Untitled Texas Attorney General Opinion

HE L% IRNEY GENEWAL EXAS May 29, 1969 Rep. Jack Blanton Opinion No. M-407 House of Representa.tives State Capitol Re: Whether House Bill 700, Austin, Texas 61st Legislature, can legally prohibit a cor- poration from engaging in the business of farm- ing, livestock feeding Dear Mr. Blanton: or ranching. In your recent request for an opinion from this office you stated: "I am enclosing a copy of House Bill 700 of which I am chairman of the sub-committee. The point has been raised that it may be illegal for us to prohibit a corporation from farming in the State of Texas. We request your opinion on this matter." House Bill 700 is an act to amend Article 2.01, Subsection B of the Texas Business Corporation Act and to add provisions to that Article. Pertinent provisions of House Bill 700 read as follows: "BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: Section 1. BUSINESSES IN WHICH CORPORA- TIONS MAY NOT ENGAGE. No corporation, foreign or domestic, except as provided in this Act, may engage in the business of farming, live- stock feeding, or ranching. Sec. 2. DISPOSING OF OPERATIONS AND LAND. (a) All corporations except those falling under the provisions of Section 4 -2011- Rep. Jack Blanton, page 2 (M-407) of this Act which are engaged in farming, livestock feeding, or ranching operations at the effective date of this Act shall dispose of all such interests and withdraw from those operations within two years af- ter the effective date of this Act. (b) All corporations except those falling under the provisions of Section 4 of this Act which are engaged in farming, livestock feeding, or ranching operations which own or hold real estate which was acquired prior to the effective date of this Act and which is used or usable for farming, livestock feeding, or ranching purposes, but which Is not reasonably nec- essary to the conduct of the other business of the corporation, shall dispose of the real estate within 10 years after the ef- fective date of this Act. A corporation holding real estate subject to the provi- sions of this section may use the land for farming, livestock feeding, or ranching purposes until the date by which it must be sold. (c) The ownership limitation pro- vided in this section shall be deemed a covenant running with the title to the land against any grantee, successor, or assignee of a corporation which is also a corporation. Sec. 3. DISPOSING OF AFTER-ACQYIRED LAND. (a) A corporation which after the effective date of this Act, acquires real estate used or usable for farming, live- stock feeding, dairylng or ranching pur- poses by judicial process, operation of law, or otherwise, shall dispose of all such real estate, except that which is reasonably necessary in the conduct of its other business, within 10 years after the real estate was acquired. -2012- Rep. Jack Blanton, page 3 (M- 407) (b) The lo-year limitation provided by this section shall be deemed a covenant running with the title to the land against any grantee, successor, or assignee of a corporation which is also a corporation. Sec. 4. CORPORATIONS WHICH MAY EN- GAGE IN FARMING. LIVESTOCK FEEDING, AND RANCHING OPERATIONS. (a) Farming, live- stock feeding, or ranching operations may be conducted by a corporation in which (1) all shareholders are actively engaged in the management or operation of the corporation and at least 80 percent of the gross income of the corporation comes from farming, livestock feeding, or ranching operations: and (2) there are no shareholders other than trusts or estates who are not natural persons. (b) The Secretary of State of the State of Texas shall accept articles of incorporatlon with a purpose clause or clauses authorizing it to conduct farm- ing, livestock feeding, or ranching op- erations, provided such articles of in- corporation conta~inthe limitations set forth in Subsection (a) of this section. Sec. 5. VIOLATIONS AND PENALTIES. Violations of the provisions of this Act are subject to the provisions of Articles 4.06 and 4.07, Texas Miscellaneous Corpora- tion Laws Act (Articles 1302-4.06 and l3O2- 4.07, Vernon's Texas Civil Statutes). sec. 6. Subsection B, Article 2.01, Texas Business Corporation Act, is amended to read as follows: -2013- Rep. Jack Blanton, page 4 (M-407) "B. No Corporation may adopt this Act or be orga~nizedunder this Act or obtain authority to transact business in this State under this Act: "(1) If any one or more of its pur- poses for the transaction of business in this State is expressly prohibited by any law of this State. "(2) If any one or more of its pur- poses for the transaction of business in this State is to engage in any activity which cannot lawfully be engaged in with- out first obtaining a license under the authority of the laws of this State to en- gage in such activity and such a license cannot lawfully be granted to a corporation. "(3) . . . .n Determination of the legality of House Bill 700 necessarilY requires an examination of the Texas law pertaining to regula- tion of statutory entities, vested property rights and consti- tutional prohibitions against impairment of contractual