Untitled Texas Attorney General Opinion ( 1987 )

THE ATTORNEY GESERAL
OF TEXAS
April 8, 1987
Mr. Perry L. Adkisson Opinion No. JM-671
Chancellor
Texas A 6 M University System Re: Validity of a proposed con-
College Station, Texas 77843 tract between Texas A 6 M and a
corporation which is a wholly
owned subsidiary of a corpora-
tion owned in part by a member of
the university's board of regents
Dear Mr. Adkisson:
You inquire about the legality of a proposed transaction between
the Texas Agricultural Experiment Station (TARS) and an agribusiness
corporation in which a regent of Texas A b I4 University is economi-
cally interested.
The Texas Agricultural Experiment Station is an agency of the
Texas A h M University System. Educ. Code 188.001(Z). It is under
the supervision of the board of regents of the Texas A 6 M University
System. Educ. Code $88.202. An Education Code provision specifically
provides that the regents
shall generate revenues through agreements esta-
blishing equitable interists, royalties, and
patent rights relating to releases of agricultural
research products by the Texas agricultural
experiment station when economically feasible.
Educ. Code 588.213.
The transaction about which you inquire involves an agreement
between TARS end Granada Development Corporation (GDC), the entity in
which the regent has an ownership interest. The Board of Regents
would have to approve any contract between the Agricultural Experimeut
Station and GDC. See Educ. Code 0588.202. 88.203, 88.213. You
describe the legal relationships between GDC. its parent corporation,
of which the regent is one-half ovner. and other subsidiaries of that
parent. We will summarize these complex corporate relationships to
provide a factual setting for your conflict of interest question.
The regent owns one-half the stock of Granada Corporation, which
engages in agribusiness. Granada Development Corporation. a wholly
owned subsidiary. of Granada Corporation. carries out research and
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Mr. Perry L. Adkisson - Page 2 (JM-671)
development projects for its own account and for the account of its
clients. Among its clients are affiliates of GUC. Pou describe GUC's
affiliates as "principally publicly owned limited partnerships for
whom Granada Management Corporation serves as General Partner: owning
uo more than a one percent interest." Granada Management is wholly
owned by Granada Land & Cattle Company, which, in turn, is wholly
owned by Granada Corporation.
Thus, the university wishes to contract with GDC. a wholly owned
subsidiary of Granada Corporation, in which a university regent owus
half the stock. In addition. GUC does work for limited partnerships
whose managing partner is wholly owned by another wholly owned sub-
sidiary of Granada Corporation. You state that the limited
partnerships cannot devote more than twenty percent of their capital
to research and development, and it is presently anticipated that no
more than fifteen percent of any partnership research and development
activities would be carried ou pursuant to the proposed agreement
with Texas A h M University.
You state that the proposed agreement would take the form of a
master agreement pursuant to which GDC's clients would totally fund
specific research and development projects, to be identified in the
future and to be carried on jointly by personnel of GUC and the
Agricultural Experiment Station. The clients of GDC for whom specific
projects were carried ou would receive a worldwide royalty-bearing
exclusive license to market and sell the product of the research
projects. The Texas Agricultural Experiment Station would receive
royalties in amounts to be agreed upon between TAES and the partner-
ship. Granada Management, as a one percent interest owner in the
affiliate partnerships. would contribute a pro rata share of one
percent of any cash contribution required and would be entitled to
receive a pro rata one percent share of any research benefit. The
regent who owns a half interest in Granada Corporation is connected to
all parties to the contract - the Unfversity. GUC, and the affiliate
clients of GDC.
The Texas courts have established a strict rule prohibiting a
public officer from having a personal financial interest in a contract
entered into by the governmental body of which he is a member. The
court in Meyers v. Walker, 276 S.W. 305 (Tex. Civ. App. - Eastland
1925, uo writ) stated this rule as follows:
If a public official directly or indirectly has a
pecuniary interest in a contract, uo matter how
honest he may be, and although he may not be
influenced by the interest, such a contract so
made is violative of the spirit and letter of our
law. and is against public policy.
Meyers v. Walker, 276 S.W. at 307. The rule aunounced in Meyers v.
Walker has been relied upou in numerous cases co invalidate contracts
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Mr. Perry L. Adkisson - Page 3 (JM-671)
made by public officials who were pecuniarily interested therein.
See, e.g., City of Edinburg v. Ellis. 59 S.W.2d 99 (Tex. Comm'n App.
