Untitled Texas Attorney General Opinion ( 2004 )

ATTORNEY GENERALOFTEXAS
GREG ABBOTT
May 12,2004
Mr. C. Tom Clowe Jr. Opinion No. GA-0186
Chair, Texas Lottery Commission
Post Office Box 16630 Re: Whether a corporate applicant is ineligible for a
Austin, Texas 78761-6630 manufacturer’s or distributor’s license if a person
holding ten percent or less of the corporation’s stock
also holds, or an individual related within the first
degree by consanguinity to such individual holds, shares
in another licensed bingo entity (RQ-0135-GA)
Dear Mr. Clowe:
On behalf of the Texas Lottery Commission (the “Commission”), you ask whether a
corporate applicant is ineligible for amanufacturer’s or distributor’s license if an individual holding
ten percent or less of the corporation’s stock, or an individual related within the first degree by
consanguinity to such individual, also holds shares in another licensed bingo entity.’
The bingo industry in Texas is regulated in accordance with chapter 2001 of the Occupations
Code, entitled the “Bingo Enabling Act” (the “Act”). See TEX. Oct. CODEANN. 5 2001.001 (Vernon
2004). The Act generallyrequires licenses for all “persons,” which is defined to include individuals,
partnerships, and corporations, see id. 5 2001.002(20), involved in any aspect of the bingo industry.
See id. $9 2001.101, .151, ,201, ,206, ,251 (requiring licenses to conduct bingo, for commercial
lessors, for manufacturers and distributors, and for system service providers). For example, an
unlicensed person may not “sell or supply to a person in this state or for use in this state bingo cards,
boards, sheets, pads, or other supplies, or equipment designed to be used in playing bingo, or engage
in any intrastate activity involving those items.” Id. 5 2001.201. An unlicensed person may
not “sell, distribute, or supply bingo equipment or supplies for use in bingo in this state.” Id.
5 2001.206.
Certain persons are ineligible for licenses by statute. See id. $5 2001.154(l), .202(l)-(2),
.207(l)-(2), .252(l) (listing eligibility requirements for commercial lessors, manufacturers,
distributors, and system service providers). Under sections 2001.202 and 2001.207, which are
‘See Letter from Mr. C. Tom Clowe Jr., Chair, Texas Lottery Commission, to Honorable Greg Abbott, Texas
Attorney General, at 1-2 (Nov. 24,2003) (on tile with the Opinion Committee, also available of http://www.oag.state.
txus) [hereinafter Request Letter].
Mr. C. Tom Clowe Jr. - Page 2 (GA-0186)
essentially identical, the following persons are ineligible for manufacturers’ and distributors’
licenses, respectively:
(1) a person convicted of a felony, criminal fraud, a gambling
or gambling-related offense, or a crime of moral turpitude if less than
10 years has elapsed since the termination of a sentence, parole,
[mandatory supervision, or community supervision] served for the
offense:
(2) a person who is or has been a professional gambler or
gambling promoter;
(3) an elected or appointed public officer or a public
employee;
(4) an owner, officer, director, shareholder, agent, or
employee of a licensed commercial lessor;
(5) a person who conducts, promotes, or administers, or
assists in conducting, promoting, or administering[] bingo for which
a license is required by this chapter;
(6) [a distributor if the applicant seeks a manufacturer’s
license or a manufacturer if the applicant seeks a distributor’s
license];
(7) aperson who has had a license to manufacture, distribute,
or supply bingo equipment or supplies revoked within the preceding
year by another state;
(8) an owner, officer, director, or shareholder of, or a person
holding an equitable or credit interest in, another manufacturer or
distributor licensed or required to be licensed under this chapter; or
(9) a person:
(A) in which a person described by
Subdivision (l), (2), (3), (4), (5), (6), (7), or (8) or in
which a person married or related in the first degree
by consanguinity or affinity . to one of those
persons has greater than a 10 percent proprietary,
equitable, or credit interest or in which one of those
persons is active or employed; or
Mr. C. Tom Clowe Jr. - Page 3 (GA-0186)
(B) in whose application for a
[manufacturer’s or distributor’s] license a person
describedby Subdivision(l), (2), (3), (4), (5), (6), (7),
or (8) is required to be named.
