No. 2991

ORGANIZATION OF INSURANCE COMPANIES-DIVISION OF CAPITAL STOCK INTO VOTING AND NON-VOTING CLASSES

1. The omission of a significant word or provision from a re-enactment indicates an intention to exclude the object theretofore accomplished by the words omitted. 2. Apparent inaccuracies and mistakes in the mere verbiage or phraseolo- gy will be overlooked to gi-ve effect to the spirit of the law. 3. The caption or marginal note appearing in a code as adopted by the legislature is to be regarded as a part of the article to which it relates. 4. Capital stock domestic fire insurance companies may not divide capital structure into classes of stock, part of which are composed of voting shares and part of non-voting shares. 5. The holder of each share of domestic capital stock fire insurance com- panies is entitled to vote each share of stock that he holds at all stockholders' meetings. 6. This decision is not in conflict with the case of St. Regis Candies vs. Hovas, 3 S. W. (2) 430, which treats with ordinary corporations only.

Austin, Texas September 17, 1936

Honorable R. L. Daniel Chairman, Board of Insurance Commis- sioners, Austin Texas.

DEAR SIR: Your communication of August 3 has been referred to the writers for consideration. We have concluded that, due to the importance of your inquiry, a conference opinion should be rendered. Your letter reads in part as follows:

"There has been presented to this Department the Articles of Incorporation and other information relative to the incorporation of a capital stock fire insurance company. It is the intent of the organizers to provide for a fully paid capital stock of not less than $100,000. It is their desire, however, to divide the stock into Common and Preferred, the Common stock to retain the entire voting power conferred by the stock. The Preferred stock in question will be non-voting. I "You are requested to advise this Department whether or not in your opinion such a division of stock would be permissible under the laws of this State."

We think the best solution to your problem can be obtained by briefly reviewing the history of applicable general corpora- tion and insurance legislation, and court decisions. According- ly, we direct your attention to Chapter 108, beginning at page 192 and ending at page 215 of the General Laws of Texas, Reg- ular, First and Second Called Sessions of the Legislature, 1909. The portion. of this Act to which we direct your attention is found at page 194, about the center of such page, as follows: REPORT OF ATTORNEY GENERAL

"At all meetings of the stockholders, each stockholder shall be entitled to one vote for each share of stock fully paid up appearing in his name on tha books of the company, which vote may be given in person or by written proxy." This is an Act providing primarily for the incorporation of life, accident and health insurance companies and defining the same, and is now found as a part of Article 4718, R. C. S. 1925. In connection with this provision, we refer you to a letter ad- dressed to Honorable R. L. Daniel, Chairman of the Board of Insurance Commissioners, by W. W. Heath, of this Department, under date of May 4, 1935, in which it was held under this pro- vision that no stock in such company could be issued without voting privileges. We find, however, provision on page 210, Section 55 of said Original Act of 1909, as follows:

"All the provisions of the laws of this State applicable to life, fire, marine, inland, lightning or tornado insurance companies, shall, so far as the same are applicable, govern and apply to all companies transacting any other kind of insurance business in this State, so far as they are not in conflict with provisions of law made specially applicable thereto." (Italics ours).

We have briefly reviewed the title on insurance of the Re- vised Civil Statutes of 1925, but in our rather casual examina- tion of same we have failed to find incorporated therein Section 55, as hereinabove quoted. This becomes immaterial to the question here presented, in view of Article 4710 of the 1925 Codification as hereinafter set forth. In the case of St. Regis Candies, Inc., et al vs. Hovas, et al, 3 S. W. (2d) 432, in an opinion by the Supreme Court Commis- sion of Appeals adopted by the Supreme Court, the question of the power of a private Texas corporation to divide its shares of stock into two classes, one class to have voting privileges, and the other class to be without voting privileges, is fully dis- cussed. The following language is used by the Court:

