OFFICE OF THE AlTORNEY GENERAL OF TEXAE
AUSTIN
Dssr 8lr:
opinion x0. o-u389
Be: coartmat:on 0f Art
Ravfsed Civl
x0 El-e in rscsipt of
.lon ca tts foltowln& :;uastl
oh lnatsnos orrning
two oor~ora$lonr (
atian and the
sarano~ c or*ra-
seeb where It appw8
af each 3oard is lCe~tioa1,
ooatrolllnrplatarest
"iisa conowte flleetr?itioaof the ques-
tion ~~h3k 00nrr0aa u&; tbr farlo~ing 18
tjr3foal:
lTha controlling stook of &auance Qorpora-
tion A is orned by B.C. and D, mo ocmstitaate
1 tsBoard OS ~ir eo to r s.
2%. o o ntr o llirsto
l& o k
OS o o r p o r a g io a finance oorjioratlon,$8
It, l
owned by B,C, and D, thsy being U ldentioal
~arsciis who own the oontrolllng stock la In-
mrsaoa Cmpsny A,
*Tim itines oorpxatios 1 sol18 to Imaursnoe
Cor?oratbm A orrtaia socurltles owned b7 it.
3%~ quwtion uhioh eonSzoat8 nm is whaOhor or
not uuder suoh obwaritstanoes an6 la rim d
Artfal. 412’1, notBfthstanding said Artiole 1s
a prohibition agsinst SOW JS the directors,
offioiels, agents do., should thr Board oS
IasurMoe c4xaui*sjonarsreoogniza the saouri-
ties so guraka8ed as adnlsslbla asset&P
%I propounding the ioregolng puastions,
I am laborirg under the izapraasion that the
mubuss of t?m 3owd of the 8ellfng Corpora-
tto%E have a ;eouniary interest in the amour-
ities sold to Inmranos Corporation A, the Di-
rectors oS rhich are either ldontlcal with the
Direotors cd the S4vLUng Corporatfcisor owzt
and aoatrol ths maJorffq stook.
'CT- will note that In at9 lettsarto yaa
of October l?th, I requested that you oonsld~~
whether or not a distlaotlon OM? or should be
nmde where the oirlcars and diraetors OS tko
two oorgoretions are identical, and whether or
not the ofriosrs and directors am not identi-
oal, and to aomider IS there 1~ a distinction
to be drawn between Inatanms where th* ofticer
or director of both oorporatlonn 3p1lsthe eon-
trolling intereeatin both coryorotiozs or oua8
ths a~ntrolU.ng interest in the borrow& oox-
porstion.
l * * I .*
R sfetec c e is mdd to h r ti01 0 4VE7, Uti8e6
Civil StatPlieS, 1925. I.itsve given nost oamical con-
8fdsntica end analysis to thf 8 eftll statut8. II 18
OwT utudied a.$nion that the prohibition contained
th8roin do48 not agply to tha oircmt8nara you hare
d48crlbsd. S84 in this uonnsction Cbnferenoe G&x.ion
X0. 5097 or t%i8 departrent.
Art1ole 4727 and Artlale 577, Penal C&4, 1925,
Eave a8 their aceibinsd obfsative the prohiblthm an8
psnalitlng of IIdirector and offioer or dlreatorr end
otiksr8 of aor~oratlon8 in re8prat to oertaioper8an-
a1 aot8. Both the prohlbltion and the p8tmlty apply
to indirldualr. They do not embrace tha oorporation
itaslt 68 an entity. The language ir alerr, umablgu-
0128 an6 not 8Ubj44t to aoatruotfon.
Th4 lneetiion ot th8 prwirion8 aoncarning
polio loa!m WQSundolabtedlpfor the xrpoae of anabl-
fng d ITO4tOr8 md OfffO8rs of fwiurance oo~paxi48 to
take e&vantage af tr:lrxell-rcocg~-.lzedclass .ztf
loaae.,
It camot be cocaluded that it f.?dic&tsra legislative
intent thet bXt~ranCCiCO2pa?ii48, ~8 aSu 48 th8h &-
dltidual dlreotors and officers, mre within the atat-
utmy inhibition.
Artlole 577, eapra, 4XpT4881l 8tate8 that *4~
VfOlati,w any proti8ioIloi thi8 article 8hal-d.
brlloll
ha- not le8.8than thres huMred nor more than one
thousand Qo11ems'r (t3nber8corlng Our8)*
The raat tbut irticlo 4727 and brticlo 577 are
not a.?pUoable d,aea not amen that the kerd of Insurance
tkd88iOZWr8 18 pOwerlsBS to OOntrOl the 8dsi84ibllity
oi asset8 of life lnsuranas co.:paniel aaquired under
the oirewnstence8 outlined in your letter.
