Dividends

Question 1

What is a shareholder’s right to receive dividends?

Answer 1

Entitled to receive dividends only when, as, and if declared by directors

Question 2

What is the priority of distribution of dividends?

Answer 2

In general:
Any preferred shares get paid their preference first, so:

1. Cumulative preferred shares have the right to be paid first for the past years in which there were no dividends in addition to current dividend payment
2. Preferred participating shares have the right to be paid twice–once as preferred shares and again with the common shares
3. Common stock gets paid last and gets paid equally

Question 3

When may a corporation NOT issue dividends?

Answer 3

If it’s insolvent or the dividend would render it insolvent
* This means that the corporation is unable to pay its debts as they come due in the ordinary course of business or assets are worth less than liabilities (before or after dividends are paid)

Question 4

Who becomes liable for an unlawful payment of dividends?

Answer 4

The directors who have declared an illegal dividend
* Defense if there is good faith reliance on financial officer’s representations
* Directors have a right to contribution from shareholders receiving unlawful dividends and from other directors who assented
* Two year statute of limitations