long
been the policy of this office to follow its earlier
opinions on the same subject where not clearly erroneous.
Attorney General Opinion No. O-1659 (1939). It appears
appropriate to do so here.

                                -4072-
Hon. Martin Dies, Jr., page 4     (M-840)

     Should the "may" language of Section 1, Article 1434a,
be considered as ambiguous because of the permissive versus
mandatory interpretations , we may resort to the rule of
agency construction.

     The Supreme Court in Calvert v. Kadane, 427 S.W.Zd 605
(Tex.Sup. 1968) stated the rule governing agency construc-
tion of a statute at page 608:
           11
            . ..if, on the other hand, the meaning of the
           provision be doubtful or ambiguous, the con-
           struction placed upon a statutory provision
           by the agency charged with its administration
           is entitled to weight..."

     In your letter to our office, you state:

           "This office has continuously interpreted the
           provisions of Article 1434a as requiring cor-
           porations formed pursuant to said Act, to be
           non-profit corporations.  I can find no rec-
           ord of this office ever having issued a Cer-
           tificate of Incorporation for a 1434a water
           supply corporation under any act other than
           the Non-Profit Corporation Act, since that
           Act became effective in 1959."

     Therefore, based on your past uniform departmental con-
struction of Article 1434a, and the established rule of
statutory construction of Calvert, supra, we hold that the
use of "may" is mandatory rather than permissive.

     In Board of Insurance Commissioner v. Great Southern
Life Insurance Co., 150 Tex. 250, 239 S.W.2d 803 (1951), is
presented the primary guide to be followed in the construc-
tion of any statute. The court, at page 808, said:
           9,...the cardinal rule in statutory interpre-
           tation and construction is to seek out the
           legislative intent from a general view of
           the enactment as a whole, and, once the in-
           tent has been ascertained, to construe the
           statute so as to give effect to the purpose
           of the legislature..."

                                -4073-
Hon. Martin Dies, Jr., page 5    (M-840)

     In viewing Article 1434a as a whole to glean the Legis-
lative intent, several provisions indicate that corporations
formed pursuant to this Article were to be operated on a non-
profit basis.

     Section 9 of Article   1434a reads:

           "The provisions of the Texas Securities
           Act shall not apply to any note, bond,
           or other evidence of indebtedness issued
           by any corporation doing business in this
           State pursuant to this Act, to the United
           States of America or any agency or instru-
           mentality thereof, or to any mortgage, deed
           of trust or other instrument executed to

     The language of Section 9 makes clear that none of the
provisions of the Texas Securities Act, Article 581-1, Ver-
non's Civil Statutes, et seq., apply to 3   corporation formed
pursuant to Article 1434a. There is no distinction in the
application of the Securities Act exemption in Section 9,
Article 1434a, between profit and non-profit corporations
formed pursuant to the water supply corporation law. In ad-
dition, there is no merit in the argument that Article 581-6,
Subdivision D, exempts water supply corporations from the
Securities Act the same as Section 9 of Article 1434a. Ar-
ticle 581-6, Subdivision D states:

           "Except as hereinafter in this Act expressly
           provided, the provisions of this Act shall
           not apply to any of the following securities
           when offered for sale, or sold, or dealt in
           by a registered dealer or salesman of a
           registered dealer:
           I,
            ...

           "D . Any security issued or guaranteed either
           as to principal, interest, or dividend, by a

                              -4074-
Hon. Martin Dies, Jr., page 6    (M-840)

           corporation owning or operating a railroad
           or any other public service utility; pro-
           vided, that such corporation is subject to
           regulation or supervision either as to its
           rates and charges or as to the issue of its
           own securities by the Railroad Commission
           of Texas, or by a public commission, agency,
           board or officers of the Government of the
           United States, or of any territory or insu-
           lar possession thereof, or of any state or
           municipal corporation, or of the District
           of Columbia, or of the Dominion of Canada,
           or any province thereof; ...'I

     Section 6 of the Securities Act exempts the securi-
ties of the corporations enumerated therein from the regis-
tration provisions of the Act: however, it does not exempt
the corporations it applies to from the remaining provisions
of the Securities Act, as does Section 9 of Article 1434a.
Indeed, Article 581-23, Subdivision A states:

           "Anything in this Act to the contrary not-
           withstanding.

