SALE OF SECURITIES IN PUBLIC SERVICE COMPANY

SALE OF SECURITIES IN PUBLIC SERVICE COMPANY

Washington Public Service Commission approval is not a prerequisite to a valid sale and transfer by an existing stockholder to a prospective stockholder of common stock constituting the controlling interest of the public service corporation.

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                                                               November 25, 1949

Washington Public Service Commission
Insurance Building
Olympia, Washington                                                                                                              Cite as:  AGO 49-51 No. 167

Attention:  !ttHonorable Raymond W. Clifford,
            Commissioner

Gentlemen:

            You have inquired whether the approval of the Washington Public Service Commission is a prerequisite to a valid sale and transfer by an existing stockholder to a prospective stockholder of common stock constituting the controlling interest of a public service corporation.

            Your question is answered in the negative.

                                                                     ANALYSIS

            Your written request of November 22, 1949, reads in part as follows:

            "The Washington Public Service Commission was notified by the Secretary of the Prescott Telephone and Telegraph Company, Inc., on October 12, 1949, of the transfer of certain stock of the corporation, effective on that date.

            "Mr. Martin V. Palmer acquired four (4) shares of stock from Mrs. U. F. Edgecombs, and thirteen (13) shares of stock from Mr. F. M. Benson.  The outstanding common stock of the Prescott Telephone and Telegraph Company, Inc., totals eighteen (18) shares, and those shares purchased by Mr. Palmer constitute the majority of the outstanding common stock, and represent effective control of the company.

             [[Orig. Op. Page 2]]

            "The Commission requests your opinion as to whether or not under the provisions of Chapter 159, Laws of 1941, or any other Public Service Law, this transaction must be submitted to the Commission for its approval."

            Chapter 159, Laws of 1941, as amended by chapter 75, Laws of 1945, in so far as applicable to your inquiry, reads:

            "The term 'department' when used in this act shall mean the Department of Public Service of Washington or such body as may succeed to the powers and duties now exercised by the Department of Public Service.

            "The term 'public service company' shall mean every person, firm, corporation or association, or their lessees, trustees or receivers, now or hereafter engaged in business in this state as a public utility and subject to regulation as to rates and service by the Department of Public Service: * * *" Sec. 10440a, Rem. Supp. 1941.

            "No public service company shall sell, lease, assign or otherwise dispose of the whole or any part of its franchises, properties or facilities whatsoever, which are necessary or useful in the performance of its duties to the public, and no public service company shall, by any means whatsoever, directly or indirectly, merge or consolidate any of its franchises, properties or facilities with any other public service company, without having secured from the Department of Public Service an order authorizing it so to do:  * * *" Sec. 10440-b, Rem. Supp. 1945.

            "No public service company shall, directly or indirectly, purchase, acquire, or become the owner of any of the franchises, properties, facilities, capital stocks or bonds of any other public service company unless authorized so to do by the Department.  * * *"  Sec. 10440d, Rem. Supp. 1941.

             [[Orig. Op. Page 3]]

            In our opinion the foregoing statutes are the only enactments relative to your point of inquiry.

            As an initial consideration, reference is made to that line of cases of our Supreme Court holding that:

            "It is well settled in this state, as elsewhere, that a public service commission, such as the department of public service in this state, is an administrative agency created by statute and as such has no inherent powers, but only such as have been expressly granted to it by the legislature or have, by implication, been conferred upon it as necessarily incident to the exercise of those powers expressly granted.  Wishkah Boom Co. v. Greenwood Timber Co., 88 Wash. 568, 153 Pac. 367;Puget Sound Nav. Co. v. Department of Public Works, 152 Wash. 417, 278 Pac. 189; Northern Pac. R. Co. v. Denney, 155 Wash. 544, 285 Pac. 452;State ex rel. Northeast Transp. Co. v. Schaaf, 198 Wash. 52, 86 P. (2d) 1112;North Bend Stage Lines v. Schaaf, 199 Wash. 621, 92 P. (2d) 702; 43 Am. Jr. [[Am.Jur.]]701, Public Utilities and Services, § 193; 51 C.J. 36, Public Utilities, § 78.

            "In Northern Pac. R. Co. v. Denney, supra, it is stated:

            "'The department of public words (now department of public service), being purely a creature of statute, has only such powers as are expressly conferred upon it, or such powers as are necessarily incident to the powers expressly conferred upon it by statute.'"  State ex rel. Public Utility District No. 1 of Okanogan County v. Department of Public Service et al., 21 Wn. (2d) 201, 208, 150 P. (2d) 709,

            and

            "* * * In the absence of statutory authority, the department has no power to act * * *" Id. p. 214.