1933); Delta Electric Construction Co. v. City of San Antonio, 437
S.W.2d 602 (Tex. Civ. App. - San Antonio 1969, writ ref'd n.r.e.);
Bexar County v. Wentworth. 378 S.W.2d 126 (Tex. Civ. App. - San
Antonio 1964, writ ref'd n.r.e.); Attorney General Opinion Nos. JM-171
(1984); FW-179 (1980); E-1309 (1978); H-916 (1976); M-340 (1969);
WW-1362 (1962); V-640 (1948); O-2929 (1942). The conflict of interest
cannot be cured by the interested officer's recusing himself. Delta
Electric Construction Co. v. City of San Antonio, 437 S.W.2d at 609.
IU our opinion, the common law rule announced in Meyers v. Walker
provides the answer to your question. Under the proposed contract,
the affiliate clients of Granada Development Corporation will have a
right to receive royalties on projects that may be developed from the
research they fund. The legislature recognized the potential economic
value of research conducted at TAPS when it enacted section 88.213 of
the Education Code directing the regents to generate revenues "through
agreements establishing equitable interests, royalties, and patent
rights relating to releases of agricultural research products" by
TAES . See also General Appropriations Acr. Acts 1985. 69th Leg., ch.
980, art. V, 170. at budget 510 (protection of state's property rights
in patentable product of research funded under Appropriations Act).
The regent who owns half the stock in Granada Corporation has a
pecuniary interest in Granada‘s subsidiaries and in their trans-
actions. The economic well-being of Granada till be affected by the
business activities of its subsidiaries, including work done under the
proposed contract with Texas A h M University. Therefore, we believe
the regent has a pecuniary interest in the contract between GDC and
the university, arising out of his ownership interest in the sub-
sidiary, even though GDC's clients, and not the subsidiary itself,
will pay the costs and receive the benefit of projects undertaken by
GDC and the university agricultural experiment station. The fact that
GDC would uot receive any consideration from the university would not
prevent the regent from having at least an indirect interest in that
transaction. See generally Bexar County v. Wentworth, s. We
believe the regent has a pecuniary interest through GDC's affiliate
clients in the agreement with the uuiversity.
Moreover, where the client for whom the Agricultural Experiment
Station undertakes a project is an affiliate of GDC, the regent
actually has a pecuniary interest in the transaction. Although you
argue chat the regent's interest is "de minimis," the common law
conflict of interest has been applied to small interests. See
Attorney General Opinion H-624 (1975); see also Attorney Gene=
Opinion J'M-424 (1986).
The general partner of a limited partnership has, with certain
exceptions, all the rights and powers of a partner in a partnership
without limited partners. V.T.C.S. art. 6132a. 510(a). Thus, the
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Mr. Perry L. Adkisson - Page 4 (JM-671)
general partner is "an agent of the partnership for the purpose of
its business." V.T.C.S. art. 6132b. §9(1). He may contract for
the partnership. Boyd v. Leasing Associates, Inc., 516 S.W.2d 485.
489 (Tex. Civ. App. - Houston [lst Dist.] 1974, writ ref'd n.r.e.1.
The general partner of a limited partnership moreover stands in a
fiduciary capacity to the limited partners. Crenshaw v. Swenson, 611
S.W.2d 886. 890 (Tex. Civ. App. - Austin 1980. writ ref'd n.r.e.);
Watson v. Limited Partners of WCXT, Led.. 570 S.W.2d 179. 182 (Tex.
Civ. App. - Austin 1978. writ ref'd n.r.e.1. It is the general
partner's duty to administer the partnership affairs solely for the
benefit of the partnership. Creashaw v. Swenson, 611 S.W.Zd at 890.
Granada Management Corporation is the general partner of Granada
Development's affiliate client;. The individuals who own the parent
corporation of Granada Management's parent may benefit economically
from contracts which Granada Management Company may eater into on
behalf of its clients.
You argue that the enactment of article 6252-9b. V.T.C.S..
changed the common law rule of Meyers v. Walker and thus that doctrine
does not govern this transaction. Section 6 of article 6252-9b.
V.T.C.S., provides in part:
(a) This section applies only to an elected or
appointed officer who is a pember of a board or
commission having policy direction over a state
agency. excluding officers subject to impeachment
under Article XIV, [sic] Section 2, of the Texas
Constitution. If such an officer has a personal or
private interest in any measure, proposal, or deci-
sion pending before the board or commission. he
shall publicly disclose the fact to the board or
commission in a meeting called and held in com-
pliance with the Open Meetings Law (Article
6252-17, Vernon's Texas Civil Statutes,) and shall
not vote or otherwise participate in the decision.