‘Ilrk8I.8aZl in0Ur~Ce OO%~ell~>Ur4h4888 88OtSitie8
from a aor>oration whose 3mrd of ikectorr haa a member-
8hlp identical with thst of the ,inzreharin8
Insurance
th~~p~~y~th8 Board Of ~8UmUX?~ Ca.BSLiSlrianOr8 i8 entitled
to b8 g~l&~d by asrtain itlndaaS?.t?idm148 of hW in &O-
twaiofng th0 adaLi88ibility Of 8uch 88WritLa8 a8 elreet8
of the in8urance ecxpany.
It 18 toa ~.a11sstablfshcd to requim citation
of out::oritythct ciilmrr und especially diXMtOr8
of 0or~orat:onr are riduclsrier. SO, kO01OVer,8
yyv3s*tJ cz X",
....K IntP
....~i&iS. Ch. 49, p. 777 *DutIe8 and
Tower8 ot DIreotor8 a8 Piduoiarie8ng 2 COW3 OX XY-
emotive 1451 B 5094 on *Dlreotorrr~ 25 BAWARD LAW
iUXBU 427 gInterloeklng tireotoratea, The Problem
Mid it8 sOh.Oll -; TRmrTr-mBsAL nsmw3 caxrA?a
XT AI, 1. HS?XLL 22’ AL 101 S.W. (2d) 607.
??hO ia4t that 8 QUt OT 811 Of the dlnO%‘X8
of 054 ooatreating oorporatfon 8re dirclotz-nt of the
other oontraatl.ngoorporatioa afford8 a ground ior sub-
jeoting the oontzwat Into r!xiohthey enter to the 8triot-
88t sarutiap by courts of e uity. a lFSXQ%ox C34Co&OR-
.?TI@XS841; 10'TSX. JUR. 953 .
?ho true rule in Texa8 with relrpeatto colt-
tract8 betaeen wrporation8 having intarlooking alrsct-
oretea or dricers lb cownon poerally nap :33round
enunaiatod in CITY H:,T?&%L %XGi WJ. %lSXJTS* QiD
xii33RS XxX.%. SMX. 105 s.3. 336 (c&i 1907). to
the 0rfe0t thfet
‘1% 18 nOti fnhW4Xitly Wona; fW tW0 OOr-
poratIon8, hrrvlng all or a part of their aoa-
trolling oriicrers In aasao5, +ABaont?a& with
eaah other. Xven when a majorityor 811 of
the aontiscting 0rsicers of two cor~osationa
8zO memm to b!th, that raot alom bow 2ot
mke e eontreat between th8 tW0 COrgarationU,
entered into by euah oontraotiq oiiioar8,
ab8olntely void and incagable of refificafion.
TS4 current of modern autkmitY 5oldr that
funfi siltii it * ld awear, upn
;,,e&&;:%.i' that the aoi%::ot 18 ialT md
thoro has bee; no abuse of the trust relation,
.q~.crrn
by the sdjudiontod cfis48. de;.Ond8in a
-of- ,
Son. ‘#alter C. L’oo4ward,Chairman, pa+y 5
lor case. 20 lnflaribis rtllahas b;on sstnb-
llehed.*
The ale wae ateted rtth remarkable clarity
by Xr. Justice Clark, apeaklng ror the 3tited States
salpramacourt in GsT&s TS. j&,fJ;xDj,CC;;';;,3
',cI;:x:G
CC&
PAST, 254 U.S. 590, 599, 41 9. ct. 2G9, 65 L. 3d. 425,
when he eaidr
Y?ie relation 0r Clreator8 to oorpratlonr
is of such a tidueiars nature that traa%eation%
between board8 her&g acanon ms.bers are reqrd-
ed as jealously by the lsa ae arc ;ersonal deal-
ingo b&mm 6 direotor and &i8 corFretion,
and where the raimes8 Or meh transaction% i%
ahallengsd tha burden 1% upon those who wcxlld
maintain them to show their entire rabies6 an8
wkeerea sale :s ictolved the full cd%quacy of
the cmr;i4er:&io~. 33,waially is this true
whore e common director is do5inetlni;in i,*lu-
exe or in ohsraoter. T::iri court has been con-
sletently emphatic in the appllcetlon 0i this
rule, uhlah, It has dealarea, is fMlnded in
soundest morality, and wa mm add ln the sound-
est busln4s% policy.*
In oorrinenting
on thi% rile, the United State%
Suprome Court in TCmz-LrCE EL CG.;ZY V%. x.zG3mY, 91
