Untitled Texas Attorney General Opinion ( 1999 )

March 8,1999
The Honorable Elton Bomer Opinion No. JC-00 15
Secretary of State
Office of the Secretary of State Re: Whether, under Business Corporation Act article
Executive Division 5.17, a for-profit domestic business corporation may
P.O. Box 12697 convert to a Texas nonprofit corporation organized
Austin, Texas 7871 l-2697 under Texas Revised Civil Statutes articles 1396-1.01
through -11 .Ol, and related questions 014-1159)
Dear Mr. Secretary:
Your predecessor in office asked whether a for-profit business corporation, domestic or
foreign, may convert under article 5.17 of the Business Corporation Act to a Texas nonprotit
corporationorganizedunder Texas Revised Civil Statutes articles 1396-l .Ol through -11 .Ol He also
asked whether a for-profit domestic business corporation may convert under Business Corporation
Act article 5.17 to a Texas nonprofit water-supply corporation. In the event we answer either of
these two questions negatively, he asked whether the Secretary of State should accept for tiling
articles of conversion that purport to convert a for-profit domestic corporation to a nonprofit
corporation, including a water-supply corporation. We conclude a for-profit domestic corporation
may convert to a nonprofit corporation, incorporated in accordance with Texas Revised Civil
Statutes articles 1396-1.01 through -11.01. Likewise, we conclude that a for-profit domestic
corporation may convert to a nonprofit water-supply corporation, incorporated in accordance with
Water Code chapter 67. Given our conclusions, we do not reach the third question.
Your predecessor’s questions concern corporate conversion, a method by which a business
organization may transform itself into another organizational form without ceasing operations.
“Conversion” means
(a) the continuance of a domestic corporation [the converting entity] as,
and in the organizational form of, a foreign corporation or other entity [the
converted entity]; or
(b) the continuance of a foreign corporation or other entity [the
converting entity] as, and in the organizational form of, a domestic
corporation [the converted entity].
The Honorable Elton Bomer - Page 2 (JC-0015)
TEX. Bus. COW. ACT ANN. art. 1.02(S) (Vernon Supp. 1999); see also id. art. 1.02(9), (10) (defining
“converted entity” and “converting entity”). The term “other entity” includes “any entity, whether
organized for proJit or not, that is a corporation (other than a domestic or foreign corporation),
limited or general partnership, limited liability company, real estate investment trust, joint venture,
joint stock company, cooperative, association, bank, trust, insurance company or other legal entity
organized pursuant to the laws ofthis state or any other state or country.” Id. art. 1.02(20) (emphasis
added).
Article 5.17 authorizes a corporation to convert in certain circumstances:
A. A domestic corporation may adopt a plan of conversion and convert
to a foreign corporation or any other entity if:
(1) the converting entity acts on and its shareholders approve a plan of
conversion in the manner prescribed by Article 5.03 of this Act as if the
conversion were a merger to which the converting entity were a party and not
the survivor;
(2) the conversion (a) is permitted by, or not inconsistent with, the laws
of the state or country in which the converted entity is to be incorporated,
formed, or organized, and (b) the incorporation, formation, or organization
of the converted entity is effected in compliance with such laws;
(3) at the time the conversion becomes effective, each shareholder of the
converting entity (other than those who receive payment oftheir shares under
Article 5.12 of this Act [dissenting shareholders]) will, unless otherwise
agreed to by that shareholder, own an equity interest or other ownership or
security interest in, and be a shareholder, partner, member, owner, or other
security holder of, the converted entity;
(4) no shareholder of the domestic corporation will, as a result of the
conversion, become personally liable, without the shareholder’s consent, for
the liabilities or obligations of the converted entity; and
(5) the converted entity shall be incorporated, formed, or organized as
part of or pursuant to the plan of conversion.
