I      .




    Honorable William M. King              Opinion lo. C-630
    Securities Commissioner of Texas
    Sam Houston State Office Building      Re:   Payment of dividends
    Austin, Texas                                from earned surplus.
    Dear Mr. King:

              In your opinion request you have submitted the
    fbllowing questionsI
                “1. May a domestic corporation lawfully
           pay dividends In cash, property, or shares out
           of its earned surplus to any persons other than
           Its ahareholdere?
                "2. May a life lneumnce corporation,
           chartered and authorized to do business in the
           State of Texas, lawfully pay dividends In cash,
           property or shires out if-its earned surplus to
           policy holders?”
              The peyment of dividends by.a domestic corporation
    organized under the Texas Business Corporation Act Is controlled
    by Article 2.38 of such Act.
              Article 2.38,   Texas Business Co-oration Act, pro-
    vides 8s follows:
                “A. The board of directors of a corporation
           may, from time to time, declare, and the corpora-
           tion may pay, dividend0 on Its outstandlnu sharea
           .r&;;;;si;d;zy;‘ty,   or In its own shares. . . .”


              The above quotation clearly limits a corpor8tlon
    coming within the terms thereof to pay dividends only to Its
    outstanding shareholders.
              Therefore, the answer to your first~qucstion muet
    be answered in the negative.




                                 -3056-.
Hon. Willie5 W. King,   Page 2 (C-630)   :’


          Your second question relates to whether 8 life
insurance corporation msy pay dividends out of Its earned
surplus to policyholders.
          The.'TexasBusiness Corporation Act,'Artlcle 2.01,
Sec. B(J+)(d).sndArticle 9.14, Sec. A, excludes insurance
companies of every type and character that operate under
the insurance laws of this State, except to the extent that
the insurance laws of this State Contain no ProViSion in
regard to some of the matters provided In the Texas Business
Corporation Act.
          Those portions of the Texas Insurance Code controlling
payment of dividends by'lnsurance companies are 8s follows:
           Article 3 .ll provides;
          "IV0life insurance com~sn~ ah811 declare or
     pay dividends to Its policy hoiders, except from
     the expense loading and profits made by such com-
                     however, any such company not
     5F
     s owing
           provlded~
             a profit may pay dividends on Its participa-
     ting policies from the expense loading on such
     pollclcs. * . .No such company shall dtcl8rC or
     pay any dividendsto its stockholders, except
     from the earned surplus of said          88
                                       U4%3Xly,
     defined in. and in the manner auz:orized or
     provided by the Texas Business Corporation Act.
     . . ." (Emphasis added.)
           Article 3.01, Sec. 11, provides:
            "The 'profits' of 8 company are that
     portion of its fund6 not required for the
     payment of losses and expenses, nor set
     apart for any other purpose required by
     18W. "                              -~a
                                          , .;
                                           .;‘
           Article 21.31 provides:
          "It shall not be lawful for any insurance
     company organized under the lawa of this State
     to make 8nv dividend, except from surplus profits
     arising ?%z Its business1 In estimating such
     orofits, there shall be reserved therefrom the
     lawful reserve on all unexpired riske and also
     the amount of unpaid lossea, whether adjusted or




                              -3057-
,          -




    Hon. wllllam       H. King,   page 3 (c-630)


               .unadjusted, 8nd all other debt8 due and payable,
                or toWbecome due and ps able, by the company.
                '. . . (Emphaele added.T
                    Article 21.32 provides:
                      "Ho life, health, fire, marine, or inland
               lnlrurance cospp~~y, organized under the laws of
               thin State, shall make an dividend     lxcc t from
               the surplur Droflts arls  +b   from itrr um cm.
                                                      -dir-
               E crtilnatingsuch profite, then hhallbc rc-
               rcrved therefrom the lawful rebervc on all un-
               expired rirks computed in the manner a8 provided
               elrewhcrc In thle Code, and also there ahall be
               reserved the amount of the unpaid lo86cr,    whether
               adjusted   or unadjuctcd;  all mum due the compang
               on bondr, mortgages, stocks and book accounta,
               of which no part of the prlncip&l or lnterert
               thereon ha8 been paid during the year preceding
               ruch eetfrmateOS profltm, and upon which wit
               for fonclorurca or collections has not been
               commenced, or which aft& judgment har been
               obtained   thereon shall have remained more than
               two yearm unratlsfled, and upon which intcrcct
               shall not have been paid. In case of any mch
               judgment, the interest due or accrued thereon
               and remaining unpaid ehall also be reserved.
                . . . (Emphasis added.)
              It is obrervcd from the foregoing Article8 of the
    Insurance Code that pollcyholdere of an lneumnce company ccn
    be paid dividends from two sources, to-wit: (1) cxpcnre
    loading, and 2) proSIts made by such company. lke term
    "profits" is 6efincd in the above quoted articlae.
              An in8urance company can pay dl~ldends to 8tockhold~rs
    only        from the earned
                         surplus of the company as defined in the
    Texas Bualnenr Corporation Act, Article 1.02, See. A(u) which
    State8 aa followe:
                     "(13) yearned Surpluo~ meant that portion
                of the surplua of a corporation remaining after
                -deducting from its net profits, income and realized
               'gains and lomaea from the date of Incorporation or
                from the latest date when a deficit wan clihinated
                by an application of itm capital eurplw or rtated




                                         -3058-
xon. w~~licuaw. xing,           page 4 (c-630)


      capital, or othcnvl8c, all lubrcqucnt dlatributiona
      to lharcholdcra and trrmafcrn to stated capital
      and capita,1aurplua to the extent such dlatrlbu-
      Mona and transfers are made out of tamed aurplu~."
           Prior to 1963, lnaurancc compsalta were allowed to
pcy dividends to their stockholders    only from the~proflta  made
E; aaaccmpcalcr    not including  aurplua arlalag   from the sale.
            In 1963, the 58th Lcgialcturc   cmcndtd Article 3011,
Texrr &ranoc     Code, a8 the aase is above quoted.

