Hon. J. M. Falkner, Chairman Opinion NO. ~-56.
State Department of Banking
Austin, Texas Re: Applicability of the
requirement for col-
lateralization of
obligations payable
only to stockholders
of the debtor corpora-
tion ma to banks,
insurance companies
and other financial
Dear Sir: institutions.
Pour request ana supplemental Information
presents the question of whether a corporation organ-
-. ized under Article 13034 V.C.S., which now proposes
to issue long-term notes or debentures to its own
stockholders &, is required by Article 152&a, Sec-
tion 7, V.C.S., to collateralize such notes or deben-
tures.
Among other things, your supplemental in-
formation contains the following facts:
llAllied Auto Finance, Inc, was organ-
ized in 1950 pursuant to the provisions
of Article 1303(b), V.T.A.S. Its present
capital structure consists of 805,000
shares of common stock each of the par
value of $0.10 ana 15,600 shares of Pre-
ferred Stock, without nominal or par value.
It Is primarily engaged in the business of
lending money, secured by liens upon auto-
mobiles. Discounting its commercial paper
with financial institutions and pledging
its commercial paper, as security for bor-
rowed money, with financial institutions
are its primary source of working capital.
*IIt is the desire of Allied Auto Fi-
nence, Inc. to issue long-term notes or
Hon. J. MOFalkner, Page 2 (g-56)
debentures, to stockholders only, under
the terms of a trust indenture to be
executed by end between the company and
a state or national bank* The trust in-
denture would contain provisions usual
in the circumstances including sinking
fund provisions for c he retirement of
the notes or debentures. Preferred
stockholders would be given an option to
exchange preferred stock for notes or
debentures on a dollar for dollar basis.
Any notes or debentures issued would
have a maturity date of from ten to
twenty years would be registrable in
all denomina 4ions as to principal aa
would be transferable only on the books
of the compauy or its appointed regis-
trar.
“Notes or debentures would be ls-
sued only to common stockholders. Pre-
ferred stockholders who exchanged pre-
ferred stock for notes or debentures
would be required to own at least one
share of cormnon stock. Additional com-
mon stock would be made available for
those persons who desire to become stock-
holders in order to purchase the notes
or debentures. Any transfer of the notes
or debentures would have to be on the
books of the company, and before such
transfer became effective the company
would ascertain that the transferee was
also a stockholder.
“The proceeds from the issuance of
the notes or debentures would be used by
the company in the usual course of busi-
ness, i.e,, lending money, secured by
liens upon automobiles.n
The legal question here is a matter of statutory
interpretation. hoes Section 13 of Article 1524a, which
specifically exempts from the examination features of the
statute those corporations whose notes or other inst;Fk;ts
evidencing debt are payable either to stockholders
insurance companfes or other financial instltution~, like:
wise operate to exempt long-term notes or debentures sold
Hon. J. M. Falkner, Page 3 (~-56)
only to stockholders from the collateralization require-
ments of Section 7 of Article lfi2b?
It is the opinion of this office that Section
13 of titicle 1524a cannot be properly construed to ex-
empt long-term notes or debentures sold only to stock-
holders from the collateralization requirements of Sec-
tion 7.
The plain meaning of the words used in Section
13 will yield but one interpretation. They refer to and
make the exemption given in Section 13 applicable only
to nthe provisions of this Act requiring or authorizing
an gxamination by the Banking Commissioner of Texas."
The collateralization provisions of the Act contained
in Section 7, obviously deal with an entire4 different
subject than the examination provisions. Both the exami-
nation end collateralization provisions have been in the
Act since Its original passage in 1931. If the Legisla-
ture in 1945 had intended by the passage of what is the
present Section 13 that corporations whose only written
obligation consisted of debts payable to the stockhold-
ers or to banks, Insurance companies or other financial
institutions should be exempt from the collateraliza-
tion provisions as well as the examination provisions,
we think the Legislature would have included language
to express such an intent.
Nor does a consideration of the general pur-
pose of Article 1524a require a different conclusion.
That general purpose was to furnish protection to the
investing public. Att'y Gen. Op. No. O-5858 (1944).
The several provisions of the Act authorizing and re-
quiring examination reporting of financial statements,
publication and/or h iling of statements of condition,
collateralization, and bonding of certain personnel,
together with the sanctions provided against non-compli-
ance, Including remedies against any impairment of capi-
tal or any ultra vires activity, were all intended to
serve the main purpose of protecting the investing pub-
lic. The several provisions were separately described
by the Legislature. Each in its own way will tend to
carry out the general purpose of the Act.
General exemption from these several provi-
sions have been in Section 12 of the Act from the be-
ginning. Section 12 by way of reiteration of the terms
of the regulatory sections provides that "none" of these
Hon. J. M. Falkner, Page 4 (s-56)
provisions, the filing of statements of condition
under Secti all apply to sales by a subject cor-
poration (a ation organized under Article 1302
(48)(49)(50 cle 1303b) unless it offers for sale
or sells "bonds, notes certificates, debentures and
other obligationsg whfb it has issued and which are its
own direct obligations. We have construed the second
sentence of Section 12 to likewise generally exempt a
subject corporation from all of the above provisions,
except the one requiring the filing of statements of con-
dition if the corporation’s notes or other obligations
in whaiever form constitute the borrowing of money froth
banks or other financial institutions to be used Bin the
usual course of business.” Att “y Gen. Op. No. 1489
(1952)a
If a subject corporation is exempt under either
of the sentences in Section 12 then neither collaterali-
zation or examination or any o4her provision of the Act,
except the filing of financial statements, is applicable.
But if a subject corporation is not exempt under Section
32, collateralization and the several other requirements
of the Act are applicable. As was stated by us in Opinion
O-5858 (1944) in reference to the situation where no ex-
emption under Section 12 is proper:
“Again, if the obligations of such company
come within the class of obligation re-
quired to be collateralized, it would make
no difference that such issue in whole or
in part had been sold to banks or other
financial institutions, for they are part
of the public to whom such obligations may
not be sold except they be properly col-
lateralized. n
In 1945, when the Legislature enacted what is
the present Section 13 a special exemption was added
which (as we construe it) removed from the scope of the
examination provisions those corporations whose otherwise
non-exempt obligations were sold to its own stockholders,
or to banks, insurance companies OP other financial in-
stitutions. The emergency clause to this special exemp-
tion recites that “no good purpose could be served by re-
quiring examinatioq of such corporations in such instances.”
Apparently it was the Legislature’s view that examinations
by the Banking Commissioner could serve no purpose because
Hon. J. M. Falkner, Page 5 (S-56)
stockholders would be familiar with the true condition
of their corporation at all times and because banks, in-
surance companies and other financial institutions are
quits able to examine and appraise for themselves the
condition of an issuing corporation.
Section 13 of Article 1524a does not
exempt long-term notes or debentures sold
only to stockholders from the collaterali-
zation requirements of Section 7.
APPROVED: Yours very truly,
C. K. Richards JOHNBEN SHELPPERD
Appellate Division Attorney General
Willis E. Gresham
neviewing Assistant
,,lQytm-
Burnell Waldrep Phil ip Robinson
Reviewing Assistant Assistant
John Ben Sheppera
Attorney General
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