obli- gations. Article 1, Section 17, Constitution of Texas, expressly provides that "all privileges and franchises granted by the Legislature, or created under its authority shall be subject to the control thereof." Article 9.12, Texas Business Corporation Act, which superseded old Article 1318, Vernon's Civil Statutes, states: "The legislature shall -- at all times have power to prescribe such regulations, provisions and limitations as it may deem advisable, which reg- ulations, provislons and limitations shall be binding u on any a~ndall corporations subject to the prov -5 sions of ms Act, and the ,Legis- lature shall have power to amend, re eal or modify this Act." (Emphasis added+ -2014- Rep. Jack Blanton, Page 5 (M- 401) It is, therefore, clear that in Texas the legislature has reserved the power to alter, suspend or repeal all laws, providing for organization of corporations, and that such reservation becomes a part of the charter of the corporation. 18 Am.Jur.2d 631-632, Corporations, Sec. 92, wherein it is said: 11 . . . Corporations are the creations of the state, endowed with such faculties as the state bestows and subject to such conditions as the state imposes; and if the power to modify their cha~rters is reserved, that reservation is a part of the con- tract, and no change within the legitimate exercise of the power, whether directly or by an independent general regulation, Cainbe said to impair its obli- gations. "General constitutional or statutory provisions in force at the time of incorporation reserving power in the legislature to amend, annul, or re- peal any such corporation, are a part of the corpor- ate charter, so much so, in fact, that it has been held that the right to repeal the charter will not be affected by the repeal of the general law . . .' In accord, Jefferson County Title Guaranty Co. v. Tarver, 119 Tex. 410. 29 S.W.2d 3lb, 318 (1930). Texas authorities likewise recognize that a corporation is a creature of the state and it is therefore subject to its dominion and control. Zerr v. Lawlor, 300 S.W. 112 (;_'ex.Civ. App. 1927, no writ): McCutcheon v. Wazencraft, 230 S.W. 733, eters-Pierce rev. on other grounds 255 S.W. 71 Oil Co. v. Texas, 177 U.S. 28 (1900). House Bill 700, if enacted, would not terminate the ex- istence of corporations now engaging in the sole business of farming and ranching, but would require such corporations to dispose of their interests in such activities within two years from the effective date of the Act. All real estate acquired prior to such date, used or usable for farming, livestock feeding, or ranching, not reasonably necessary to the conduct of the other business of the corporation, is required to be disposed of within ten years after the effective date of the 2015- Rep. Jack Blanton, .page6 (M-407) Act. Article 2.02 of the Texas Business Corporation Act, and Article 1302-4.01, Vernon's Civil Statutes, Miscellaneous Cor- poration Laws Act, require that land owned by a corporation must be held as a necessary part of the business of the cor- poration. Consequently, we must determine whether such provisions would violate the provision found in Article 1, Section 16 of the Constitution of Texas, prohibiting retroactive laws or laws impairing the obligations of contracts. In addition, the question of violation of due process and equal protec- tion of the laws, in contravention of the Fourteenth Amend- ment of the U. S. Constitution, is raised for consideration. It should be observed in this connection that unless "vested rights" are actually destroyed or impaired, an act is not invalid even when retroactive in its operation. Paschal v. Perez, 7 Tex. 348 (1851); City of Ft. Worth v. know, 284 S W 274 (Tex.Civ.App. 192b, error ref.) Th -ion thui presents itself, does House Bill 700 impa:r any property rights which may be deemed "vested" so that it amounts to an arbitrary exercise of power in denial of the equal protection of the laws, constituting a deprivation of property without due process of law? Does the legislature have the power to pass a law which has the effect of 'ermin- ating the corporate existence of such farming and ranching cor- porations; that is, by eliminating the corporate purposes of farming, ranching, etc.? We find the law on these questions to be pertinently stated in 18 Am.Jur.2d 633, Corporations, Sec. 33, as follows: "A reservation . . . in a general law of power to amend, alter, or repeal affects the entire rela- tion between the state and the corporation and places under legislative control all rights, priv- ileges, and immunities derived by its charter di- rectly from the state, including its very existence. . . !I . . Under the reserved power of repeal the leg- islature may terminate the corporate existence . . ." -2016- . Rep. Jack Blanton, page 7 (M-407) Among the cases cited in support of the latter statement are Erie R. Co. v. Williams, 233 U.S. 685 1914 ; Spring Valley Waterworks v. Schottler, 110 U.S. 347 I18@4 1; State v. Louisville & N.R. Co., 97 Miss. 35, 51 so. 918, 53 so. 454 (1910); People v. O'Brien, 111 N.Y. 1, 18 N.E. 692 (1888). In 18 Am.Jur.2d 636-637, Corporations, Sec. 94, we