ADMISSION TO DO BUSINESS IN STATE WHERE ARTICLES OF INCORPORATION DO NOT PROVIDE FOR SUPERADDED LIABILITY OF SHAREHOLDERS

INSURANCE - FOREIGN STOCK INSURANCE COMPANY - ADMISSION TO DO BUSINESS IN STATE WHERE ARTICLES OF INCORPORATION DO NOT PROVIDE FOR SUPERADDED LIABILITY OF SHAREHOLDERS.

An otherwise qualified foreign stock insurance company can be admitted to do business in Washington if its articles of incorporation do not (or under the law of the state of its domicile cannot) provide for liability of shareholders in the amount of the par value of their stock in addition to the amount paid for the shares.

                                                                  - - - - - - - - - - - - -

                                                                February 24, 1960

Honorable William A. Sullivan
Insurance Commissioner
State of Washington
Insurance Building
Olympia, Washington                                                                                              Cite as:  AGO 59-60 No. 101

Dear Sir:

            You have requested the opinion of this office on the following question:

            Can an otherwise qualified foreign stock insurance company be admitted to do business in Washington if its articles of incorporation do not (or under the law of the state of its domicile its articles of incorporation cannot) provide for liability of shareholders in the amount of the par value of their stock in addition to the amount paid for the shares?

            We answer the question in the affirmative.

                                                                     ANALYSIS

            The question asked is substantially the same as that asked by the insurance commissioner in 1926, which was answered in the attorney general's opinion of October 6, 1926 [[1925-26 OAG 241]].  That opinion held that such a foreign insurer could be admitted, but only if its articles of incorporation did not expressly recite the absence of superadded liability.  Insofar as that opinion restricted the admission of such foreign insurance corporations, it is hereby  [[Orig. Op. Page 2]] overruled for reasons presently to be explained.

            Art. XII, § 11 (as amended) of the Washington constitution provides in part that:

            ". . . Each stockholder of any . . . insurance corporation or joint stock association, shall be individually and personally liable equally and ratably, and not one for another, for all contracts, debts and engagements of such corporation or association accruing while they remain such stockholders, to the extent of the amount of their stock therein at the par value thereof, in addition to the amount invested in such shares."

            The liability created by this constitutional provision is popularly known as "superadded" liability.

            Art. XII, § 7, provides:

            "No corporation organized outside the limits of this state shall be allowed to transact business within the state on more favorable conditions than are prescribed by law to similar corporations organized under the laws of this state."

            The second proviso of RCW 23.52.030 is to the same effect.

            It is well to note at the outset that the law of the state in which a corporation is created, either in its constitutional provisions or legislative enactments, alone fixes and determines the liability of the shareholder.  This rule is beyond controversy.  See e.g.Leyner Eng. Works v. Kempner, 163 Fed. 605 (1908); 23 Am.Jur.,Foreign Corporations, § 457; Restatement, Conflict of Laws, §§ 185, 187 (1934); 18 C.J.S.Corporations, § 618.  It follows that there is no way in which the superadded liability imposed by Art. XII, § 11,supra, on shareholders of domestic insurance corporations can be imposed by our courts on shareholders of foreign insurers.

            Your inquiry, then, necessarily can go solely to exclusion or admission; that is, whether an insurance corporation organized in a state which imposes liability on shareholders only for the amount of unpaid stock can be admitted into Washington, or whether it must be excluded on the ground that its admission would offend against Art. XII, § 7, supra (i.e., its lack of superadded liability would allow it to transact business within the state on more favorable conditions than those imposed on domestic corporations).

             [[Orig. Op. Page 3]]

            The case ofState ex rel. Amalgamated Republic Mines v. Nichols, 47 Wash. 117, 91 Pac. 632 (1907) announced the broad rule that if a foreign corporation is allowed to file articles of incorporation which a domestic corporation could not, such filing would give the foreign corporation the sort of preference forbidden by Art. XII, § 7, supra.  Since a domestic insurance corporation obviously could not file articles denying superadded liability of shareholders, the Nichols case would seem to support the exclusion of foreign insurers whose articles contain such a denial.

            However, the facts of the Nichols case show that the language of the opinion was unnecessarily broad.  Section 1, chapter 176, Laws of 1903 (p. 367) provided:

            ". . . no corporation shall be organized for the purpose of carrying on a trust company business in the state of Washington except under this act."