           Pro8 a review of Article 1.02, Sec. A(U),      Texas
Xualneaa Oorporatlon Act, It la obvloua thct "Earned Surplus"
u thcrcfn defined would include "proffta" cud "aurplua profita'
ca defined In Article 3.01, Sec. 11; Article 21.313 and Article
2i.32,  %xU   bW&UXC    Code.  This conclualon is l  tnngthencd by
the lcat l en~cncc of the first full parrgraph on P8gc 15,
Volume 3A, V.A.T.S., which says “Ewncd surplus, at ray time,
includes current profits and la not ntccaaarlly a year end
rigu=.n    Alao, in Unlted Barth md South Developmeat Co-x
v. Heath, 78 s.w.2d b50 TG cl      A   1935             r    the
Co-ted        with approdl r;omyidi%da   v .‘D?%arc2$        U 8.
205, k8 S.Ct. 85, 70 L. Ed. 23sr tocficc      *        “CUA
aurplua" ia derived wholly from undistributed prcfita.
           It would appear that there la a conflict between the
provision6  of the Inau~amc Code allowing dividend6 from the
profits of the oompany to be paid to pollcyholdcra, and the
provialona of the Tc~a Buaiacaa Corporation Act allowing on3.y
shareholder6 tc be paid dividends   out of caned aurplua. It
is the opinion o$ this office that the apcclflc prwlrfona of
the Insurance  Code allewbg dlvldcnda   to pollcyholdcra muat
control over the general provlaiona   of the Tcxu Buainc86
Corporation Act that restrict earned aurplua to the pcymnt
of dlvldenda only to ah6reholdcrr.
          Thlr orflcc   on previous occulona                   has concluded        that
lnat.uancccolllpraiea cm pay dlvldcnda to
profits      of   the   co   any.     Atty.   Ocn. Op.
                   3) Ho. 5052. Opinion
Atty. Ocn. Op. (1;ft
that cn inaur8ncc aonqany conducting life, health and lccldcnt
bualnc66 in dlf?crent departments   must.show a &w&It   from the
tot81 operation of the comri8~~ bcforc divldtnda  could be
              mrticl~at3.m          ~0iic~.    Opinion   lo.   5052   atbtad   Et
             ion in a putieipating            polioy providing for the pIyarnt




                                         -8059-
Ron, William W. Xlng, page 5 (C-630)


of dlvldenda from the aurplua camlnga of the company, and
further providing that such dividends would never be leas than
the dlvldend paid on a apcclflcd number of co-n   aharca of tha
company, was in compllancc with the law.
          The State   Board of   Incurancc   has for many years   approved
in~urancc policy form6 providing for the payakcntof dividends          to
policy holders out of the profits of the company.
           In YICW of the fact that the Iaaumncc  Cede unquestionably
allow8 the p&ymcat of policy holder dlvidcnda upon the profit6
made by the coa~#any,the llmltatlonr placed upon the pyacnt   of
dlvldcnda only to ah8reholdcra from earned 8urplau by a doacatlc
corporation organlaed under the Texas Business Corporation Act
can not apply to lift laaurancc  corporations because lproflta”
would of acccaalty be a part ot “caned surplus”   as that tam
la defined by the Texas Bualncra Corporation Act.
           It la our oplnlon that a domeatlc Insurance company
 can pry dlvldeada to pollcyholdcra from aumlua ftmds arising  from
profits aade by such company, but such lnaurancc company may not
pnda                             from that portion of surplus funds
dealgnated  by Its board of mctora    as earned aurplua to be
available for diatributlon to Its atockholdcra.
           To hold contrary to this oplnlon would be contrary to
a long-standing departmental construction OS the State Board OS
Insurance.   We arc not willing to overrUle such a long-atmding
departmental construction In the absence of authority to rhow
such coaltnictlon to be wrong.


          A domestic corporation msy not lawfully pay
     dlvldcnda out of its earned surplus to amy person
     other thrn its shareholders.
          A life ineurancc corporation, chartered and
     authorltcd to do bualneaa in the Sktc of Texas
     may Iswfully pay dlvldcnda to pollcyholdera from
     surplus funds arising from profits made by such
     company, but such Insurance company may not pay such




                             -3060-
Ron. wiuiam    Y. xtag, page 6 (c-630)


     policyholder dlvldcnda from th8t portion of
     aurplua funds dcalgnated bs lta board of
     directors as earned aurplua to be available
     for distribution to Its atockholdera.




                                          aal8tmt   Attorney-General

TBWraj          ‘P

APPROVED:
OPINION ComuTTEE
W. v. deppert, Chairman
Pat Bailey
Wade Aaderaoa
Kcrna Taylor
Robert Flowers
APPI@VEDEWtTHFLATToRNEp CENERAL
By: Eawtho~e Phllllpa
     First Assistant Attorney Gcncti




                              -3061-