Distributions Flashcards
Distributions
- distribution: payment by the corporation to SHs
- distribution types:
i. dividends
ii. repurchase (SH voluntarily sells stock to corporation)
iii. redemption (SH forced to sell stock to the corporation at price set in the articles) - distribution is in the board’s discretion
i. SHs have no right to a distribution until it is declared
ii. an action to compel the BoD to declare a distribution is direct (not derivative)
a. requires a very strong showing of abuse of discretion
Dividend distributions
- common shares take on a pro rata basis
- preferred shares get paid first on their amount of preference: preferred means pay first
- participating shares: participating means pay again
i. pay the preferred shares, then pay common and participating shares pro rata
ii. may result in double counting (ex. a preferred participating share is double counted, once as preferred once as common) - cumulative shares: cumulative means add up accumulated unpaid dividends
i. cumulative dividends accrue year to year
ii. i.e. combine current year’s dividends with each previous year’s unpaid dividends
iii. see example (iv)
Examples of dividend distributions
i. $400k dividend, 100k outstanding common shares:
• $4 per common share
ii. $400k dividend, 100k outstanding common shares, 20k $2 preferred shares:
• $40k to preferred shares, at $2 per share
• remainder split between common shares: $3.60 to each common share
iii. $400k dividend, 100k outstanding common shares, 20k of $2 preferred participating:
• $40k to preferred shares, at $2 per share
• $360k split between common and participating shares (120k shares): $3 per share
iv. $400k dividend, 100k outstanding common shares, 20k $2 preferred cumulative shares, no dividends paid in 3 prior years
a. cumulative preferred get: 4 years (include current year) x 20k x $2 = $160,000
i) each cumulative preferred shareholder gets $8, and are paid first bc preferred
b. common shares split remaining $240k: $2.40 per share
Proper distribution view 1: funds used
- funds that can be used for distributions (dividend, repurchase, redemption):
i. earned surplus
ii. capital surplus, if SHs informed - earned surplus: all business earnings minus all business losses minus paid distributions
i. always usable for distributions
ii. money generated by business activity - stated capital:
i. never usable for distributions
ii. par value for par issuance, or as allocated for non-par issuance
iii. when stock is issued, it is split between stated capital and capital surplus
a. if stock is issued for par, stated capital is the par value
i) ex. 10k shares of $2 par stock for $50k: $20k stated capital, $30k capital surplus
b. if stock is not issued for par (non-par issuance), the board allocates the consideration between stated capital and capital surplus - capital surplus:
i. can be used for distributions if you inform the shareholders
ii. excess over par in par issuance of stock, or as allocates in non-par issuance
Proper distribution view 2: modern view
- modern view: does not look at the funds
- the corporation can make a distribution as long as the company is and remains solvent
- a corporation cannot make a distribution if it is insolvent or if the distribution would render it insolvent
- insolvent if either:
i. the corporation is unable to pay its debts as they come due, or
ii. total assets are less than total liabilities (including preferential liquidation rights)
Liability
- directors are jointly and severally liable for improper distributions
i. but directors’ good faith reliance on an expert is a defense (ex. accountant said company would still be solvent) - shareholders are personally liable only if they knew the distribution was improper when they received it