Request By:
Hon. Billy L. Oliver
Wolfe County Attorney
Post Office Box 877
Campton, Kentucky 41301
Opinion
Opinion By: Chris Gorman, Attorney General; Gerard R. Gerhard, Assistant Attorney General
By letter of June 2, 1992, you asked whether Wolfe County may accept, in place of a debt currently owed to the County by Campton Electronics Manufacturing, Inc., preferred stock of the firm.
In our view Wolfe County cannot lawfully accept preferred stock in a private firm in place of a debt owed to the county by that firm. Constitution of Kentucky Section 179. Discussion follows.
As understood from your letter, and a follow-up telephone conversation with you, Campton Electronics is a small factory in Wolfe County with the probable capacity to employ 300 people. It currently employees some 60 persons. The firm received a loan of some $ 400,000 from the county under the Community Development Block Grant Program. The firm is experiencing certain financial difficulties and wants to substitute preferred stock in the firm, for the debt owed to the county, so that the firm's debt to equity ratio would be improved. This, you explain, would improve the firm's ability to contract with large electrical firms (and thus would presumably improve the firm's chance of survival, with its related contribution to employment within the county).
Section 179 of the Constitution of Kentucky provides, in part, that the General Assembly shall not authorize any county to become a stockholder in any company or corporation. The effect of this language is to ban a county from becoming a stockholder in a corporation.
Section 177 of Kentucky's Constitution imposes a ban on ownership of stock in a corporation on the Commonwealth itself. Despite the literal terms of this ban, Kentucky's highest court has recognized that the Commonwealth could buy the stock of a corporation in order to dissolve it and thus accomplish the public purpose of eliminating tolls. Long v. Mayo, Ky., 111 S.W.2d 633 (1937). In Cawood v. Coleman, Ky., 172 S.W.2d 548 (1943), the Court found that a city's acquisition of capital stock of an operating company, which would be contemporaneously dissolved with such acquisition, did not violate Section 179 of the Kentucky's Constitution.
While these cases might serve as legal authority for a county to acquire the stock of a private corporation in order to dissolve it, they do not serve as authority for a county's long term holding of the preferred stock of a private corporation. The undersigned was unable to locate any case that would authorize a county's general holding, presumably through time, of the preferred stock of a private corporation, as would apparently be involved under the facts concerned here.
The only question is whether there is an appropriate rationale that might avoid the strict terms of Section 179 of Kentucky's Constitution.
In interpreting the command of Section 171 of the Constitution, that public funds may only be expended for public purposes, our highest court has approved expenditure of public funds for incentives for otherwise private industrial projects, where the purpose of the expenditure was relief of unemployment. Relief of unemployment, the Court observed, is a public purpose within the purview of the case law and the Constitution. The important point, the court indicated, is whether the purpose is public, and not whether the agency through which it is dispensed is public. Hayes v. State Property and Bldgs. Com'n, Ky., 731 S.W.2d 797, 801 (1987).
The Hayes case, however, involved the provision of incentives by the state under specific statutes, requiring, among other things, a prior written determination, after diligent investigation, that new taxes, termed "incremental taxes," would be received by the state from a project that might be extended aid, and further, providing a mechanism for recovery of costs by the state, if the benefiting project is disposed of prior to recovery of those costs through incremental taxes. See for example, KRS 56.501(3). No similar statutory scheme is available to authorize a county to become the owner of preferred shares in a private corporation.
Although the county's acceptance of preferred stock in a private corporation, in place of a debt owed the county by the corporation, might ultimately result in a salutary effect on unemployment, such public purposes, carried out by a county, and not under a specific statutory framework, is not allowed by Section 179 of the Constitution of Kentucky.
We find no basis at law for authorizing acceptance by a county of the preferred stock of a private corporation under the facts you have presented.