The disclosure shall be entered in the minutes of
the meeting.
(b) For the purposes of this section, the term
'personal or private interest' has the same meaning
as is given to it under Article III. Section 22. of
the Texas Constitution, governing the conduct of
members of the legislature. For the purposes of
this section, a person does not have a 'personal or
private interest' in any measure, proposal, or
decision if he is engaged in a profession, trade,
or occupation and his interest is the same as all
others similarly engaged in the profession, trade,
or occupation.
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Mr. Perry L. Adkisson - Page 5 (JM-671)
(c) A person who violates this section is
subject to removal from office on the petition of
the attorney general on his own initiative or on
the relation of any other member of the board or
commission or on the relation of any citizen. . . .
You suggest that a state board may contract with a company in which a
board member is interested as long as the interested person publicly
discloses the fact and recuses himself.
We have held that article 988b. V.T.C.S., a 1983 enactment per-
taining to conflict of interest by local public officials, repealed
the Meyers v. Walker doctrine at the local level. See Attorney
General Opinion .R4-424 (1985). Article 988b. V.T.C.S.,provides in
part:
Sec. 3. (a) Except as provided by Section 5 of
this Act, a local public official commits an
offense if he knowingly:
(1) participates in a vote or decision on a
matter involving a business entite in which the
local public official has a substantial interest if
it is reasonably foreseeable that an action on the
matter would confer an economic benefit to the
business entity involved;
. . . .
Sec. 4. If a local public official or a person
related to that official in the first or second
degree by either affinity or consanguinity has a
substantial interest in a business entity that
would be peculiarly affected by any official action
taken by the governing body. the local public
official, before a vote or decision on the matter.
shall file an affidavit stating the nature and
extent of the interest and shall abstain from
further participation in the matter. The affidavit
must be filed with the official recordkeeper of the
governmental entity.
Sec. 5. (a) The governing 'body of a govern-
mental entity may contract for the purchase of
services or personal property with a business
entity in which a member of the governing body has
a substantial interest if the business entity is
the only business entity that provides the needed
service or product within the jurisdiction of the
governmental entity and is the only business entity
that bids on the contract.
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Mr. Perry L. Adkisson - Page 6 (JM-671)
. . . .
Sec. 6. . . . The finding by a court of a
violation under this article does not render an
action of the governing body voidable unless the
measure that ~was the subject of an action involving
conflict of interest would not have passed the
governing body without the vote of the person who
violated this article. (Emphasis added).
The language and legislative history of article 988b demonstrate that
it applies to contract formation and that ic changes the common law
rule invalidating a public contract in which even one member of the
contracting governmental body has a private pecuniary interest.
Section 6 of article 6252-9b, V.T.C.S.. prohibits voting or other
participation in a decision by an officer who has
a personal or private interest in any measure,
proposal, or decision pending before the
board. . . .
V.T.C.S. art. 6252-9b. 06(a). Article 988b prohibits participation
in a vote or decision on a matter involving a
business entity in which the local public official
has a substantial interest. . . .
V.T.C.S. art. 988b. 53(a)(l).
These two prohibitions are expressed in similar language. Article
6252-9b does not, however. include any language indicating that
section 6 was intended to apply to contracts, nor does its legislative
history suggest an intent to modify the Meyers v. Walker rule. Article
6252-9b was adopted in 1973 as Rouse Bill No. 1. Acts 1973, 63rd
Leg., ch. 421. at 1086. It was described as "The Ethics Bill" and
imulemented its ournoses throuuh financial disclosure bv state
officers. Id.; "Background Repott on Local Officers' Conflict of
Interest Problems" at 17 in Final Report of the Public Servant
Standards of Conduct Advisory Committee, August 1983. Section 6 was
added only when House Bill No. 1 was discussed by the conference
committee. Texas Legislative Council. "Ethics and Financial
Disclosure," at 31 in Selected Public Interest Legislation, May 1978.
Some conferees expressed the opinion that the restriction on voting by
members of the legislature in article III, section 22 of the Texas
Constitution should also apply to members of boards and commissions.
Id. Article III. section 22 of the Texas Constitution provides as
follows:
A member who has a personal or private interest
in any measure or bill, proposed, or pending
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Mr. Perry L. Adkisson - Page 7 (JM-671)
before the Legislature, shall disclose the fact to
the House, of which he is a member, and shall not
vote thereon.
"It is an ancient rule that members of a lawmaking body shall not vote
on matters in which they have a personal interest." Lute, Legislative
Procedure, 366 (1922) (quoted in Texas Legislative Council, "Ethics
and Financial Disclosure" at 32).
