The opinion
. .
Honorable Henry Wade Opinion No. M-1205
District Attorney
Dallas County Government Center Re: Constitutionality of the
Dallas, Texas 75202 Insurance Holding Company
System Regulatory Act,
Article 21.49-1, Texas
Insurance Code
Dear Mr. Wade:
In your recent letter you state that you believe the above mentioned
statute to be unconstitutional for various reasons and ask this office for
an official opinion on the matter. It is our opinion that the statute is
constitutional with respect to each of the questions which you raise,
namely:
“1. Is the caption or title of Article 21. 49 suf-
ficient to meet the legal requirements for consti-
tutionality?
“2. Does the concept of ‘control’ as used in the
Act render it unconstitutionally vague and unen-
forceable?
“3. Does the Act so impair the right to contract
as to be unconstitutional?
“4. Does the Act violate due process under State
and Federal prohibitions?
“5. Does the Act unconstitutionally create a
mandatory presumption that a control person,
as defined in the Act, will deal with the company
contrary to its interest, without any prior fact
determination; further, because of such pre-
sumption, is the Act so broad as to prohibit
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Honorable Henry Wade, page 2 (M-1205)
a control person in one insurance company from
dealing with another insurance company in which
said control person owns no stock without prior
approval of the Commissioner of Insurance?
In considering the constirutionality of a statute, the courts do not
presume a statute to be invalid. On the contrary, they presume any
statute under attack to be valid. As was stated in Vernon v. State, 406
S. W. 2d 236, (Civ.App. 1966, error ref. n. r. e. ):
“In the field of constitutional law, no stronger
presumption exists than that which favors the
validity of a statute. A legislative act must be
sustained unless it is clearly invalid beyond a
reasonable doubt. State v. City of Austin, 160
Tex. 348, 331 S. W. 2d 747 (1960); Trapp v.
Shell Oil Co., 145 Tex. 323, 198 S. W. 2d 424 at 440
(1946). The strength of this presumption is nurtured
by an appreciation of the nekds of the people and by
a recognition that the laws are directed to problems
manifest by experience. The courts will not exert
ingenuity to find reasons for holding a statute invalid:
rather, they will sustain its validity even if it is
valid by the narrowest margins. Texas Nat. Guard
Armory Board v. McGraw, 132 Tex. 613, 126 S. W. 2d
627-634 (1939); Dendy v. Wilson, 142 Tex. 460. 179
S. W. 2d 269-277 (1944). This is particularly true
when the statute pertains to governmental policies
established in the interest of public health, safety,
and welfare as is present in this statute. Lombard0
v. City of Dallas, 124 Tex. 1, 73 S. W. 2d 475, 486
(1934). 12 Tex. Jur. 2d Constitutional Law, Sec. 36,
p. 380. ”
The Insurance Holding Company System Regulatory Act (hereinafter
called the “Act”) grew auf of legislative concern with the trend toward
conglomeration. There has been a recent trend within the insurance
industry toward restructuring into holding company systems. As was
stated by Professor J. Leon Izbowitz in Corporations, Annual Survey of
Texas I,aw, 26 Southwestern Law Journal at page 91, (1972): _
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Honorable Henry Wade, page 3 (M-1205)
“In keeping with this trend and possibly due
to concern with forestalling yet another crisis
of confidence within the Texas insurance industry
through takeovers by corporate raiders or stock
manipulators, a comprehensive law regulating
the acquisition of control of Texas insurers
through holding companies and other devices
has been added to the Texas Insurance Code. ”
In light of the strong presumption that exists in favor of the validity
of a statute and the fact that the public welfare is directly and acutely
involved in the regulation of these quasi-public financial institutions,
this office must consider any challenges to the constitutionality of this
statute in accordance with the above cited rules of law to be applied by
our courts.
Concerning your first question, we would point out, that while the
caption of the Act is broad, it is not deceptive and it gives fair notice
of the contents of the statute, as required by Section 35 of Article III of
the Texas Constitution. The caption to the bill reads as follows:
“An Act adding a new Article 21.49 to the Texas
Insurance Code to be known as the Insurance
Holding Company System Regulatory Act, relating
to regulation of insurance holding companies, sub-
sidiaries, and affiliates, and their transactions with
insurance companies; prohibiting certain acts:
providing penalties and declaring an emergency. ”
The fact that the Act contains provisions for enforcement purposes
does not mean that these provisions must be referred to in the caption.
