Capital Structure - Distributions to Shareholders

Question 1

Courts will defer to the board’s measurement of surplus, absent evidence of ___ _____ or _______, on the part of the board, to evaluate the assets on the basis of acceptable data it reasonably believed reflected current value.

Answer 1

Courts will defer to the board’s measurement of surplus, absent evidence of BAD FAITH or FAILURE, on the part of the board, to evaluate the assets on the basis of acceptable data it reasonably believed reflected current value.

Question 2

Will courts defer to the board’s measurement of surplus where there has been no allegation of bad faith and the board has used acceptable data it reasonably believed reflected actual value?

Answer 2

Yes. DGCL § 160 forbids a corporation to repurchase its shares if doing so would cause an impairment of capital. An impairment would occur if the amount spent on repurchase exceeds the corporation’s surplus, defined as the amount by which net assets exceed the par value of all outstanding shares of stock. The corporation’s balance sheet is not conclusive evidence of the presence or absence of impairment. Balance sheets do not always reflect the actual current value of the corporation’s assets and liabilities, because unrealized appreciation or depreciation or other factors may cause the balance sheet to present an inaccurate picture. A corporation is entitled to revalue its assets and liabilities for the purpose of evaluating possible impairment. No specific methodology is required; the board must simply use methods reasonably calculated to present a reasonable estimate of current values.