find this statement: I, . . . it has been held that the reserved power of a state to amend a corporate charter is not limited to changes or alterations solely between the state and the corporation, but au- thorizes amendments and alterations, within certain limitations, directly affecting stock- holders in their relations to the state, to the corporation, and to each other, and that such power may be invoked to sustain charter alterations justified by the advancement of public interest, even though they a~ffectcon- tractual rights between the corporation and its stockholders and between stockholders inter se. . .I' It is held, however, that the reserved power to amend or repeal corporate charters does not give the legislature the power to impair or destroy the "executed" contracts of third persons with the corporations, as distinguished from "execu- tory" contracts at the time the statute takes effect. Conse- quently, as to the latter, it is held that 11 . . . The fact that a repealing statute de- stroys the right of a corporation to continue in existence under the statute repealed does not make such repealing statute unconstitu- tional even as against bondholders of the cor- poration. The execution of the mortgage and the issuing of bonds secured by the property of the corporation does not affect the right of the legislature to repeal the statute." 18 Am.Jur.2d 638, Corporations, Sec. 95; People v. Calder, 153 Mich. SUP. 724, 117 N.W. 314 (1908). -2017- Rep. Jack Blanton, page 8 (M-407) We do not perceive any attempt in House Bill 700 to impair or destroy the contracts of third persons with the affected cor- porations. If such legislation should unconstitutionally threaten such am impairment, as applied to the specific facts of the case, and the legislature has not provided some special remedy, the courts will enforce such property rights by the means within their power. 18 Am.Jur.2d 636, Corporations, Sec. 94. We a~greewith the Supreme Court of Illinois in its obser- vation that 11 no corporation has a constitutional right to be's corporation and it is fundamental tha~t corporate powers and charters are taken subject to the prerogative of the state to modify or amend the enabling legislation at any time. Kreicker v. Naylor Pipe Co., 374 Ill. 364, 29 N.E.2d 502. And this matter is removed from the sphere of constitutional consideration by reason of the express language of the Business Corporation Act . . . which reserves to the General Assembly the power to repea~l,amend or modify the act and to impose limitations or re- strictions at the pleasure of the General As- sembly." Braeburn Securities Corp. v. Smith, 15 Ill.Sup.2d 55> 153 N.E.2d 806, 811-812 (1956) upholding an amendment to a statute limiting the general power; of corporations in respect to owner- ship and control of stock in banks and overruling the contention that such legislation impaired obligation of contract and was a denial of equal protection under the,law. In Asbury Hospital v. Cass County, 7 N.W.2d 438 (N.D.%p. 1943), the court had before it a challenge to the constitu- tionality of an act, requiring any corporation, domestic or foreign, owning farm land, except that reasonably necessary to the conduct of its b,lsiness,to dispose of the land within ten years from the date the Act took effect. It also prohibited such corporations from engaging in farming or agriculture in the future. In upholding the constitutionality of the statute against the contention by the plaintiff corporation that it operated to deprive the corporation of property without due process, the court said, beginning at page 452: -2018- . Rep. Jack Blanton, page 9 (M- 407) "As has been pointed out, there are constitutional or statutory provisions in many states restricting the right of cor- porations to acquire and hold real estate and requiring that such corporations dis- pose of real estate which they have acquired, within a fixed period of time. "No instance has been called to our at- tention, and none has been found, where such legislation was predicated upon the proposi- tion that the State was without power to re- quire a corporation to dispose of real prop- erty that it had acquired before the statute or constitutional provision became effective: and in some of the states, the legislation restricting the right of corporations to hold real property is specifically made applicable as well to property that had been acquired before the legislation became effective as to property subsequently acquired . . . [citing numerous authorities] In Commonwealth v. Clark County National Bank, supra, It was con- tended that Inasmuch as the land sought to be escheated had been acquired by the corporation before the adoption of the constitutional pro- vision,'the corporation had a vested right which was unaffected by the adoption' of the new constitution containing the provision as 'there could be no impairment of the obliga~- tion of contract or rights acquired and vested before the making of the law.'" [x37 Ky.sup. 151, 219 S.W. 1821 "The Court of Appeals of Kentucky held that . . . (the) enactment of the statute did not result in 'unconstitutionally' impairing