Week 13 - Distributions

Question 1

what is the importance of solvency?

Answer 1

recognizes that the creditors of the company get ultimate priority over the SH upon dissolution

Question 2

what is the importance of liquidity?

Answer 2

addresses the expectation of creditors to be paid on time

Question 3

when would the company pass the solvency test?

Answer 3

if assets at FV > liabilities

Question 4

when would the company pass the liquidity test?

Answer 4

if the company can pay its debts as they become due in the ordinary course of business:

• for a period of 12 months after test
• for a period of 12 months after distribution (if dist)

Question 5

from where is the financial info for the S&L test taken from?

Answer 5

• acc records which satisfy s28

- FS that satisfy s29

Question 6

what is a distribution?

Answer 6

it is a transfer by the company of money/property (other than shares) to SH, interest holders of the comp (or company in same group)

Question 7

examples of distributions?

Answer 7

• dividend
• pmt in lieu of share capitalization
• as consideration for share repurchase
• incurrence of debt/obl by the comp for a SH’s benefit
• forgiving the debt of a SH

Question 8

what would not be considered a distribution?

Answer 8

any action taken during liquidation of the company

Question 9

whose decision is it to make a distribution?

Answer 9

the board, no SH resolution is required

Question 10

what are the requirements to make a distribution?

Answer 10

(s46)

• must be pursuant to existing legal obl or board must authorize
• it reasonably appears that the company will satisfy the S&L test immediately after the dist
• the board, by resolution, acknowledges that it has applied the S&L test and concluded that the company will satisfy it after dist

Question 11

what requirements must a company meet to acquire its own shares?

Answer 11

(s46)

• must be pursuant to existing legal obl or board must authorize
• it reasonably appears that the company will satisfy the S&L test immediately after the dist
• the board, by resolution, acknowledges that it has applied the S&L test and concluded that the company will satisfy it after dist

Question 12

what are the requirements a subsidiary must meet before they can acquire shares in their parent company?

Answer 12

(s46)

• must be pursuant to existing legal obl or board must authorize
• it reasonably appears that the company will satisfy the S&L test immediately after the dist
• the board, by resolution, acknowledges that it has applied the S&L test and concluded that the company will satisfy it after dist

Question 13

what are the restrictions for a sub acquiring shares in its parent company?

Answer 13

• no more than 10% of the shares of any class

- no shares with voting rights

Question 14

when is special resolution required for a company repurchasing its own shares?

Answer 14

• if purchased from a director or related person

- if >5% of a class is repurchased

Question 15

what are consequences for shares that are repurchased?

Answer 15

they will have the same status as unissued shares – no voting rights

Question 16

what happens if there is non-compliance with distribution requirements?

Answer 16

• company can approach court within 2 years to ask them to reverse the transaction and everyone will get back what they gave; can be expensive
• liability for directors/POs, present at meeting…