Dividends - June 26

Question 1

What is a distribution? (Epstein)

Answer 1

“A distribution is a payment by the corporation to a shareholder depending on how many shares the shareholder owns.” (503)

Question 2

What is a dividend? (Epstein)

Answer 2

“A dividend is a “special type of distribution, a payment to shareholders by the corporation out of its current or retained earnings in proportion to the number of shares owned by the shareholder.” That is, a dividend is a payment that a shareholder receives per share that she owns.” (503)

Question 3

What is the general rule about corporations paying dividends? (Epstein)

Answer 3

“The corporation should not pay a dividend if the returns that it can earn with the money are higher than the returns that the shareholder could earn if the money were distributed to them. That is, a corporation might appropriately pay no dividend because it has attractive investment opportunities that might be missed if it paid dividends. If the corporation makes these investments instead of paying dividends, it increases the value of the shares by more than the amount of the lost dividends.” (505)

Question 4

Do nonprofits pay taxes on dividends? (Epstein)

Answer 4

No. (506)

Question 5

How does the MBCA define distribution? (Epstein)

Answer 5

““Distribution” means a direct or indirect transfer of cash or other property (except a corporation’s own shares) *** to or for the benefit of its shareholders in respect of any of its shares. A distribution may be in the form of a payment of a dividend; a purchase, redemption, or other acquisition of shares; a distribution of indebtedness; a distribution in liquidation; or otherwise.” (507)

Question 6

When may a distribution not be made according to the MBCA? (Epstein)

Answer 6

“(1) the corporation would not be able to pay its debts as they become due in the usual course of business; or(2)the corporation’s total assets would be less than the sum of its total liabilities ***” (508)

Question 7

What is the earned surplus (retained earnings) account? (Epstein)

Answer 7

The earned surplus account consists of money earned by the business itself (509)

Question 8

What is the stated capital account? (Epstein)

Answer 8

““Stated capital” consists of the par value of a par issuance plus the amount allocated to stated capital on a no-par issuance.” (509)

Question 9

What is the modern approach to distributing dividends? (Epstein)

Answer 9

The modern approach is that the board of directors in its discretion determines whether to declare dividends. The only exception is when the corporation is about to go broke. (510)