Id. $5 2001.202, ,207. Corporate applicants for manufacturers’ or distributors’ licenses must list,
in their applications, “the name and home address of each officer and director and each person
owning 10 percent or more of a class of stock in the corporation.” Id. 3s 2001,203(b)(3)(B),
.208(b)(4). Anindividual’srelatives within the first degreeby consanguinity include the individual’s
parent, child, parent’s or child’s spouse, spouse, and spouse’s parent or child. See TEX. GOV’T CODE
ANN. $5 573.023(c)(l), ,025 (Vernon 1994).
You ask about the eligibility of a corporate applicant for a manufacturer’s or distributor’s
license in five circumstances:
Under what circumstances does the [Act] prohibit a
corporation from being eligible for a bingo manufacturer or
distributor’s license:
(1) if an individual shareholder owns ten percent (or less) stock
in a bingo manufacturer or distributor and also concurrently
owns ten percent (or less) stock interest in another licensed
bingo distributor or manufacturer;
(2) if an individual shareholder owns ten percent (or less) stock
in a bingo manufacturer or distributor and also concurrently
owns greater than a ten percent stock interest in another
licensed bingo distributor or manufacturer;
(3) if an individual shareholder owns ten percent (or less) stock
in a bingo manufacturer or distributor and also concurrently
each of his two adult children own ten percent (or less) stock
interest in another licensed bingo distributor or manufacturer;
(4) if an individual shareholder owns ten percent (or less) stock
in a bingo manufacturer or distributor and also concurrently
has transferred, as the corpus of the trust, his greater than a
ten percent stock interest in another licensed bingo distributor
or manufacturer, ofwhich he is not a trustee, with his children
named as beneficiaries;
(5) if an individual shareholder owns ten percent (or less) stock
in a bingo manufacturer or distributor and also concurrently
his adult child owns greater than ten percent stock in a
commercial lessor.
Request Letter, supra note 1, at l-2.
Mr. C. Tom Clowe Jr. - Page 4 (GA-0186)
In each of your five questions, a shareholder of the corporate applicant owns ten percent or
less of the corporation. You do not ask about a shareholder holding more than ten percent of a
corporate applicant’s shares. See id. Sections 2001.202 and 2001.207 facially do not render
ineligible a corporate applicant when a shareholder holding less than a ten percent interest in the
corporation (a) is a person described in subdivisions (1) through (8), or(b) is related within the first
degree by consanguinity or affinity to such an individual. Subsection (9)(A) does not apply because
the person does not hold “a greater than 10 percent interest” in the corporation, and subsection
(9)(B) does not apply because persons holding less than ten percent ownership are not required to
be named in the corporate application. TEX. OCC. CODEANN. 59 2001.202(9), .207(g) (Vernon
2004); see also id. @ 2001.203(b)(3)(B), .208(b)(4). Thus, if, in the situations about which you ask,
the individual shareholder owns less than ten percent of the applicant’s stock, the applicant is not
thereby rendered ineligible. On the other hand, a corporate applicant is plainly ineligible when a
~person described in subdivisions (1) through (8), or a person related within the first degree to a
person described in subdivisions (1) through (8), owns more than ten percent of the corporation. See
id.
With respect to a shareholder who holds exactly ten percent of the corporation, however,
the answer is more complex. Under subsection (9)(B), a corporate applicant who is required to
name a person described in subdivisions (1) through (8) is ineligible for a license. See id.
$5 2001,202(9)(B), .207(9)(B). A corporation’s application for a manufacturer’s license must
list the name of “each person owning 10 percent or more” of the corporation’s stock, id.
4 2001.203@)(3)(B); the application for a distributor’s license must list the name of “each person
owning at least 10 percent” of the corporation’s stock, id. 5 2001.208(b)(4). In either case, a
shareholder holding exactly ten percent ofthe corporation’s stock (a ‘ten-percent shareholder”) must
be listed on the application, and the corporate applicant will be ineligible for a license if the ten-
percent shareholder is “a person described by” subdivisions (1) through (8). Id. $5 2001.202(9)(B),
.207(9)(B). We accordingly consider each of your five questions with respect to only a ten-percent
shareholder, whose name must be listed on the application under sections 2001.202(9)(B),
2001.203(b)(3)(B), 2001.207(9)(B), and 2001.208(b)(4).