            The Amalgamated Republic Mines Co. brought mandamus to compel the secretary of state to accept its articles of incorporation, which articles recited the power to do a trust business forbidden to domestic corporations by the above statute.  The court, in holding that the writ would not lie, could reasonably have limited its opinion to the nature of the particular defect in the articles in question, i.e., the articles recited the power to do a type of business not permitted a similar domestic corporation.  Instead, the court chose also to talk about the act of filing of the articles itself as a preference amounting to "more favorable conditions."

            Some years later the court itself came to the conclusion that the dictum of theNichols case was unnecessarily broad, when it decided the case of State ex rel. Fibreboard Products v. Hinkle, 147 Wash. 10, 264 Pac. 1010 (1928).  In that case the relator, a Delaware corporation, brought mandamus to compel the secretary of state to accept filing of articles of incorporation which provided for two classes of common stock.  At that time the Washington corporation code did not permit different classes of shares of common stock.  The court, in a short opinion, simply held that, it would be meaningless for a state to attempt to legislate upon the internal affairs of foreign corporations; that only the state of domicile could control such internal matters, and that admission of a corporation having an internal structure not allowed a domestic corporation would not, as such, be tantamount to permitting such a corporation to transact business here upon more favorable terms than those afforded to domestic corporations.

            While theFibreboard opinion makes no mention of the Nichols case, the briefs show that the broad language of theNichols case was strongly presented to the court.  The following excerpts will show the vigor with which counsel for the respondent urged the theory that it made no  [[Orig. Op. Page 4]] difference whether the offensive article related to internal affairs or to the doing of business:

            "It is respondent's (the Secretary of State) contention (1) that if relator were seeking incorporation as a domestic company it would be prohibited since its articles classify its common stock and (2) that a foreign corporation is not permitted to file articles which are prohibited to a domestic corporation by section 7, article 12 of the state constitution . . ." (Page 2 of the brief.)

            "We submit that the constitutional and statutory provisions already quoted, as construed by this court, operate to bar a foreign corporation whose articles would not be received if it were a domestic corporation . . ." (Page 4 of the brief.)

            " . . . Therefore, to argue that questions of stock structure and voting rights of stockholders are matters involving only the internal affairs of a corporation is beside the mark.  We believe those matters do, in fact, relate to internal affairs of a corporation, but the short answer to the argument is that our public policy, as declared in the constitution, statutes and decisions of this court construing the same, has decreed that even as regard matters relative to such affairs no foreign corporation shall be accorded an advantage over domestic corporations."  (Page 10 of the brief.)

            "Relator (Fibreboard) would have the court lay down the hard and fast rule that section 7, article 12, does not embrace any matter relating to internal management.  We say the primary object of that provision was to place all corporations on a parity, both domestic and foreign, and if any advantage is conferred upon a foreign corporation in respect of a matter of internal management, then such matter falls within the scope of the provision."  (Parenthetical matter supplied.)  (Page 10 of the brief.)

            "Some question was raised as to where the line should be drawn.  Respondent (the State) says no line should be drawn, but the test should be applied which was applied in the Amalgamated Mines (the Nichols case) and the Baker River cases, viz: Do the articles show that a domestic corporation would be permitted to file them?  If not, the foreign corporation would be admitted upon 'more favorable terms' within the inhibition of section 7, article 12.  Under  [[Orig. Op. Page 5]] this test there is no room for hairline distinctions such as would be necessitated by relator's contention which would make the controlling test: Is the matter one having to do with the transaction of business or with the internal management of the corporation?"  (Parenthetical matter supplied.)  (Page 2 of supplemental brief.)

            "We submit that to lay down the broad rule that section 7, article 12, has no application to internal affairs of any kind is fraught with grave danger, since it would throw down the bars of competition to all kinds of polyglot organizations which may be formed under the notoriously lax laws of some of our sister states, - states which are a spawning place of pseudo-corporations, tramp corporations and what-nots organizing therein for the express purpose of achieving, through an ultraliberal application of the rules of comity, a right to do business in other states which pursue a saner and safer corporate policy . . ." (Page 3 of supplemental brief.)

