Court Opinion

ID: 4129555
Source: CourtListenerOpinion
Date Created: 2017-02-18 00:53:31.501417+00
Date Added: 2024-06-11T14:31:32.487482
License: Public Domain

OFFlCL   OF THE ATTORNEV   GENERAL.   STATE OF TEXAS

   JOHN       CORNYN

                                                   October 13, 1999

The Honorable Jeff Wentworth                               Opinion No. JC-0126
Chair, Nominations Committee
Texas State Senate                                         Re: Whether a state license held by a corporation
P.O. Box 12068                                             is automatically continued when the corporation
Austin, Texas 7871 l-2068                                  converts to another type of business entity under
                                                           article 5.17 ofthe Texas Business Corporation Act
                                                           (RQ-0074-JC)

Dear Senator Wentworth:

        The Texas Business Corporation Act allows a corporation to change its organizational form
and convert to another type ofbusiness entity. You ask whether a state license held by a corporation
continues automatically with the new entity when the corporation converts to a new entity. You are
concerned that different state agencies take different positions on whether a license automatically
continues, and you tell us that “a uniform interpretation of the effect of a conversion from one
business entity to another on a license held by the converting entity would be helpful to many license
holders.” Letter from Honorable Jeff Wentworth, Texas State Senate, to Honorable John Comyn,
Texas Attorney General (June 10, 1999) (on tile with Opinion Committee).

        The Business Corporation Act allows a domestic corporation to “adopt a plan of conversion
and convert to a foreign corporation or any other entity,” provided certain conditions are met. TEX.
Bus. CORP.ACT ANN.art. 5.17 (Vernon Supp. 1999). The conversion provision was enacted by the
Legislature in 1997 as part of a larger bill revising business organization laws. Supporters of the
provision argued that it would create a more favorable business climate in the state by allowing
corporations to convert easily from one type of organizational structure to another:

                   Texas law recognizes at least seven different forms of business
                   orgamzations, in both domestic and foreign forms, each of which
                   carries different benefits and drawbacks. However, once a business
                   is organized in one form, it cannot change to another business form
                   without dissolving in its current form and reforming in a new one. In
                   a healthy economy, businesses are dynamic, not static, and there
                   should be flexibility to assume new forms. However, the expenses
                   required to dissolve a business in one form and start up in another
                   now limit such conversions.
The Honorable Jeff Wentworth - Page 2             (JC-0126)

               To solve this problem, HB 1104 would allow aprocess ofconversion
               and conversion merger.

HOUSEF@SEARCHORG.,BILLANALYSIS,     Tex. H.B. 1104,75thLeg., R.S. 5 (May 5,1997);seealso
Tex. Att’y Gen. Op. No. JC-0015 (1999) at 4-6 (discussing legislative history of conversion
provision).

         In order for a corporation to convert to a new business form, it must comply with the
requirements of the conversion statute. Among other things, the corporation must adopt a plan of
conversion approved by its shareholders, draft articles of conversion, and deliver the articles of
conversion to the Secretary of State. TEX. Bus. CORP.ACT ANN. arts. 5.17, 5.18 (Vernon Supp.
1999). If the Secretary of State finds that the articles of conversion conform to law and that the
corporation has complied with applicable conversion requirements, the Secretary of State issues a
certificate of conversion and the conversion becomes effective. Id. arts. 5.18(C), 5.19.

         The Act sets out the effects of a conversion. Generally speaking, upon conversion, the
converting entity continues to exist and all of the assets and liabilities of the converting entity that
exist at the time of conversion continue with the entity in its new form:

                    A. When a conversion of a converting entity takes effect:

                    (1) the converting entity shall continue to exist, without
                interruption, but in the organizational form of the converted entity
                rather than in its prior organizational form;

                    (2) all rights, title, and interests to all real estate and other
                property owned by the converting entity shall continue to be owned
                by the converted entity in its new organizational form without
                reversion or impairment, without further act or deed, and without any
                transfer or assignment having occurred, but subject to any existing
                liens or other encumbrances thereon;

                    (3) all liabilities and obligations of the converting entity shall
                continue to be liabilities and obligations of the converted entity in its
                new organizational form without impairment or diminution by reason
                of the conversion;

                    (4) all rights ofcreditors or other parties with respect to or against
                the prior interest holders or other owners of the converting entity in
                their capacities aa such in existence as of the effective time of the
                conversion will continue in existence as to those liabilities and
                obligations and may be pursued by such creditors and obligees aa if
                the conversion had not occurred,
The Honorable Jeff Wentworth - Page 3          UC-0126)

