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 questions I 

“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 

policy holders?” 

The peyment of dividends 

organized under the Texas Business 

by Article 2.38 of such Act. 

earned surplus to 

by. a domestic corporation 

Corporation Act Is controlled 

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

“A. The board of directors of a corporation 

may, from time to time, declare, and the corporation 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.'Texas Business Corporation Act,'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 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; 

"IV0 life insurance com~sn~ ah811 declare or 

pay dividends to Its policy hoiders, except from 

the expense loading and profits made by such com5F provlded~ 

however, any such company not 

s owing a profit may pay dividends on Its participating 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 U4%3Xly, 88 

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 l xcc t from 

the surplur Droflts arls +b from itrr -dir- um cm. 

E crtilnating such profite, then hhallbc rcrcrved therefrom the lawful rebervc on all unexpired 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 eetfrmate OS 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 

"profits" is 6 

2) proSIts made by such company. lke term 

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

capital, or othcnvl8c, all l ubrcqucnt dlatributiona 

to l harcholdcra and trrmafcrn to stated capital 

and capita,1 aurplua 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 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 

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 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.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 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 payakcnt of 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 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 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-