            It would be difficult to construct a more forceful exposition of the broad rule announced in theNichols case.  Yet these arguments were summarily rejected by the court at p. 11 where it said:

            "Cases are cited to the point that foreign corporations will not be allowed to do business in this state on more favorable terms than are permitted to domestic corporations; but these authorities do not touch the point involved in this litigation, for as we view it the question here is not as to differences in terms upon which business is to be done, but merely differences as to internal construction and operations of the corporation."

            Thus the court made it clear that the test under Art. XII, § 7, was not to be whether such articles could have been filed by a domestic corporation.  Rather, a more sophisticated inquiry would have to be made to determine if the offense article concerns differences in "terms upon which business is to be done."  If the article does not address itself to such a difference, the fact that it could not have been filed by a domestic corporation would be immaterial.

            This leaves but one question to be resolved:  Since domestics must, of course, have superadded liability, would absence of such increased shareholder liability allow a foreign insurer to do business on more  [[Orig. Op. Page 6]] favorable terms than allowed domestics?  We hold that the answer to this question must be no.

            Insurance is a business "affected with a public interest" and for this reason many burdens are placed upon insurers for protection of the public.  (RCW 48.01.030) Thus, "doing business on more favorable conditions" would have two aspects where the reference is to business done by insurance companies.  As in the case of corporations generally, it would refer to terms that would give one corporation a competitive advantage over another.  In the special case of insurance corporations the term would also relate to uneven application of burdens imposed on the corporations for the protection of policyholders and creditors.

            So far as competitive advantage is concerned, it is clear that the absence of superadded liability would give no preference to a foreign corporation.  To the typical potential policyholder the fact of superadded liability or the absence of same is not a factor in his choice of insurance.  But even assuming the case of a knowledgeable insured - one who understands that upon the shareholder of a Washington stock insurance corporation superadded liability is imposed -would he not prefer a policy written by the domestic company, other things being equal?  We can only conclude that in such a case the foreign insurer would be doing business (that is, competing) at adisadvantage rather than an advantage.  The business of an insurance company is the sale of its policies and the investments of its surplus, not the sale of its own shares of stock.

            If we look at the second aspect of "doing business on more favorable terms," i.e., uneven application of burdens imposed on insurance corporations for the protection of policyholders and creditors, it is equally clear that superadded liability is not such a burden, for the simple reason that it is not imposedon the corporation.  Superadded liability is imposed upon shareholders.  It is elementary law that shareholders are beings apart from the artificial entity of the corporation itself.  See e.g., 13 Am. Jur.Corporations, § 6; 18 C.J.S. Corporations, § 4; Fletcher, Cyc. Corporations, § 25.  It follows that a preference accorded to shareholders is not a preference to the corporation.  To this effect see the attorney general's opinion to the insurance commissioner dated October 6, 1926, p. 2, and authorities there cited.

            We have not overlooked the cases of State ex rel. American Auto Ins. Co. v. Fishback, 154 Wash. 297, 282 Pac. 62 (1929), and State ex rel. Leach v. Fishback, 79 Wash. 290, 140 Pac. 387 (1914).  The insurance code regulates, among other things, the investments that  [[Orig. Op. Page 7]] may be made by insurance companies and the deposits of securities that must be maintained by such companies.  TheAmerican Auto and Leach cases hold, in turn, that Art. XII, § 7 of the Washington constitution operates to impose the same investment and deposit regulations on foreign insurance companies as are imposed on domestics.  These cases are entirely consistent with the view here taken.  In each case the state imposed burdens upon the insurance corporation for the protection of policyholders and creditors.  In each case the court held that the same burdens must be imposed on foreign insurance corporations if full effect is to be given to Art. XII, § 7 of the constitution.  In neither case was the burden imposed on anyone other than the corporation itself, i.e., the shareholders.

            We hold that liability of shareholders is a matter which can be fixed only by the law of the state of domicile; that the inhibition of Art. XII, § 7 extends to the filing of articles of incorporation which could not be filed by a domestic corporation only where the offending article relates to the terms upon which the corporation does business, and that superadded liability imposed on shareholders of a stock insurance company is not a factor in the terms on which the company does business.  It follows that there would be no violation of Art. XII, § 7 of the Washington constitution should a foreign stock insurance corporation without superadded liability of shareholders be admitted to do business in Washington.

            We trust that the foregoing will be of assistance to you.

Very truly yours,

JOHN J. O'CONNELL
Attorney General

S. FRED BRUHN
Assistant Attorney General