                  (5) a proceeding pending by or against the converting entity or by
             or against any of the converting entity’s interest holders or owners in
             their capacities as such may be continued by or against the converted
             entity in its new organizational form and by or against the prior
             interest holders or owners, as the case may be, without any need for
             substitution of parties;

                  (6) the shares and other evidences of ownership in the converting
             entity that are to be converted into shares, evidences of ownership, or
             other securities in the converted entity as provided in the plan of
             conversion shall be so converted, and if the converting entity is a
             domestic corporation, the former holders of shares in the domestic
             corporation shall be entitled only to the rights provided in the plan of
             conversion or to their rights under Article 5.11 of this Act;

                 (7) if, after the effectiveness of the conversion, a shareholder,
             partner, member, or other owner of the converted entity would be
             liable under applicable law, in such capacity, for the debts or
             obligations of the converted entity, such shareholder, partner,
             member, or other owner of the converted entity shall be liable for the
             debts and obligations of the converting entity that existed before the
             conversion takes effect only to the extent that such shareholder,
             partner, member, or other owner: (a) agreed in writing to be liable for
             such debts or obligations, (b) was liable under applicable law, prior
             to the effectiveness of the conversion, for such debts or obligations,
             or(c) by becoming a shareholder, partner, member, or other owner of
             the converted entity, becomes liableunder applicable law for existing
             debts and obligations of the converted entity;

                 (8) if the converted entity is a foreign corporation or other entity,
             such converted entity shall be deemed to: (a) appoint the Secretary
             of State in this state as its agent for service of process in a proceeding
             to enforce any obligation or the rights of dissenting shareholders of
             the converting domestic corporation, and (b) agree that it will
             promptly pay the dissenting shareholders of the converting domestic
             corporation the amount, if any, to which they are entitled under
             Article 5.11 of this Act; and

                 (9) if the converting corporation is a domestic corporation, the
             provisions ofArticles 5.11, 5.12, and 5.13 ofthis Act shall apply as
             if the converted entity were the survivor of a merger with the
             converting entity.
The Honorable Jeff Wentworth - Page 4             (~~-0126)

TEX. BUS. CORP.ACTANN. art. 5.20 (Vernon Supp. 1999). While the Act generally speaks ofthe
continuation of the converting entity and its continued ownership of all “rights, title, and interests
to all real estate and otherproperty,“no specific mention is made ofthe continuation of state licenses
held by the converting entity.

        As a genera) rule, the authority granted in an official license cannot be transferred or assigned
without the consent of the licensing authority, unless a pertinent statute provides otherwise.
John B. Barbour Trucking Co. Y. State, 758 S.W.2d 684,691 (Tex. App.-Austin 1988, writ denied).
Some licensing statutes and regulations specifically allow transfer, and others forbid it. For
example, a pawnshop license may be transferred or assigned with the approval of the Consumer
Credit Commissioner, TEX.FIN.CODEANN.5 371.070 (Vernon 1998), but a pharmacy license issued
by the State Board of Pharmacy “is not transferable or assignable,” TEX.REV.CIV. STAT.ANN. art.
4542a-1 5 30(d) (Vernon Supp. 1999).

         However, in the case of a conversion of a business entity under the Business Corporation Act,
no transfers take place. Instead, the converted entity “continue[s] to exist, without interruption,”
TEX.BUS. CORP.ACTANN.art. 5.20(A)(l) (Vernon Supp. 1999), and “all rights, title, and interests
to all real estate and other property owned by the converting entity” continue to be owned by the
converted entity in its,new organizational form “without further act or deed, and without any transfer
or assignment having occurred,” id. art. 5.20(A)(2). All assets and liabilities, all rights of creditors,
all pending causes of action, and all shares and evidences of ownership, all stay with the converted
entity in its new form. Id. art. 5.20(A)(l)-(9). These automatic continuations are consistent with the
purpose of the conversion provision: to facilitate the transition from one type of business form to
another.

         In our view, the continuation of the converting entity encompasses the continuation of state
licences held by it. The essential feature ofthe conversion statute is that the converting corporation
continues to exist, uninterrupted, as it assumes its new business form. As we have said, no transfers
take place when there is a conversion. Instead, everything that the corporation has simply stays with
it. Although state licenses are not specifically mentioned among the those things that automatically
make the transition, we think that the statute as a whole, viewed in light of its purpose, contemplates
that a state license does not die upon a corporation’s conversion, but continues with it. Accordingly,
we conclude that, as a general rule, when a corporation converts to another type of business entity
pursuant to article 5.17 ofthe Business Corporation Act, a license held by the converting corporation
continues to be held by the converted entity in its new form.