U.S. SQ7, 23 i. 3id.322. said,
8 * * + when the lendsr is a direator,
aharged rlth others, with the oontrol and man-
agxzxmt 0r.m alfairs 0r the corporation, rep-
resenting, in this regctrd,the aggrorjatsintereat
of all the etockkoldere, hia obiigetloc, if he
beeme a 2srty to a oontract -siththe CCI ,+Cy,
to cozxior and tfiir des:lq, ir: lncreorod in
the precise degr;rao t:w*ttis raixesa3tiitive
oharacter hii%given tin gower and confrsl de-
rived rra the coidlJence repwed in him by the
atockholdara ah0 aoyointe4 h.kattelr aGent.*
In England, the ~11s is that c;rgzations
having dirsotore Ln ccmzon izegxot cozArc.ct. i-c82 Tkmg-
6x1 Corj2orstions846. s: :;TT. F::,TL3jto. IL‘,;,~,s~#g
cc.,
Hon. IfalterC. :&xlward, Chalrsan, pit* 7
lwality of o p ;o r tua ity
to all entitled tkers-
80 abuaa a nd violate the flduaiary relation
aa trust obli~etioa of dlTeef&ra.
a 3aw treat-
ment must be rtow to an-e o~dsstro~ the
evil .a
A8 utstrd another rag ia EnBYE WI. 3RO+?S,?30
583, 635 (1380):
Wo take the liberty to quote a&z' from the
artlola in 39 3 .L.R. (this tlzrie at p. 4741, w3ich is a
QOllCiSO rtatmrieatcf our ~osl.tionr
Th@ the2 great might 0r autmrity
supgorta the ~onoluaioa that oontreotr made
by corporations, in wclch ita directors are
interested either individually, or through
theeirarfiiiatfons -irfth other eorpretlms,
are aot void ab fnftlo, but asr8ly voidable,
yet th6 rule 0r law in this respect is such
that a11 praotlcal plrpose8, if tha CQxtraot
or transaotlaa be attacked, It will be archled
ahoat a6 a matter 0r cow86, ‘booause the
puastlon or tha ixtegity or ?a @od rolth
oi the treneaotion will -:otbe irr;uked into.
The uourt.8 will not contidbrwbther or xot
the traxtztion Lairbeen 5xjurious. Zxclaad,
they have g&a so far zs to hold tb.et even
whiHI0 It CQUld be smZUeitiVsIy CLapm that
Eon, 34lter C. Xocdwnrd, Zhalmse, pgr 9
Eon. Xalter C. Gxduard, Cbairaan, pa,ge9
say refuse adtisaibillty ar asset8 of the lnsuranaa
ooz?any aaourltisa obteimd by purobaus frruaa aorpor-
ation hating an Identical Board of Diraotore.
na605ing
TJi0861~10 spglle~ ia thor0 0as48 where
tba Board of Xreotorr of the pmoha&.ng insurance ccan-
pw and the sslliag aorporatioa have an identloal ma-
l 14lu4nt..
jority oontrolll.llg
Iho refusal of tha Board of fnaunnoe Oaamis-
8ioaer8 to admit aertein 840uritlar a8 a804ts of ths
nt of ?.hoaagital atook of an in-oe oompeny
pnq;rrr hrtiola 4748, llarlsedCiTil St4tflto8, 19e5.
Whdhar impalrnwrnt18 brought abou4 a~ not bfthlm le-
firra,tbs authority of tha Boerd of Imurancs Cmds-
sloaers is the aamm whem the transaotion between the
insurance aar;.jaay and the oprporatioa having OO~KMS
dlraotorfi doe8 oat -84 the tar4 of fairnee8or 18 a
riolatioa of the trust rabtlon8hip.
In thf8 opinioa ws ars not passing u;ron ths
4uertion of whether or no4 tha individual dlraotoz6ia
the sl4untion do8orikd are guilty of rfolating ktiolrs
47Bt utd 6t7, mapre.
Truathg that we hare 8eti8faotorll~ answered
your in@ry, wo are
Your8 ~4ry truly
ATTOR!EWC-AS, OI TEXAS
BY I L\< s3?x$
9 Dickstixlt
CSt0b RsaiRt4nt
App~ovEcMAy 16, 1940
ATTORHEY GENERAL OF TEXAS