B. Any foreign corporation or other entity may adopt a plan of
conversion and convert to a domestic corporation if:
(1) the conversion is permitted by the laws of the state or country in
which the foreign corporation is incorporated, if a foreign corporation is
converting;
The Honorable Elton Bomer - Page 3 (JC-0015)
(2) the conversion is either permitted by the laws under which the other
entity is formed or organized or by the constituent documents of the other
entity that are not inconsistent with the laws of the state or country in which
the other entity is formed or organized, if another entity is converting; and
(3) the converting entity takes all action that may be required by the laws
of the state or country under which it is incorporated, formed, or organized
and by its constituent documents to effect the conversion.
C. A plan of conversion shall set forth:
. . . ,
(4) the manner and basis of converting the shares or other evidences of
ownership of the converting entity into shares or other evidences of
ownership or securities of the converted entity, or any combination thereof;
.
D. [Optional elements of plan of conversion]
E. [Authorizing corporation to abandon plan of conversion in certain
circumstances].
Upon approving the plan of conversion, the converting entity must execute articles of incorporation
and attempt to tile the articles with the Secretary of State. See id. art. 5.18(A) (listing required
elements of articles of conversion). “If the Secretary of State finds that the articles of conversion
conform to law” and that he or she has received all necessary filings and has issued all necessary
certificates, “the Secretary of State shall,” when all required fees and franchise taxes have been paid,
“issue a certificate of conversion to the converted entity or its representatives.” See id. art.
5.18(C). The conversion generally takes effect when the Secretary of State issues the certificate of
conversion. See id. art. 5.19.
Thus, in the conversion process, the converting entity “continue[s] to exist, without
interruption,” but in the converted entity’s organizational form, rather than in the converting entity’s
organizational form. See id. art. 5.20(A)(l). All of the converting entity’s assets and liabilities
continue in the converted entity in its new organizational form. See id. art. 5.20(A)(2), (3), (4) (5).
“[Slhares and other evidences of ownership in the converting entity that are to be converted into
shares, evidences of ownership, or other securities in the converted entity” convert consistently with
the entity’s plan of conversion. See id. art. 5,20(A)(6).
Your predecessor’s questions are narrow, and our response is limited to the situation about
which he asked. In the first question he asked only about a nonprofit corporation organized under
The Honorable Elton Bomer - Page 4 (JC-0015)
Texas Revised Civil Statutes articles 1396-1.01 through -11.01, and we therefore do not consider
conversion to a nonprofit cooperative, which incorporates under Texas Revised Civil Statutes article
1396-50.01, or an unincorporated nonprofit association, which is subject to Texas Revised Civil
Statutes article 1396-70.01. We further emphasize that your predecessor asked only about the
situation in which a for-profit domestic corporation wishes to convert to a nonprofit corporation or
water-supply corporation; accordingly, we do not consider the converse situation, where a nonprofit
corporation or water-supply corporation wishes to convert to a for-profit domestic corporation. A
conversion in that circumstance may implicate charitable trust concerns, which we need not consider
here. See Blocker v. Texas, 718 S.W.2d 409,415 (Tex. App.-Houston [lst Dist.] 1986, writ ref d
n.r.e.) (stating that charitable corporation may use its property only to further its charitable
purposes). Seegenerally Tex. Att’y Gen. LO-96-038 (1996) (concerning permissible uses of Peace
Officer Memorial funds, a charitable trust).
A. Whether a for-profit domestic corporation may convert to a nonprofit
corporation organized under Texas Revised Civil Statutes article 1396-1.01
through -11.01
We conclude first that a for-profit domestic corporation may convert to a nonprofit
corporation organized under Texas Revised Civil Statutes article 1396-1.01 through -11.01 if the
owners of the converting entity approve the plan of conversion consistently with Business
Corporation Act article 5.17(A)(l). We make two determinations to reach this conclusion: (1)
We determine that article 5.17 permits the conversion; and (2) we determine that conversion is
“not inconsistent” with the Non-Profit Corporation Act, TEX. REV. CIV. STAT.ANN. art. 1396-1.01
-11.01 (Vernon 1997 & Supp. 1999).