Article 6252-9b, V.T.C.S.. was therefore modeled on a provision
applicfble to legislators, who do not enter into contracts for the
state. The state agencies whose offices are subject to section 6
exercise regulatory and other executive functions. They may also
enter into contracts necessary to carry out their executive respon-
sibilities, but it is reasonable to conclude that section 6 pertains
to the agencies' primary functions: rule making and the application
of the statute and rules to individual cases. Section 6 does not
prohibit an officer from participating in a measure, proposal or
decision "if he is engaged in a profession, trade, or occupation and
his interest is the same as all others similarly engaged in the
profession, trade, or occupation." V.T.C.S. art. 6252-9b, 56(b).
This proviso suggests that the legislature had regulatory actions in
mind when it added section 6 to article 625%9b. Section 6 was
moreover seen by the legislature as placing an additional restriction
on state offices and.not as removing an existing restriction.
When article 6252-9b, V.T.C.S.. became effective on January 1,
1974, the following rule of statutory construction applied to all
civil statutes:
The rule of common law that statutes in deroga-
tion thereof shall be strictly construed shall
have no application to the Revised Statutes; but
the said statutes shall constitute the law of this
State respecting the subjects to which they
relate: and the provisions thereof shall be
liberally construed with a view to effect their
objects and to promote justice.
Act of Feb. 21. 1879, 16th Leg. R.S.. adopting Tex. Civ. Stat., Final
Title 53 (formerly codified as V.T.C.S. art. lO(8) repealed 1985).
See Government Code 5312.006(b). The object of article 6252-9b.
m.C.S., is stated as follows:
1. Article III. section 18, of the Texas Constitution forbids a
legislator from being interested in contracts with the state or a
county authorized by any law during a term for which he was elected.
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Mr. Perry L. Adkisson - Page 8 (m-671)
It is the policy of the State of Texas that no
state officer or state employee shall have any
interest, financial or otherwise, direct or in-
direct, or engage in any business transaction or
professional activity or incur any obligation of
any nature which is in substantial conflict with
the proper discharge of his duties in the public
interest. To implement this policy and to
strengthen the faith and confidence of the people
of Texas in their state government, there are
provided standards of conduct and disclosure
requirements to be observed by persons owing a
responsibility to the people of Texas and the
government of the State of Texas in the per-
formaace of their official duties.
V.T.C.S. art. 6252-9b, Il. This objective would be poorly served by a
construction of section 6 which weakens the common law conflict of
interest rule applicable to state officers.
Attorney General Opinions issued since article 6252-9b, V.T.C.S.,
became effective have applied the Mayars v. Walker rule to state
agencies. See Attorney General Opinion Nos. MW-179 (1980); H-1309
(1978). Section 6 of article 6252-9b. V.T.C.S., has been applied to
an agency.in its capacity as a regulatory body. Ser Attorney General
Opinion Nos. JM-126 (1984); E-1319 (1978). In our opinion, article
6252-9b. V.T.C.S., did not modify the common law conflict of interest
rule stated in Meyers v. Walker.
Accordingly, the Board of Regents of A h H University may not
approve a contract between the Texas Agricultural Experiment Station
and a corporation ia which a regent of Texas A h H University has a
financial Interest. Under the common law rule, the board is barred
from approving the contract; racusal of the interested regent will not
permit the board to approve it. See Delta Electric Construction Co.
v. City of San Antonio, supra. Thepublic policy of the state strictly
opposes such contracts even if all parties act in good faith and fully
believe that the coatract will benefit the state. A prior opinion of
this office determined that the board of regents of a state college
could not contract with a bank of which a regear was an officer. The
opinion made the following observation about the absolute nature of
the public policy against conflict of interest in contract matters:
It is not a question of whether or not the
public interest will actually suffer in permitting
the particular contract. but it is rather one of a
sound policy as to official conduct where the law
will not speculate upon the actualities following
its violation.
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Mr. Perry L. Adkisson - Page 9 (JM-671)
Attorney General Opinion V-640 (1948) at 2.
The Regents of A h M University may not approve the contract
about which you inquire.
SUMMARY
The Texas Agricultural Experiment Station, an
agency of the Texas A h M University System. may not
contract with a private agricultural development
corporation la which a regent of the university has
a pecuniary interest.
Attorney General of Texas
JACX HIGHTOWER
First Assistant Attorney General
MARYXRLLRR
Executive Assistant Attorney General
JUDGE ZOLLIE STgARLRY
Special Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Susan L. Garrison
Assistant Attorney General
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