You ask first about a corporate applicant if a ten-percent shareholder “also concurrently
owns” a ten percent or less interest in another licensed bingo manufacturer or distributor. Request
Letter, supra note 1, at 2. The ten-percent shareholder’s name must be listed in the application, see
TEX. Oct. CODEANN. $5 2001,202(9)(B), .203(h)(3)(B), .207(9)(B), .208(b)(4) (Vemon2004), and
if he or she is “a person described by Subdivision” (1) through (8), the corporate applicant is not
eligible for a license, see id. $5 2001,202(9)(B), .207(9)(B). A “shareholder of. another [licensed]
manufacturer or distributor” is a person described by subdivision (8). See id. $5 2001.202(g),
.207(g). Neither section 2001.202(8) nor section 2001.207(8) limits the term “shareholder” to one
holding a certain percentage of the other manufacturer’s or distributor’s shares; rather, the term
would include a holder of any number of shares, regardless of the percentage of ownership the stock
ownership represents. See also id. 5 2001.002 (defining terms for the purposes of chapter 2001).
Consequently, no matter how small the number of shares the corporate applicant’s ten-percent
shareholder has in the other manufacturer or distributor, he or she is a person described by
subdivision (8) and the corporate applicant is therefore ineligible for amanufacturer’s or distributor’s
license.
Mr. C. Tom Clowe Jr. - Page 5 (GA-0186)
Second, you ask about a corporate applicant in which a ten-percent shareholder holds greater
than a ten percent interest in another licensed bingo manufacturer or distributor. See Request Letter,
supra note 1, at 2. As in the first question, such a shareholder must be listed in the application, see
TEX. Oct. CODE ANN. $5 2001.202(9)(B), .203(b)(3)(B), .207(9)(B), .208(b)(4) (Vemon2004), and
may render the corporation ineligible for a license if the individual is “a person described by
Subdivision” (1) through (8). See id. $9 2001.202(9)(B), .207(9)(B). Additionally, the term
“shareholder” in subsections 2001.202(8) and 2001.207(8) refers to any shareholder, regardless of
the percentage of stock held. See id. $5 2001.202(8), .207(g). If a corporate applicant must list the
name of a ten-percent shareholder who holds shares in another licensed bingo manufacturer or
distributor, the corporate applicant is ineligible.
You ask next about a corporate applicant if a ten-percent shareholder is related within the
first degree by consanguinity to two persons each holding a ten percent or less share in another
licensed bingo manufacturer or distributor. See Request Letter, supra note 1, at 2. Again, because
the shareholder’s ownership interest is ten percent, his or her name must be listed in the application.
See TEX. Oct. CODE ANN. $9 2001.202(9)(B), .207(9)(B) (V emon 2004). Under subsection (9)(B),
a corporation is ineligible only if a person listed in the application is described by subdivisions (1)
through (8). See id. §§ 2001.202(9)(B), .207(9)(B). But subdivision (9)(B) does not extend the
grounds for ineligibility to the listed person’s relatives by consanguinity or affinity. And sections
2001,202(9)(A) and 2001.207(9)(A), which extend the conflict-of-interest ineligibility to relatives
within the first degree by consanguinity or affinity, apply only to shareholders holding more than ten
percent ownership ofthe corporate applicant. See id. $9 2001.202(9)(A), .207(9)(A). Consequently,
the corporate applicant you describe here is not rendered ineligible by virtue of the ten-percent
shareholder’s relatives’ holdings.
Similarly, with respect to your fifth question, a corporate applicant is not rendered ineligible
for a license by virtue of a ten-percent shareholder’s child’s interest in a commercial lessor. See
Request Letter, supra note 1, at 2. The corporate applicant would be rendered ineligible only if the
ten-percent shareholder personally held shares of a licensed commercial lessor or if the shareholder
held more than ten percent of the corporate applicant. See TEX. Oct. CODE ANN. $5 2001.202(4),
(9)(B), .207(4), (9)(B) (Vernon 2004).
