I

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HonorableWilliam 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 requestyou 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, charteredand authorized to do business in the State of Texas, lawfullypay dividends In cash, property or shires out if-its policy holders?” Thepeyment of dividends organized under the Texas Business by Article 2.38 of such Act. earned surplus to
by.a domestic corporation CorporationAct Is controlled

Article 2.38, Texas Business Co-oration Act, provides 8s follows:

“A. The board of directorsof a corporation may, from time to time, declare, **and** the corporationmay pay, dividend0 on Its outstandlnu sharea .r&;;;;si;d;zy;‘ty, **or** In its own shares.
. . .”

The above quotation clearly limits a corpor8tlon comingwithin the terms thereof topay dividends only to Its outstanding shareholders.

Therefore, the answer toyour first~qucstionmuet be answered in the negative.

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

Your second question relates to whether 8 life insurance corporationmsy pay dividendsout of Its earned surplus to policyholders.

The.'Texas

Business CorporationAct,'Artlcle 2.01, Sec. B(J+)(d).snd

Article 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 Containno ProViSion in regard to some of the mattersprovided In the TexasBusiness CorporationAct.

Thoseportions of the Texas InsuranceCode controlling payment of dividendsby'lnsurance companies are 8s follows:

Article 3.llprovides; "IV0 life insurance com~sn~ ah811 declareor pay dividends to Itspolicy hoiders, except from the expense loading and profits made by such com5F provlded~ however, any such company **not** s owing a profit may pay dividendson Itsparticipatingpolicies from the expense loading on such pollclcs. *
. .No such company shall dtcl8rCor pay any dividendsto its stockholders,except from the earned surplus of said U4%3Xly, 88 defined **in.** and in the manner auz:orized or providedby the Texas Business CorporationAct.

. . ." (Emphasisadded.) Article 3.01, Sec. 11,provides: "The 'profits'of 8 company are that portion of its fund6not required for the payment of losses and expenses,nor set apart for any other purpose requiredby 18W. " -~a ,.; Article 21.31 provides: .;‘

"It shallnot **be** lawful for any insurance company organizedunder the lawa of this State to make 8nv dividend, except from surplusprofits arising ?%z Its business1 In estimating such orofits, there shallbe reserved therefrom the lawful reserveon all unexpired riske and also the amount of unpaid lossea,whether adjustedor

-3057-, -

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

.unadjusted,8nd all other debt8 due andpayable, or toWbecome due and ps able, by the company. '.
. . (Emphaeleadded. 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 l xcc t from +b -dir- the surplurDroflts arls 

### fromitrr um cm. E crtilnating

such profite, then hhallbc rcrcrved therefrom the lawful rebervc on all un**expired** rirks computed in themanner 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** thereonha8 been paid during the year preceding **ruch** eetfrmate

**OS** profltm, **and** upon which wit for fonclorurca or collectionshas not been commenced, or which aft& judgment har been obtained thereon shall have remained more than twoyearm 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.

. . . (Emphasisadded.)
It is obrervcd from the foregoingArticle8 of the Insurance Code that pollcyholdere of an **lneumnce** company ccn be paid dividends from two sources, to-wit: (1) cxpcnre loading, and "profits" is 62) proSIts made by such company. lke term

efincd in the above quoted articlae.
An in8urance company canpay dl~ldends to 8tockhold~rs only from the **earned** surplus of the companyas defined in the Texas Bualnenr Corporation Act, Article 1.02,See. A(u) which State8 aa followe:

"(13) yearned Surpluo~meant thatportion of the surplua of a corporation remainingafter -deductingfrom its **net** profits, incomeand realized 'gains and lomaea **from** the date of Incorporationor from the latest **date** when a deficit **wan** clihinated by an application of itm capital eurplw **or** rtated

-3058-

## xon.w~~licua w.xing, page 4 (c-630)

capital, or **othcnvl8c, all**  

### l **ubrcqucnt** dlatributiona to l harcholdcra and trrmafcrn to stated capital and capita,1aurplua to the extent such dlatrlbuMona 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 OorporatlonAct, It la obvloua thct "EarnedSurplus" u thcrcfn defined would include "proffta"cud "aurpluaprofita' 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 ntccaaarllya year end rigu=.n Alao, in Unlted Barth md South Developmeat Co-x v. Heath, 78 s.w.2d b50 TG cl A 1935 Co-ted with approdl r;omyidi%da v r the

.‘D?%arc2$ U 8. 205, k8 S.Ct. 85, 70 L.Ed. 23sr tocficc * “CUA aurplua" ia derivedwholly from undistributedprcfita.

It would appear that there la a conflictbetween 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 CorporationAct allowing on3.y shareholder6tc be paid dividends out of caned aurplua. It 

### is the opinion o$ this office that the apcclflcprwlrfona of the Insurance Code allewbg dlvldcnda to pollcyholdcramuat control over the general 

### provlaiona of the Tcxu Buainc86 CorporationAct that restrict earned aurplua to thepcymnt of dlvldenda only to ah6reholdcrr.

Thlr orflcc on previous 

### occulona has concluded that lnat.uancc

colllpraiea

cm pay dlvldcnda to profits of 

### the co Atty. Ocn. Op. (1 any. ;ft Atty. Ocn. Op. 3) Ho. 5052. Opinion that cn inaur8ncc 

### aonqany conducting life,health and l ccldcnt 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 dividendswould **never** be leas than the dlvldend paid on a apcclflcdnumber of co-n aharca **of** tha company,was in compllanccwith the law.

The State Board of Incurancc **has for**  many years approved in~uranccpolicy form6providing for thepayakcnt of dividends to policy holders out of theprofits of the company.

In YICW of the fact that the Iaaumncc **Cede**unquestionably allow8 thep&ymcat of policy holder dlvidcnda upon the profit6 **made**by the coa~#any, the llmltatlonrplaced upon the pyacnt 

### of dlvldcnda only to ah8reholdcra **from** earned 8urplau **by** a doacatlc corporationorganlaed 

### under the Texas Business Corporation Act can **not** apply to lift laaurancc corporationsbecause 

## l proflta” 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 companymay not pnda from thatportion of surplus funds 

### dealgnated by Itsboard 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 constructionOS the State Board OS Insurance. We arc **not** willing to overrUle such a long-atmding departmental construction In the absenceof authority to rhow such coaltnictlon to be **wrong.**

A domestic corporationmsy not lawfullypay dlvldcnda out of its earned surplus to amy person 

### otherthrn its shareholders.
A life ineurancc corporation, chartered and authorltcd to do bualneaa in the Sktc of Texas may Iswfullypay dlvldcnda topollcyholdera from surplus funds arising from profits made **by** such company,but such Insurance companymay not pay such

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

policyholder dlvldcnda 

### fromth8t portion

### of aurplua funds dcalgnated **bs** lta board of directors as earned aurplua tobe 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 AttorneyGcncti



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