(1) Whether Business Corporation Act article 5.17 permits a for-profit domestic
corporation to convert to a nonprofit corporation
The definition of the phrase “other entity” as used in Business Corporation Act article
5.17(A) includes a nonprofit entity, see TEX. BUS.CORP.ACT ANN.art. l.O2(A)(20) (Vernon Supp.
1999), and article 5.17 thus explicitly permits a for-profit domestic corporation to convert to a
nonprofit corporation. While a few provisions in articles 5.17,5.18, and 5.20 require that the owners
of the converting for-profit domestic corporation hold an equity interest or other ownership or
security interest in the converted nonprofit corporation and may, therefore, suggest that a for-profit
domestic corporation may not convert to a nonprofit corporation, the legislative intent makes clear
the purpose for the law and its proper interpretation.
The legislative history suggests that the legislature intended the provisions to permit a for-
profit domestic corporation to convert to a nonprofit corporation to create an atmosphere most
favorable to business. Although the conversion provisions were adopted in 1997 when the
legislature enacted Senate Bill 555, nearly identical provisions were first introduced to the legislature
in 1995 as House Bill 1425. House Bill 1425 proposed “a comprehensive package of amendments
to” several corporation and partnership acts, including the Texas Business Corporation Act, and it
The Honorable Elton Bomer - Page 5 (JC-0015)
was the product of the State Bar’s Business Law Section and the Business Law Foundation. See
HOUSECOMM.ONBus. & IND., BILLANALYSIS,Tex. H.B. 1425,74th Leg., R.S. (1995); Hearings
on Tex. H.B. 1425 Before the House Comm. on Bus. & Ind., 74th Leg., R.S. (Mar. 7, 1995)
(statement of Representative Brimer, Chair, Committee on Business & Industry). According to
Dr. Alan Bromberg, representing the Business Law Foundation before the House committee
considering the bill, the bill would, among other things, permit greater flexibility in the structure and
operation of business. See Hearings on Tex. H.B. 1425 Before the House Comm. on Bus. & Ind.,
74th Leg., R.S. (Mar. 7, 1995) (statement of Dr. Alan Bromberg, representing the Texas Business
Law Foundation). Professor Bromberg described the conversion provisions of the bill in particular
as permitting “virtually universal convertability of one form of business organization to another.”
Id. Curtis Huff, the Chair of the Business Law Section of the State Bar, also testified to the House
committee that passage of House Bill 1425 would enhance Texas’ reputation as a flexible state in
which to incorporate. See id. (statement of Curtis Huff, representing Business Law Section of Texas
State Bar). The House of Representatives passed the bill to engrossment, but the full Senate
apparently did not vote on the bill, although the Senate Committee on Economic Development had
recommended the bill’s adoption by the full Senate. See Hearings on Tex. H.B. 1104 Before the
House Comm. on Bus. & Ind., 75th Leg., R.S. (Mar. 5,1997) (testimony OfRepresentative Solomon,
sponsor).
House Bill 1425 (1995) was substantially reincarnated in 1997 as Senate Bill 555 and its
identical companion, House Bill 1104. See id. During hearings before the House Committee on
Business and Industry on House Bill 1104, Representative Dukes asked Dr. Bromberg whether a
business could convert itself to avoid taxation. See id. (Representative Dukes, member of House
Committee on Business & Industry). Dr. Bromberg responded: “I don’t think it would affect
taxation except possibly under the federal income tax. A lot ofthe switching of entities has been
in the past to try to achieve partnership taxation under federal law.” See id. (testimony of Dr. Alan
Bromberg, representing Texas Business Law Foundation). Curtis Huff also indicated that the
conversion process largely would aid corporations that desire to transform themselves into
partnerships. See id. (testimony of Curtis Huff, Chair, Corporate Law Committee, Business Law
Section, State Bar of Texas).
While the conversion provisions may have been designed in large part to facilitate the
transformation of corporations to partnerships, we believe legislators were aware of the provisions’
broader implications, The background section of the House Research Organization’s Bill Analysis
lists nonprofit corporations regulated by the Non-Profit Corporation Act as a form businesses in this
state may take. See HOUSERESEARCHORG., BILL ANALYSISat 1, Tex. H.B. 1104,75th Leg., R.S.
