Request By:
Donna H. Terry
Eldred, Paxton & Terry
P.O. Box 644
Princeton, Kentucky 42445
Opinion
Opinion By: Robert F. Stephens, Attorney General; Mark F. Armstrong, Assistant Attorney General
We are in receipt of your question in which you ask our opinion of whether an alien may own shares in a corporation incorporated under the laws of the Commonwealth of Kentucky.
We have found no reported case in Kentucky which deals with this specific question. The general rule, however, is as follows:
"In the absence of charter or statutory restrictions, a person who is otherwise capable of entering into a binding contract is not rendered incompetent to subscribe for stock in a corporation by the fact that he is a non-resident of the state, or an alien. But a state has the right to debar aliens from holding stock in its corporations, or to admit them to that privilege on such terms as it may prescribe. And generally the statutes require that a certain number of the corporators shall be residents of the state, and such a provision is mandatory." 4 Fletcher Cyc. Corp. (Perm. Ed.) Section 1395 (Footnotes omitted.)
In the Kentucky Business Corporation Act, KRS Chapter 271A, there does not appear any restriction on the right of aliens to own stock on corporations incorporated under that act. Further, there does not appear any restriction, such as that mentioned above, that a certain number of the incorporators be residents of the state. However, you should carefully examine the statutes under which the particular corporation is formed and ascertain whether any of the above-mentioned restrictions might be present in that particular act.
You also ask our opinion of whether property owned by a corporation in which aliens hold shares is subject to the escheat provisions of KRS 381.300. In this jurisdiction, a corporation is a legal entity distinct from its shareholders, cf.
Lowry Watkins Mortgage Co., v. Turley-Bullington Mortgage Co., 248 Ky. 285, 58 S.W.2d 591 (1933). The distinction between the corporation and its shareholders is maintained unless there are special circumstances which impel the court to disregard the corporate entity, such as fraud, cf.
May v. Sullivan, 300 Ky. 321, 188 S.W.2d 469 (1945).
In this regard we may refer to the case of
Laine v. Commonwealth, 287 Ky. 134, 151 S.W.2d 1055 (1941), in which the defendant was charged with the embezzlement of funds from a corporation in which he was the holder and owner of one-third of the outstanding shares. On appeal, he argued that the corporation was operated as a partnership. As such he could not be guilty of embezzlement of partnership funds because, as a partner, he had an undivided interest in the partnership property. By embezzling partnership funds, he argued that he was, in fact, taking his own property and not the property of another. The court rejected this argument:
"But the weakness of defendant's position is that he was not a partner in the [corporation], but a stock-holder. There is a vast distinction between an owner, or the beneficial owner, of one-third of a corporation's capital stock and the owner of one-third interest in a partnership; . . . . Even when one becomes the owner of all the stock of a corporation he does not in law become the legal owner of the corporation's property, and cannot ignore the existence of the corporation and deal with its property as his own without action of the corporation, 18 C.J.S. 1193, Corporations, Section 513: . . . ."
Laine v. Commonwealth, supra, S.W.2d at 1058 (Some cases omitted.)
Based upon the clear distinction between the corporation and its shareholders and the equally clear distinction between the property of the corporation and the ownership interest of the shareholder, as discussed in the Laine case, supra, we are of the opinion that the property of the corporation, the shares of which are partially or wholly owned by a non-resident alien, is not subject to the escheat provisions of KRS 381.300.