The resolution of your fourth question, regarding a corporate applicant’s eligibility if a ten-
percent shareholder “concurrently has transferred, as the corpus of a trust, his greater than a ten
percent stock interest in another licensed bingo distributor or manufacturer, with his children
named as beneficiaries,” depends upon whether the ten-percent shareholder will continue to be a
“shareholder of’ or will hold an equitable or credit interest in the manufacturer or distributor
following transfer to the trust. Request Letter, supra note 1, at 2; see TEX. Oct. CODE ANN.
§§ 2001.2W9, P)(B), .207@),(9)(B) (V emon 2004). Because the shareholder holds no more than
ten percent of the corporate applicant, the corporation is not disqualified by the shareholder’s child’s
interest. See. TEX. Oct. CODEANN. @ 2001,202(9)(A), .207(9)(A) (Vernon 2004). You tell us that
the shareholder will not be a trustee of the trust, but that the trust will be revocable. See Request
Letter, supra note 1, at 2-3.
Mr. C. Tom Clowe Jr. - Page 6 (GA-01 86)
Whether such a ten-percent shareholder will continue to be a shareholder of or will hold an
equitable or credit interest in the other manufacturer or distributor following the transfer of the
shareholder’s share in a trust will depend upon the terms of the trust instrument. See SamueN v.
Brooks, 207 S.W. 626, 629 (Tex. Civ. App.-Dallas 1918, writ ref d) (stating that a trust may be
created in one of three ways: “by conveyance or assignment to the donee, or by such transfer to third
persons upon declared terms, or by declaration which fastens a beneficial interest in or upon property
and retains then legal title in the donor”). In our opinion, if the trust is structured so that the ten-
percent shareholder no longer holds title to the shares or any equitable or credit interest in the other
manufacturer or distributor, the corporate applicant is not rendered ineligible by the trust’s shares.
On the other hand, if the trust is structured so that the ten-percent shareholder remains a
“shareholder” of the other manufacturer or distributor or holds an equitable or credit interest in the
manufacturer or distributor, the corporate applicant is ineligible for a license. Construing a trust
instrument involves questions of fact and is not, therefore, a function of the opinion process. See
Vaughnv. Gunter, 458 S.W.2d 523,527-28 (Tex. Civ. App.-Dallas), writ ref’d n.r.e., 461 S.W.2d
599 (Tex. 1970) (indicating that, if a settlor’s intent cannot be determined from a trust instrument’s
plain language, the court must examine the facts to determine the settlor’s intent); see also Tex. Att’y
Gen. Gp. No. GA-0003 (2002) at 1 (stating that the opinion process does not determine facts). In
our opinion, the Commission must determine in the first instance the extent and nature of the
shareholder’s interest in shares held in a trust.
Mr. C. Tom Clowe Jr. - Page 7 (GA-0186)
SUMMARY
A corporate applicant for a bingo manufacturer’s or
distributor’s license is not rendered ineligible under section 2001.202
or 2001.207 of the Occupations Code solely because an individual
holding less than ten percent of the corporation’s stock also holds
stock in, or is related within the first degree by consanguinity or
affinity to an individual who holds stock in, another licensed bingo
entity. On the other hand, the corporate applicant is rendered
ineligible if an individual holding ten percent of the corporation’s
shares also holds shares, in any quantity, in, or holds an equitable or
credit interest in, another licensed bingo manufacturer or distributor.
The corporate applicant is not rendered ineligible solely because an
individual holding exactly ten percent of the corporation’s stock is
related within the first degree to an individual holding shares in a
commercial lessor or a manufacturer or distributor.
Very truly yours,
Attorney General of Texas
BARRY R. MCBEE
First Assistant Attorney General
DON R. WILLETT
Deputy Attorney General for Legal Counsel
NANCY S. FULLER
Chair, Opinion Committee
Kymberly K. Oltrogge
Assistant Attorney General, Opinion Committee