the 'contract or vested rights' of the corpora- tion. "We think it clearly follows from the prin- ciple announced by the Supreme Court of the United States in Connecticut Mutual Life Insurance Company v. Spratley, supra (172 U.S. 602) and Phillips -2019- . . Rep. Jack Blanton, page 10 (M-407) Petroleum Company v. Jenkins, supra (297 U.S. 629), that the provisions of the statute in question here restricting the power of the plaintiff to hold real estate, used or usable for farming or agriculture and requiring it to dispose of the same within ten years from the date the act took effect, do not impair the obligations of any plaintiff, or impair any vested property right of the plaintiff. "The question next presents itself whether such provisions operate to deprive the plaintiff corporation of its property without due process of law. This question must be answered in the negative. The State having the right to restrict the power of the plaintiff and corporations sim- ilarly situated as to the acquisition and owner- ship of real estate within the State, it naturally follows that any legislation which it might enact to carry such polic into effect must have a be- ginning, and 'the 1E th Amendment does not forbid statutes and statutory changes to have a beginning.' Sperry & Hutchinson Co. v. Rhodes, 220 U.S. 502, 31 S.Ct. 490, 491, 55 L.Ed. 561. Of course, the State could not put its new policy into effect in such sudden and arbitrary manner as to prac- tically sacrifice and confiscate the interest of the corporation In the property that it had been permitted to acquire within the State. In making the change it must give the corporation reason- able time in which to dispose of its property. 17 Fletcher, Cyc. Corps., p. 799. See also, State v. Crescent Cotton Oil CO., 116 Miss. 398, 77 So. 185; Crescent Cotton Oil Co. v. State, 121 Miss. 615, 83 So. 680; Crescent Cotton Oil Co. v. Mississippi, 257 U.S. 129, 42 S.Ct. 42, 66 L.Ed. 166. The statute gives . . . ten years in which to dispose of it before such property becomes subject to the provisions of the statute providing for disposal of the prop- erty under the procedure provided by the statute. Clearly the period of time . . . cannot be said to be so unreasonable or arbitrary as to operate -2020- , . . Rep. Jack Blanton, page 11 (M-407) to deprive corporations holding land subject to the statute of property without due process of law . . . [citing authorities] Such period is considerably longer than that prescribed in an- alogous laws in other states. Thus, Oklahoma prescribes seven years, and Kentucky five years . . .' With respect to the discretion of the legislature in exer- cising its reserved power to repeal or alter the corporations charter, It is the general rule that no notice need be given to a corporation of such exercise. Jefferson County Title Guaranty Co. v. Tarver, supra, 119 Tex. 410, (1930); 18 Am.Jur. 638, Corporations, Sec. 95. House Bill 700, however, does allow two years from the effective date of the Act within which the subject corporation may withdraw from its farming and ranching operations and dispose of its interests. The ten year time period applies to real estate acquired prior to the effective date of the act. Such periods appear reason- able, and our research fails to reveal any such periods as having been held to be unreasonable. Texas laws recognize limitations u on the right of corpor- ations to hold property. Article l3O2-E *Ol V.C.S., the Mis- cellaneous Corporations Laws Act prohibits a corporation from acquiring land except such as may be necessary to conduct the type of business for which it is incorporated. Article 1302- 4.05 of the Miscellaneous Corporation Laws Act accords relief only to the extent of permitting corporations to acquire urban land, such entities being known as Town Lot Corporations. Ar- ticles 8.19 and 3.40 of the Texas Insurance Code require dis- position of certain realty of Casualty and Life Insurance Com- panies within a five year period. See Attorney General Opinion No. O-1470 (1939). Article 4.02 Miscellaneous Corporation Laws Act, (old Article 1360, prior to 1961) Vernon's Civil Statutes, gives a fifteen year time period to corporations to dispose of lands deemed unnecessary to, or In excess of their business needs. All of these laws have remained unchallenged to this date and are presumably valid. In view of all of the foregoing considerationsr we con- clude that House Bill 700, if enacted, would be constitutional. '-2021-- . . Rep. Jack Blanton, Page 12 (M-407) SUMMARY House Bill 700, prohibiting corporations from engaging in the business of farming, livestock feeding, or ranching, and al- lowing a two year period for such corporations to withdraw from operations and to dispose of their interests and a ten year period to dispose of their real estate, if enacted, would be constitutional. Veryely yours, Prepared by Neil Williams Assistant Attorney General APPROVED: OPINION COMMITTEE Kerns Taylor, Chairman George Kelton, Vice-Chalrman Ralph Rash Terry Goodman Malcolm Quick Bill Allen W. V. GEPPERT Staff Legal Assistant HAWTHORNE PHILLIPS Executive Assistant -2022-