           "A. If it appears to the Commissioner at
           any time that the sale or proposed sale or
           method of sale of any securities, whethe~r
           exempt or not, except the sale of secur:Eies
           as defined in subsection A of Section 6,
           would not be in compliance with this Act or
           would tend to work a fraud on any purchaser
           thereof.. .the Commissioner may,...issue a
           written cease and desist order, prohibiting
           or suspending the sale of such securities
           ...II (Emphasis added.)

     Thus, the Legislature, through the exclusion granted in
1434a to water supply corporations, did not contemplate that
profit corporations would be formed which were not subject
to Article 581-23, subdivision A, and Article 581-33, which
provide for fair dealings in securities transactions.

     In Vernon's Civil Statutes, Title 32, Corporations,
Chapter 10 is entitled "Public Utilities".  The Public Utili-
ties chapter includes telegraph, telephone and telegraph,

                                -4075-
Hon. Martin Dies, Jr., page 7      (M-840)

water, gas and light and sewerage companies. Of all of the
public utilities listed in Chapter 10, only Article 1434a,
providing for water supply corporations, makes specific
provisions for the formation and operation of the corporation.
The formation of the water supply corporation is as a non-
profit corporation, a provision not applicable to any of the
other public utilities.  In addition to the non-profit stat-
us granted to water supply corporations in Article 1434a,
the statute also specifies the banks in which funds of the
corporation are to be deposited, the investment of funds,
and the maximum salaries payable to the officers of the cor-
poration.

     In view of the foregoing authorities and the long con-
tinued and consistent interpretation, enforcement and ad-
ministration of Article 1434a, we conclude that Article 1434a
requires corporations formed pursuant to it to operate as
non-profit corporations.  The answer to your first question
is yes.

     Article 1434a, Section 3, "Application for Charter to
Secretary of State: Board of Directors", states:

           "(a) The persons applying for a charter for
           such corporation shall make application to
           the Secretary of State in the manner now
           provided by law for private corporations and
           in the name designated for such corporations
           shall use the words 'Water Supply Corporation'
           ...II

     However, Section lO.O4G, Article        1396, V.C.S., Non-
Profit Corporation Act, states:

           "G. This Act shall not apply to those cor-
           porations excepted under Article 2.01 B,
           subsections (31, (41, and (5) of this Act;
           provided however, that if any of said ex-
           cepted domestic corporations were hereto-
           fore or are hereafter organized not for
           profit under special statutes which con-
           tain no provisions in regard to some of
           the matters provided for in this Act, or

                                -4076-
                                                     .   .   .

Ron. Martin Dies, Jr., Page 8     (M-840)

           if such special statutes specifically ap-
           plicable provide that the general laws
           for incorporation shall supplement the
           provisions of such statutes, then the
           provisions of this Act shall apply to the
           extent that they are not inconsistent
           with the provisions of such special stat-
           utes."

     Since Article 1434a corporations are organized not for
profit, under a special statute which does not provide for
the contents of the Articles of Incorporation, then the pro-
visions of the Non-Profit Corporation Act apply and Section
3.02A states what the Articles of Incorporation Act shall
include. Section 3.02A(2) provides that the articles must
have " . ..a statement that the corporation is a non-profit
corporation..."    Therefore, the answer to your second ques-
tion is yes.

                        S U M M AIR Y
                        ------_
           A water supply corporation organized pur-
           suant to Article 1434a, V.C.S., is required
           to operate as a non-profit corporation and
           such corporation must affirmatively show
           in its Articles of Incorporation the state-
           ment required by Article 1396-3.0214(2),
           V.C.S.

                                Yours very truly,

                                CRAWFORD C. MARTIN
                                Attorney General of Texas

                                   NOLA WRITE
                                   First Assistant

Prepared by A. J. Gallerano
Assistant Attorney General

                                -4077-
Hon. Martin Dies, Jr:, page 9     (M-840)

APPROVED
OPINION COMMITTEE

Kerns Taylor, Chairman
W. E. Allen, Co-Chairman

Wardlow Lane
Harold Kennedy
Pat Bailey
Gordon Cass

MEADE F. GRIFFIN
Staff Legal Assistant

ALFRED WALKER
Executive Assistant

                                -4078.