(May 5,1997). (The other four listed forms are corporations, regulated by the Business Corporation
Act; limited-liability companies, regulated by the Limited Liability Company Act; limited
partnerships, regulated by the Revised Limited Partnership Act; and partnerships and limited liability
partnerships, regulated by the Revised Partnership Act. See id.) Later, summarizing supporters’
rationale, the bill analysis seems to refer back to this list of organizational forms:
The Honorable Elton Bomer - Page 6 (JC-0015)
One significant change [this bill proposes] would provide for conversion
of different business forms. Texas law recognizes at least seven different
forms of business organizations, . , each of which carries different benefits
and drawbacks. In a healthy economy, businesses are dynamic, not
static, and there should be flexibility to assume new forms. However, the
expenses required to dissolve a business in one form and start up in another
now limit such conversions.
To solve this problem, HB 1104 would allow a process of conversion.
Id.at 4-5. We infer from this bill analysis that the legislature thought of a nonprofit corporation as
an organizational form that an entity may assume and meant to include it within the realm of entities
to which a for-profit domestic corporation may convert.
(2) Whether conversion from a for-profit domestic corporation to a nonprofit
corporation is inconsistent with the Non-Profit Corporation Act
Determining that the conversion provisions, articles 5.17 through 5.20 of the Business
Corporation Act, permit a for-profit domestic corporation to convert to a nonprofit corporation is
insufficient, however. We must also determine that such a conversion is “not inconsistent” with the
Non-Profit Corporation Act, TEX.F@V.CIV.STAT.ANN.art. 1396-1.01 through-l 1.01 (Vernon 1997
& Supp. 1999). Article 5.17(A)(2)(a) of the Business Corporation Act authorizes a domestic
corporation to convert to another organizational form if the conversion is permitted by or not
inconsistent with the law of the state in which the converted entity is to be incorporated. As your
predecessor stated, the Non-Profit Corporation Act does not expressly recognize conversion to a
nonprofit organization.
We conclude, however, that a for-profit domestic corporation’s conversion to a nonprofit
corporation is not inconsistent with the Non-Profit Corporation Act. We find nothing in the Non-
Profit Corporation Act itselftbat is incompatible with the conversion process. Our chief concern is
that the interests of the owners or shareholders be protected, and we are satisfied that the statutes do
so. A plan of conversion must be approved by a two-thirds majority of those shareholders entitled
to vote on the plan. See TEX. Bus. CORP.ACTANN. art. 5.03(B)(2), (E) (Vernon Supp. 1999); see
also id. art. 5.17(A)( 1) (requiring corporation to adopt plan of conversion using procedures in article
5.03). All shareholders, whether they are entitled to vote or not, must be notified of the conversion
proposal and the meeting at which the vote will be taken. See id. art. 5.03(D); see also id. art.
5,17(A)(l) (requiring converting corporation to adhere to procedures in article 5.03). Moreover, a
dissenting shareholder who was entitled to vote may be paid for the fair value of the shareholder’s
shares. See id. arts. 5.1 l(A)(2), 5.12(A)(l)(a). These protections are virtually identical to those
Pennsylvania grants in its statutes explicitly permitting a for-profit domestic corporation to convert
to a non-profit corporation. See 15 PA. CONS.STAT.$5 1961, 1962(b), (c).
The Honorable Elton Bomer - Page 7 (JC-0015)
Your predecessor argued that conversion is inconsistent with the Non-Profit Corporation Act
for two reasons. First, because the Non-Profit Corporation Act is silent with respect to conversion
while the legislature inserted specific provisions into the Revised Limited Partnership Act, TEX. F&v.