In Continental Bus System, Inc. vs. Carney, 310 S. W. 2d 676, (Civ. App.,
1958. error ref. n. r. e. 1 the cantion of the statute stated that it was an
act amending certain other statutes “by designating corporations subject
to franchise tax. ” The court quoted with approval the following statement
of the law from Texas Jurisprudence:
“Incorporate in the body of an act of the means
by which its objects may be accomplished does not
render the act obnoxious to the constitutional
inhibition against bills containing more than one
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Honorable Henry Wade, page 4 (M-1205)
subject. Accordingly, an act with one leading
subject, which is expressed in its title, may
contain appropriate provisions designed or tending
to accomplish, effectuate or enforce the general
object or purpose of the law. When the title expresses
the main subject dealt with by the act, it embraces
any lawful mea~ns for the accomplishment of the legis-
lative object. It is immaterial that such subsidiary
provisions are not expressly mentioned in the title,
if they are legitimately connected with the subject
expressed. ”
This case also refers to the well-established rule of law that the caption
will be liberally construed in favor of its constitutionality.
In our opinion, the caption of the Act complies with the requirements
of Section 35 of Article III of the Texas Constitution. We have taken into
consideration the numerous provisions of the Act which you view as not
being covered by the caption and we find them all to be mere provisions
for the accomplishment of the purposes expressed in the caption.
Your second question is whether the concept of “control” as used in
the Act renders the Act unconstitutionally vague and unenforceable.
Section 2(c) of the Act provides as follows:
“(c) Control. The term ‘control’, including the
terms ‘controlling, ’ ‘controlled by’ and ‘under
common control with, ’ means the possession,
direct or indirect, of the power to direct or cause
the direction of the management and policies of
a person, whether through the ownership of voting
securities, by contract other than a commercial
contract for goods or nonmanagement services,
or otherwise, unless the power is the result of
an official position with or corporate office held by
the person. Control shall be presumed to exist if
any person, directly or indirectly, owns, controls,
holds with the power to vote, or holds irrevocable
proxies representing, 10 percent or more of the
voting securities or authority of any other person.
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Hanorable Henry Wade, page 5 (M-1205)
This presumption may be rebutted by a showing
made in the manner provided by Section 3(i)
that control does not exist in fact. The commis-
sioner may determine, after furnishing all
persons in mterest notice and opportunity to be
heard and making specific findings of fact to
support such determination, that control exists
in fact, notwithstanding the absence of a pre-
sumption to that effect, where a person exercises
directly or indirectly either alone or pursuant to
an agreement with one or more other pzrsons such
a controlling influence over the management or
policies of an authorized insurer as to make it
necessary or appropriate in the public interest or
for the protection of the policyholders or stock-
holders of the insurer that the person be deemed
to control the insurer. ”
In our opinion, this definition is neither vague nor unenforceable.
While it deals with sophisticated and technical corporate procedures, it
is felt that one who is qualified to manage the affairs of a corporation will
have no difficulty understanding the meaning of the concept of “control”
as embraced in the Act.
The cited definition of the word “control” principally comes from the
Model Legislation on the subject adopted by the National Association of
Insurance Commissioners. In an analysis of that model legislation
(Proceedings of N. A. I. C., 1969, Vol. 1, page 196) it is stated that the
definition of control is derived from the Savings and Loan Holding
Company Amendments of 1967 (12 U. S. C. A. ( Sec. 1730a), the Bank
Holding Company Act of 1966 (15 U. S. C. A., Sec. 1841) and the Investment
Company Act of 1940 (15 U. S. C. A., Sec. 80a-2 (a)(9)). In connection with
the use of the control concept in relation to the Investment Company Act
of 1940, there are several reported cases where the courts had no difficulty
in applying the concept in highly complicated business relationships so
that there is no doubt that the concept is workably precise. See: Phillips
vs. Securities Exchange Commission, 388 1:. 2d 964 (7th Cir., 19r
Willheim vs. IMurchison, 342 1:. 2d 33 (2nd Cir., 1965), cert. denied,
382 U.S. 840. 86 S. Ct. 36, 1.5 I,. Ed. 2d 82 (1965); and Acampra vs.
Berkland. 220 1:. Supp. 527 (11. Cola., 1963).
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Honorable Henry Wade, page 6 (M-1205)
It should be noted that the Texas Legislature did add the following
words to the part of the definition giving the regulatory agency power to
find a person in control without the statutory presumption:
1,
. . . where a person exercises directly or
indirectly either alone or pursuant to an
agreement with one or more other persons
such a controlling influence over the manage-
ment or policies cf an authorized insurer as to
make it necessary or appropriate in the public
interest or the protection of the policyholders or
stockholders of the insurer that the person be
deemed to control the insurer. ”
If there was ever any doubt that the definition as used in the model act
lacked a proper standard for the regulatory agency to follow, the Texas
Legislature foreclosed that issue.
Your third question deals with the impairment of obligations of contract.
You conclude that the Act affects rights accruing before the Act became
effective, and, therefore, constitutes an impairment of the obligation of
contracts within the meaning of the provisions of the Texas and United States
Constitutions. We must respectfully disagree.