"Authorized increase or decrease of 'authorized capital stock' may be secured by action of the directors based upon 'a two-thirds vote of all its stock' in the one case, or 'a two-thirds vote of all its outstanding stock' in the other, Articles 1330, 1332. Voluntary dissolution may be had 'where four- fifths in interest of all stock outstanding shall vc.te' therefor 'at a stockholders' meeting,' or 'when, without a stockholders' meeting, all the stockholders . . . consent in writing,' Article 1387. In respect to action taken or proposed under these provisions (i.e., articles 1330, 1332, and 1387) and action taken or proposed in respect to other fundamental alterations of the corporate purpose, structure, and properties, and for instant purposes, two assumptions are indulged in favor of the holders of class B stock, so-ealled: (a) Every stockholder is entitled to vote; and (b) those owners are 'stockholders.' "We have generally reviewed the constitutional and statutory provisions mentioned above for the purpose of indicating that no expressed declaration of voting right in a stockholder exists, save in the exceptional instances last mentioned and on the assumptions there made. If the right exists in virtue of law it rests in implication. The fact that the Legislature, in execution of REPORT OF ATTORNEY GENERAL the command given, made specific provision for voting rights in what we have called the exceptional situations and omitted provision therefor in other cases is not without cogency. With the exact subject of voting rigbts present in the minds of the law makers, a specific enactment for named con- ditions and silence in respect to other conditions would seem to indicate a purposed omission in deference to liberty of contract. "There are other situations of like import: (a) The general requirements of article 12 of the Constitution have reference to railroad and insurance corporations, as well as to corporations generally. But in executing the command the Legislature put railroad corporations into a class (title 112, arts. 6259-6534, R. S. 1925) and insurance corporations into another class (title 78. arts. 4679-5068, R. S. 1925). "In article 6289 certain 'rules' are named to be controlling in the 'election of the board of directors' of a railroad corporation. Among the rules is this: "'Each stockholder shall have the right to vote . . . for the number of shares of stock owned by him for as many persons as there are directors to be elected.' "The matter of 'by-laws' is the subject of article 6293, and it is there said that: " 'The stockholders of the corporation shall be entitled to one vote for each share of stock held by them.' "Comparable provisions are made for 'life, health, and accident insurance' corporations (article 4718), 'mutual assessment accident companies' (article 4789), 'mutual life insurance companies' (article 4801), and 'mutual insurance companies' (article 4868), and omitted in respect to various other classes of 'insurance companies,' etc. "(b) By the terms of section 16, art. 16, Constitution, the Legislature is required to provide, by general laws, for the incorporation of, 'bodies with banking and discounting privileges, for supervision, etc., and for adequate protection and security of depositors and creditors. Execution of the require- ments has general evidence in title 16, R. S. 1925 (articles 342-548). Among other things, it is there provided (article 503) that: " 'In the elections of directors, and in deciding all questicns at meetings of shareholders . . . each shareholder shall be entitled to one vote on each share of stock held by him.'"

It is apparent from a reading of the above quotation that it is the opinion of the court that, except to the extent as provided for by the Legislature to the contrary, corporations may be created in Texas with two classes of stock, one with voting privileges, and the other without voting privileges. It is equally apparent from a careful study of said decision that the Legisla- ture has the right to provide that all of the stock of a corpora- tion shall have voting privileges. It, therefore, necessarily fol- lows that since the Legislature has seen fit to make the special provision entitling each stockholder to one vote for each share of stock fully paid up carried in his name on the books of the life, accident and health company, organized under the provi- sions of Chapter 3, Title 78 of the Revised Civil Statutes, as set out in Article 4718, Revised Civil Statutes 1925, in the absence of some similar provisions with respect to other domestic in- REPORT OF ATTORNEY GENERAL