       However, as your question implies, a specific licensing statute or regulation might conflict
with this general rule by prohibiting the continuation of a license, by imposing conditions or
requirements on its continuation, or by restricting the issuance of a license to certain types of
business entities. For example, the Alcoholic Beverage Code allows conversion of a business
holding a permit or license only if the ownership of the newly created business entity is identical to
the ownership of the former business entity. See TEX. ALCO.BEV. CODEANN. @ 11.12, 61.14
(Vernon Supp. 1999). It also requires a converting license holder to file a notice ofthe conversion
The Honorable Jeff Wentwortb - Page 5             (X-0126)

and pay a $100 fee for each licensed premises affected by the conversion. Id. And the Consumer
Credit Commissioner requires a pawnshop licensee to tile an application to alter its organizational
form of business. See 7 TEX. ADMIN.CODE$ 85.2 (1999). Similarly, the Railroad Commission
requires a licensed gas dealer to apply for a license when converting to a new business form. See
16 TEX. ADMIN.CODE§§ 9.16, 13.67 (1999).

        Such conditions and restrictions are normally part of a licensing entity’s authority, and the
conversion statute does not take away that authority. A license is generally a privilege, and once a
license or permit has been granted, “the holder may be subject to certain requirements in order to
keep it.” Exparte Mata, 925 S.W.2d 292, 292 (Tex. App.Corpus Christi 1996, no pet.). The
requirements “vary with the nature of the activity and the goals of the regulating government.” Id.
at 294. Texas has a diverse array of licensing entities, and each might have particular reasons for
imposing conditions or requirements on a converting license holder. As we have said, the particular
requirements of a licensing statute or regulation might conflict with the general provisions in the
Business Corporation Act that the converting entity continues to exist in its new form with all that
it had in its previous form.

         Normally, when a general statute conflicts with a more specific statute, the statutes should
be construed to give effect to both, ifpossible. TEX.Gov’TCODEANN. 5 3 11.026(a) (Vernon 1998).
However, if the conflict between the general provision and the specific provision is irreconcilable,
the specific provision prevails as an exception to the general provision, unless the general provision
is the later enactment and the manifest intent is that the general provision prevail. Id. 5 3 11.026(b).

         We find nothing in the conversion provision or its legislative history that manifests an intent
that it prevail over more specific, previously enacted licensing provisions. In fact, the statute may
be read to express an intent to yield to laws with which it is inconsistent:

                A domestic corporation may adopt a plan of conversion and convert
                to a foreign corporation or any other entity if.   the conversion (a)
                is permitted by, or not inconsistent with, the laws of the state or
                country in which the converted entity is to be incorporated, formed,
                or organized, and(b) the incorporation, formation, or organization of
                the converted entity is effected in compliance with such laws      .

TEX. Bus. CORP. ACT ANN. art. 5.17(A) (Vernon Supp. 1999). Since the legislature requires a
conversion to be consistent with and in compliance with other laws, we doubt that the legislature
intended it to prevail over more specific laws. Thus, if a state licensing law or regulation imposes
additional requirements or restrictions on a converting entity, the entity must comply with those
requirements or restrictions.

        Whether a specific licensing statute or regulation conflicts with the general conversion
provisions of the Business Corporation Act, and whether the Act or a conflicting statute or rule
controls in such event, depends upon the particular statute or regulation at issue. Consequently, we
The Honorable Jeff Wentworth - Page 6            (~~-0126)

are unable to say that all state agencies must treat all state licenses the same when a conversion takes
place. It is within the discretion of the legislature to implement a uniform treatment of licenses by
all state agencies upon the conversion of a corporation holding a license. In the absence of such a
law, we conclude that while the general rule is that licenses convert automatically, this rule may be
subject to the specific statutory requirements or regulations of particular licensing entities.

                                         SUMMARY

                        When a corporation converts to another type of business
                entity in accordance with the Texas Business Corporation Act, aa a
                general rule a state license held by the converting corporation
                continues to be held by the new business entity. This rule may be
                subject to the particular statutory requirements or regulations of the
                specific state entity that issued the license.

                                                JOHN     CORNYN
                                                Attorney General of Texas

ANDY TAYLOR
First Assistant Attorney General

CLARK RENT ERVIN
Deputy Attorney General - General Counsel

 ELIZABETH ROBINSON
 Chair, Opinion Committee

 Barbara Griffin
 Assistant Attorney General - Opinion Committee