Corporations, being creatures of the state, remain subject to its
regulation and control. Article 9. 12 of the Business Corporation Act ex-
pressly reserves to the state the power to change the laws governing
corporations. This statute provides as follows:
“The Legislature shall at all times have the
power to prescribe such regulations, provisions,
and limitations as it may deem advisable, which
regulations, provisions, and limitations shall
be binding upon any and all corporations subject
to the provisions of this act, and the Legislature
shall have power to amend, repeal, or modify
this act, ”
In Jefferson County Title Guaranty Company v. Tarver, 29 S. W. 2d
316, 119 Tex. 410 (1930), the court said:
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Honorable Henry Wade, page 7 (M-1205)
“Under the above constitutional and statutory
provisions, we hold that the company having
been incorporated under the Constitution and
general laws of Texas, expressly reserving in
the 1,egislature the right to alter, reform, or
amend incorporation, laws, and charters is subject
to the act of 1929, requiring a capital stock of
$100,000 as a condition precedent to doing business
in this state, and that such statutory requirement
does not impair any contract evidenced by the
charter granted by the state to the company. We
further hold that the Constitution and general laws
of this state in force at the time the charter here
under consideration was granted are parts thereof
to the same extent, and with the same force and
effect, as if they were expressly incorporated
or written therein: and this being the case, the
state’s exercise of its reserved power to require
an amendment to the charter of this concern
increasing its capital stock to $100,000, as a
condition precedent to continuing in business, does
not impair or abrogate any contract between the
company and its members, between the state and
the company, or between the stockholders of the
company and the state. ”
The power of the Legislature to control and regulate corporations
generally and insurance companies in particular, may not be superceded
by private contracts, which are subject to this reserved power of the
state to regulate. See Daniel v. Tyrrell & Garth Inv. Co., 93 S. W. 2d
372, 127 Tex. 213 (1936): Attorney General’s Opinion No. M-407 (1969).
We have studied the numerous provisions of the statute which you
consider to be violative of the constitutional provisions regarding im-
pairment of contracts, and we view these challenges to be governed by
the foregoing principles. We find the statute to be constitutional per se.
Your fourth question concerns whether the Act violates the state
and federal constitutional prohibition against seizure of property without
due process of law. In your brief you contend: “The seizure of voting
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Honorable Henry Wade, page 8 (M-1205)
securities and the power to declare a contract void, together with the
power to invalidate an authorized shareholder meeting, constitutes
arbitrary and unreasonable remedies with no substantial relation to the
protection of an insurance company’s shareholders or policyholders and
of the public. The termination [sic] that control exists thereby requiring
registration and reporting is a denial of the due process guarantee. ”
We do not construe the Act as authorizing seizures. On the contrary,
the sections in question establish very adequate court procedures for the
litigation of the rights of the interested parties.
In our opinion, the provisions of Section 12, Section 5 and Section 16
of the Act are well within the police powers of the State, as a creator or
controller of corporations. In Scar&n v. Home Insurance Company, 79
S. W. 2d 186, 189 (Tex. Civ. App., 1935, error ref. ), the court declared:
“The business of insurance is of public concern
and therefore subject to strict regulation and
control by the State. ”
For further discussion of these principles see 44 C. J. S. 518, Insurance,
Sections 55 and 56.
As stated above, the statute in question was enacted by the Legislature
in an effort to curb very serious abuses in the insurance industry by the
employment of the holding company device. It is our opinion that the
provisions of the Act constitute a proper exercise of the police powers of
the state and that they do not violate due process in the respects advanced
in your request and brief.
Your fifth question is as follows:
“5. Does the Act unconstitutionally create a
mandatory presumption that a control person, as
defined in the Act, will deal with the insurance
company contrary to its interest, without any
prior fact determination: further, because of such
presumption, is the Act so broad as to prohibit
a control person in one insurance company from
dealing with another insurance company in which
said control person owns no stock without prior
approval of the Commissioner of Insurance?”
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Honorable Henry Wade, page 9 (M-1205)
We do not hold the opinion that the Act creates any such “mandatory
presumption. ” It merely provides for the regulation of holding companies
and others who control insurance companies. The Act does not require
any administrative body or court to presume that such control is inimical
to the interest of the insurance company: it merely puts “control persons”
under the administrative surveillance of the Commissioner of Insurance.
In our opinion, this is a valid exercise of the police powers of the state
under the authority discussed above.
It should be noted that you have presented no specific factual situation
in connection with your request and therefore our opinion is necessarily
limited to whether the Act is constitutional per se.
SUMMARY
Article 21.49-l of the Texas Insurance Code,
which is known as the Insurance Holding Company
System Regulatory Act, is constitutional.
Veryy uly, yours,
Prepared by James Hackney
Assistant Attorney General
APPROVED:
OPINION COMMITTEE
Kerns Taylor, Chairman
W. E. Allen, Co-Chairman
Van Thompson, Jr.
Robert Lemens
James Broadhurst
Vince Taylor
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Honorable Henry Wade, page 10 (M-1205)
SAMUEL D. MCDANIEL
Staff Legal Assistant
ALFRED WALKER
Executive Assistant
NOLA WHITE
First Assistant
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