surance companies, such other domestic insurance companies could be created with two classes of stock, one with voting privi- leges, and one without voting privileges, especially if Section 55 of the Original Act of 1909, making the provision of the laws of this State, applicable to life companies, govern and apply to all companies transacting any other kind of insurance business in this State, has been repealed by omission from the 1925 Codi- fication. The question confronting us, therefore, narrows down to the proposition of whether or not there is any law on the statute books of our State providing that all stock in insurance com- panies in Texas, (either capital stock fire insurance companies, which you inquire about, or insurance companies generally), shall have voting powers. Article 4708, Revised Civil Statutes, 1925, reads as follows: "The affairs of any such company organized under the laws of this State shall be managed by not more than thirteen nor fewer than seven directors, all of whom shall be stockholders in the company. Within thirty day. after the subscription books of the company have been filed, a majority of the stockholders shall hold a meeting for the election of directors, each share entitlinq the holder thereof to one vote. The directors then in office shall continue in office until their successors have been duly chosen and have accepted the trust. The annual meeting for the election of directors of any such company shall be held during January. as the by-laws of the company may direct." (Italics ours). Clearly, this statute applies only to the election of directors. Article 4710, Revised Civil Statutes, 1925, reads as follows: "No meeting of stockholders shall elect directors or transact such other business of the company, unless there shall be present, in person or by proxy, a majority in value of the stockholders equal to two-thirds of the stock of each company." (Italics ours). This statute was brought forward from Vernon's Civil Stat- utes, 1914, (Revised Civil Statutes, 1911); Article 4718, un- changed except the omission of the words "at such meeting" after the word "present". We must determine what is meant by the language in said Article 4710, "transact such other business of the company." If the codifiers in 1925 had not changed the language "unless there shall be present at such meeting" to "unless there shall be present", it would be obvious that "such other business of the company" would be limited to that transacted "at such meeting", referring back to the meeting held for the purpose of electing directors. It is to be considered that the codifiers and the Legislature in adopting the code intended to accomplish some purpose in dropping the language "at such meeting", or they would not have done so, and the only reasonable explana- tion to the mind of the writer hereof is that it was no longer intended to limit said Article 4710 to business transacted at meetings for the purpose of electing directors, but, on the con- REPORT OF ATTORNEY GENERAL trary, intended that it apply to all meetings of stockholders for the purpose of electing directors, or transacting any other busi- ness of the company. The rule just stated is set forth in 39 Texas Jurisprudence on page 241 in the following language, and is supported by the Texas authorities there cited: "In the construction of an act or provision that has been amended, re- enacted, or re-stated, the circumstance that the original statutory language has been modified . . . may be taken into consideration as an aid to the ascertainment of the legislative intent. . . . The omission of a significant word or provision from an amendment or re-enactment indicates a desire to change the effect or interpretation of the act, or an intention to exclude the object theretofore accomplished by the words omitted." (Italics ours). To say that the language "transact such other business of the company" was not intended by the Legislature to mean "trans- act any other business of the company" would be to make the language meaningless, and place a purposeless and useless in- terpretation upon the statute. Texas Jurisprudence, Volume 39, page 222, uses the following language: "Thus it has been decided that a statute or provision should not be given a construction rendering it fruitless, futile, meaningless, purposeless, or useless, when the language can be otherwise construed." (See Texas cases cited thereunder). A careful examination of the preceding statutes in Chapter 2 of Title 78 of the Revised Civil Statutes, wherein Article 4710 is found, reveals that the only business of the company set forth in such Chapter 2 for the stockholders to attend to is the elec- tion of directors, and, therefore if the word "such" is interpreted literally rather than as "any", that portion of the statute will be meaningless. Corpus Juris, Volume 59, under the title "Statutes", Section 573, reads as follows: "(3) Spirit or Letter. In pursuance of the general object of giving effect to the intention of the legislature, the courts are not controlled by the literal meaning of the language of the statutes, but the spirit or intention of the law prevails over the letter thereof, it being generally recognized that whatever is within the spirit of the statute is within the statute although it is not within the letter thereof, while that which is within the letter, although not within the spirit, is not within the statute. Effect will be given the real intention even though contrary to the letter of the law. The rule of construction according to the spirit of the law is especially applicable where adherence to the letter would result in absurdity or injustice, or would lead to contradictions, or would defeat the plain purpose of the act, or where the provision was inserted through inadvertence. In following this rule, words may be modified or rejected and others substituted, or words and phrases may be transposed. So the meaning of general language may be restrained by the spirit or reason of the statute, and may be construed to admit implied exceptions. Apparent inaccuracies 'and mistakes in the mere verbiage or phraseology will be overlooked to give effect to the spirit of the law. However, to permit the REPORT OF ATTORNEY GENERAL application of the principle under discussion, there must be something in the statute which makes it clear that the legislature did not intend that the letter of the statute was to prevail. When the law is free and clear from ambiguity, the jetter of it is not to be disregarded on the pretext of pursuing its spirit." We believe that it is obvious that said Article 4710 was in- tended to apply to all meetings of the stockholders in, any Texas insurance corporation held for the purpose of electing directors, or transacting any other business. If that be true, then no meet- ing of stockholders shall transact any business of the company unless there shall be present in person or by proxy a majority in value of the stockholders equal to two-thirds of the stock of such company. Then the question to determine is whether or not such language prevents an insurance company from being created with two classes of capital stock, one class voting, and another class non-voting. The caption or heading of this statute in the 1925 Codification is "Quorum of stockholders". The word quorum as defined in Webster's Unabridged Dictionary is as follows: "Such a number of officers or members of any body as is, when duly as- sembled, legally competent to transact business. The quorum of a body is an absolute majority of it, unless the authority by which the body was created fixes it at a different number." The caption or marginal note appearing in a code as adopted by the legislature is to be regarded as a part of the article to which it relates. 39 Texas Jurisprudence, page 229; Robinson v. State, 11 Criminal Appeals, 309; R. C. L., page 1034. If Article 4710 has for its purpose the defining of what is a quorum of stockholders of an insurance company, and such quorum is defined to be a majority in value of stockholders equal to two-thirds of the stock of such company, and such a quorum is that number of stockholders, as when duly assembled, is legally competent to transact business, it is obvious that it is intended by said Article 4710 to provide for voting power for all of the stock of such company. It might be contended that the language "unless there shall be present, in person or by proxy, a majority in value of the stockholders equal to two-thirds of the stock of such company", merely requires the presence of such number of stockholders for the purpose of advancing their views to those entitled to vote under the provisions of the charter of the company, and does not of necessity grant voting privileges to such stockholders. We, believe, however, that the use of the word "quorum" of stockholders in the marginal note or title to said Article 4710, placed there by the codifiers, indicates that it was intended that the number of stockholders set forth in such article as being those necessary to be present in order to transact business im- plies that such stockholders have the usual powers of those nec- essary to make such a quorum of any body. For instance, there are certain territorial representatives in the Congress of the REPORT -OF ATTORNEY GENERAL