CIV. STAT.ANN. art. 6132a-1 (Vernon Supp. 1999); the Limited Liability Company Act, TEX.REV.
CIV. STAT.ANN. art. 1528n (Vernon 1997 & Supp. 1999); and the Revised Partnership Act, TEX.
REV. CIV. STAT.ANN. art. 6132b-1.01 through -11.04 (Vernon Supp. 1997), he averred that the
legislature did not intend a for-profit entity to convert to a nonprofit entity. Second, because the
converted company would be effective when the certificate of incorporation is filed, instead ofwhen
the articles of conversion are filed, your predecessor contended that the conversion laws and the
Non-Profit Corporation Act are inconsistent. We respond to each point serially.
First, although the legislature did not amend the Non-Profit Corporation Act specifically to
authorize conversion, we cannot read into this fact a legislative desire to preclude a for-profit
domestic corporation from converting to a nonprofit corporation. Rather, all we can surmise is that
the legislature did not desire to enable a nonprofit corporation to convert to a for-profit domestic
corporation. On its face, the Business Corporation Act broadly authorizes a corporation to convert
to any “other entity,” TEX. Bus. CORP. ACT ANN. art. 5.17(A) (Vernon Supp. 1999), which is
expressly defined to include nonprofit corporations. See id. art. 1.02(20). Your predecessor
appeared to argue, however, that the legislature intended to enable a for-profit corporation to convert
to only a limited partnership, a limited liability company, or a partnership. In support of his
argument, he observed that the same 1997 bill that amended the Business Corporation Act to permit
conversions also amended the Revised Limited Partnership Act; the Limited Liability Company Act;
and the Revised Partnership Act to permit conversions-but it did not amend the Non-Profit
Corporation Act to permit conversions. See Act of May 13, 1997,75th Leg., R.S., ch. 375,§§ 79,
95, 122, 1997 Tex. Gen. Laws 1516,1573-75,1585-88, 1602-05.
We respectfully disagree with his assessment. The amendments he cited, which parallel the
conversion-related amendments to the Business Corporation Act, authorize, among other things, a
domestic limited liability company, domestic limited partnership, or a domestic partnership to
convert to an “other entity,” which is defined in each instance to include a nonprofit corporation.
These amendments do not limit a corporation’s capacity to convert, under the Business Corporation
Act, to a limited liability company, a limited partnership, a partnership, or any other entity.
Second, we do not believe that any overlap of time between the date the converting
corporation ceases to exist and the date the converted, nonprofit corporation becomes operational
creates a fatal inconsistency between the Business Corporation Act and Texas Revised Civil Statutes
article 1396-l .Ol through -11 .Ol Under the conversion provisions in the Business Corporation Act,
a converting corporation is to file its articles of conversion with the Secretary of State. If the
Secretary of State finds that these articles “conform to law,” that he or she has received all the
requisite tilings, and that he or she “has issued all certificates required to be issued in connection
with the incorporation of the converted entity,” then the Secretary will issue a certificate of
conversion. See TEX. BUS. CORP.ACT ANN. art. 5.18(C) (Vernon Supp. 1999) (emphasis added).
The conversion becomes effective when the Secretary issues the certificate of conversion. See id.
The Honorable Elton Bomer - Page 8 (X-0015)
art. 5.19(A). On the other hand, underTexasRevisedCivi1 Statutes article 1396-3.04(A), partofthe
Non-Profit Corporation Act, a nonprofit corporation exists as soon as the Secretary of State issues
a certificate of incorporation. Thus, there may be an overlap of time during which the nonprofit
corporation exists and the converting for-profit domestic corporation has not yet ceased to exist.
As your predecessor suggested, this overlap is in contrast with the Revised Limited
Partnership Act, the Limited Liability Company Act, and the Revised Partnership Act. Under
section 2.01(b) ofthe Revised Limited Partnership Act, for example, a limited partnership is formed
at the time the initial certificate of limited partnership is filed with the Secretary of State “[elxcept
in the case of a limited partnership formed under a plan of conversion.” TEX. REV. CIV. STAT.