            It is noted from your letter and from an examination of your files that the Prescott Telephone Company is a corporation, that the transaction involved relates to the sale by certain stockholders of their shares therein, and that  [[Orig. Op. Page 4]] the purchaser was not theretofore engaged in any activity which could be so construed as constituting doing business as a public service company.

            It is fundamental that a corporation is, in general, a separate entity distinct from its shareholders.  Ownership of corporate assets rests in this artificial entity and not in the natural persons constituting the shareholders.  When such corporation is, at the same time, "* * * engaged in business in this state as a public utility * * *" within the contemplation of § 10440a,supra, the corporation, and not the shareholders, becomes a public service company.

            With these considerations in mind, we note that § 10440b, supra, refers to certain transactions by a "public service company."  In our opinion this section confers no authority on the public service commission to approve or disapprove the transaction in question.  The sales involve only acts by stockholders disposing of their interest in the public service corporation, and do not involve any action by the public service company to "sell, lease, assign or otherwise dispose of the whole or any part of its franchises, properties, or facilities whatsoever, which are necessary or useful in the performance of its duties to the public, * * *."

            The jurisdiction of the public service commission under the statute is over the activities of the public service company and not over the activities of its stockholders.  By such act of the stockholders the public service company, the artificial entity, distinct from its stockholders, has not disposed of anything; there has been merely a change in the controlling interest of the public service company.

            As we read section 10440d, supra, it applies only to the acquisition by a public service company of such interests as are therein enumerated, and, in our opinion, our courts would not extend it to govern purchase of the stock of a public service company by an individual not then engaged in an activity constituting doing business as a public service company.

            Having in mind the previously cited legal principle that the public service commission has only such powers as have been expressly granted to it by the legislature or have, by implication, been conferred upon it as necessarily incident to the exercise of those powers expressly granted, it appears clear that the public service commission has not been granted any express power to assume jurisdiction over the transfer of stock of a public service corporation where a public service company itself is not a party to such transaction.  It only remains, therefore, to determine whether the assumption of such jurisdiction has, by implication, been conferred upon it as necessarily incident to the exercise of the express powers granted.

             [[Orig. Op. Page 5]]

            Our Supreme Court has held that implied powers arise only out of necessity for the existence and operation of powers expressly granted.  SeeJames v. Seattle, 22 Wash. 654, 62 Pac. 34;State ex rel. Rice v. Sell, 124 Wash. 647, 215 Pac. 326; State ex rel. Port of Seattle v. Superior Court, 93 Wash. 267, 160 Pac. 755.  Under such ruling we have no hesitancy in saying that such implied authority is not to be garnered from a full reading of the foregoing statutes.

            A case of interest, though not directly in point because of somewhat dissimilar statutes and dissimilar issues, is that of Corporation Commission v. Consolidated Stage Co., 63 Ariz. (2d) 257, 161 P. (2d) 110.  The pertinent facts as stated by the Supreme Court of Arizona were:

            "A Mr. Hood, owning a share of stock in the appellee corporation, filed an application with the commission for permission to transfer or assign his share of stock and 'his interest' in the corporation to a Mr. Fix.  The applicant shareholder proceeded upon the theory that he was one of the joint owners or associates or copartners in the ownership of the assets of the company, and disregarded the legal entity of the corporation.  His apparent purpose was to transfer physically what he considered to be his interest in the certificate of convenience, completely disregarding that the corporation and not he owned the certificate of convenience and all other assets of the company."

            The appellee (corresponding to a public service company under our statutes) contended that the commission (equivalent to our public service commission) was without jurisdiction in the matter and reviewed the decision of the commission ordering such transfer.  In reversing the commission's order, the Supreme Court held:

            "It is elementary that a corporation is for most purposes an entity distinct from its individual members or stockholders.  By the very nature of a corporation the corporate property is vested in the corporation itself and not in the stockholders.  The natural persons who procured its creation and have pecuniary interest in it are not the corporation * * *"

            and held that the commission was without jurisdiction in the matter.

             [[Orig. Op. Page 6]]

            It may well be that, under the conclusion which we have been compelled to reach in this instance, public service companies organized as corporations can escape to a measure the jurisdiction of the commission that could properly be exercised if its form of organization were otherwise.  If such be true, and if it be also true that such is not felt to be in the public interest, this is a matter to be addressed to the legislature.

            Trusting the foregoing fully answers your inquiry, we remain,

Very truly yours,

SMITH TROY
Attorney General

FRANK P. HAYES
Assistant Attorney General