United States who possess certain privileges and rights of mem- bers of Congress who do not have voting privileges, but they are not required to be present to transact business and are not taken into consideration in determining a quorum. The position here taken is further supported by the use of the word "proxy" in the language "there shall be present, in person or by proxy." The word "proxy" is defined in Webster's Unabridged Dictionary as follows: "The action or practice of voting; making promises, etc., by means of an authorized agent or substitute; agency, function, sometimes office, of a procurator or deputy; as to vote or appear by proxy; marriage by proxy. "Authority or power to act for another, as in voting in a legislative or corporate capacity; specif., document or writing giving such authorization; as to send proxies for the directors' meeting." If such stockholders must be present in person or by proxy under such definition of the word proxy, there is carried with it the intention and meaning that the person holding the proxy shall have the right to vote in the place of the absent stock- holder. It may be contended that such statute only requires the grant- ing of the voting privilege to a majority in value of the stock- holders equal to two-thirds of the stock of such company, but it will be noted that under the terms of such article, if a majority in value of stockholders equal to two-thirds of the stock of such company are present either in person or by proxy, they constitute a quorum authorized to transact business, and we believe that under said article if any majority in value of the stockholders equal to two-thirds of the stock of such company are present, that they constitute a quorum with voting powers, and, therefore, it necessarily follows that all of the capital stock of said com