ANN.art. 6132a-l, § 2.01(b). In the case ofa limited partnership formed under a plan ofconversion,
section 2.01(b) continues, “the existence of the limited partnership as a limited partnership begins
on the effectiveness of. the conversion.” Id. Likewise, a limited liability company generally
begins to exist upon the issuance of the certificate of organization except “[i]n the case of a new
domestic limited liability company being organized” under a plan of conversion. TEX. REV. CIV.
STAT. ANN. art. 1528n, subart. 3.04(A), (B) (V emon Supp. 1999). In that case, the converted
domestic limited liability company begins to exist when the conversion itself is effective. See id.
subart. 3.04(B). Finally, a partnership formed under the Revised Partnership Act is created by
agreement and intent of the parties; nothing need be filed with the Secretary of State’s office. See
TEX. F&v. CIV. STAT.ANN.art. 6132b-2.02, -2.03 (Vernon Supp. 1999).
While we understand your concern, we do not think it precludes conversion from a for-profit
domestic business corporation to a nonprofit corporation organized under Texas Revised Civil
Statutes articles 1396-1.01 through -11.01. Article 5.18(C) clearly contemplates that the Secretary
of State may already have issued a certificate of incorporation at the time he or she reviews the
articles of conversion: “If the Secretary of State finds that the articles of conversion conform to
law, , and [that he or she] has issued all certificates required to be issued in connection with the
incorporation ofthe converted entity, , the Secretary of State shall . (3) issue a certificate
of conversion. . .” Moreover, with some coordination, it may be possible for the Secretary of State
to issue the certificate of conversion shortly after issuing the certificate of incorporation, reducing
the overlap to an inconsequential time period.
B. Whether a for-profit domestic corporation may convert to a nonprofit water-
supply corporation
In response to your predecessor’s second question, we similarly conclude that a for-profit
domestic corporation may, under Business Corporation Act article 5.17, convert to a domestic
nonprofit water-supply corporation organized under Water Code chapter 67 if the owners of the
converting entity approve the plan of conversion consistently with article 5.17(A)(l). As we stated
above, article 5.17 explicitly authorizes a for-profit domestic corporation to convert to any “other
entity,” and the phrase “other entity” is defined to include a nonprofit corporation. Consequently,
the Business Corporation Act itself permits the conversion about which he asked.
The Honorable Elton Bomer - Page 9 (JC-0015)
In addition, we do not believe that conversion from a for-profit domestic corporation is
inconsistent with chapter 67 of the Water Code. A water-supply corporation is created in the same
manner as is a private corporation, incorporated under the Business Corporation Act. See TEX.
WATER CODE ANN. 5 67.003(a) (Vernon Supp. 1999). In all other respects, a water-supply
corporation is subject to the Non-Profit Corporation Act to the extent that act does not conflict with
Water Code chapter 67 or Texas Revised Civil Statutes article 1434a. See id. 5 67.004. Your
predecessor did not contend that conversion is inconsistent with the Business Corporation Act, and
we concluded above that conversion is not inconsistent with the Non-Profit Corporation Act.
Because we conclude that a for-profit domestic corporation may, under article 5.17 of the
Business Corporation Act, convert to a nonprofit domestic corporation or a water-supply
corporation, we do not reach your predecessor’s third question.
The Honorable Elton Bomer - Page 10 (JC-00 15)
SUMMARY
A for-profit domestic corporation may, in accordance with article 5.17
ofthe Business Corporation Act, convert to anonprofit corporation organized
under the Non-Profit Corporation Act, Texas Revised Civil Statutes articles
1396-1.01 through -11.01, or a water-supply corporation, created under
chapter 67 of the Water Code, if the owners of the converting entity approve
the plan of conversion consistently with Business Corporation Act article
5.17(A)(l).
JOHN CORNYN
Attorney General of Texas
ANDY TAYLOR
First Assistant Attorney General
CLARK KENT ERVIN
Deputy Attorney General - General Counsel
ELIZABETH ROBINSON
Chair, Opinion Committee
Prepared by Kyrnberly K. Oltrogge
Assistant Attorney General