Corporate Distributions and Dividends During the COVID-19 Pandemic
COVID-19 / Corona Virus
COVID-19 is having a once in a generation impact on businesses and their operations. During this dynamic and uncertain time, corporate businesses may be reluctant to make profit distributions to shareholders, mindful of the potential economic hardships ahead. At the same time, shareholders may be relying on the continuance of regular corporate distributions. When can distributions be made to shareholders? Can shareholders demand a corporate dividend? The Orange County business and corporate attorneys at Brown & Charbonneau, LLP can help.
When Can Distributions Be Made to Shareholders?
A corporation’s distribution of profits to its shareholders is most commonly in the form of a dividend.
California’s General Corporation Law contains specific standards which must be satisfied before a corporation may declare a dividend to its shareholders. A corporation may not make any distribution to its shareholders unless the board of directors has determined, in good faith, either of the following:
- (1) The amount of retained earnings of the corporation immediately prior to the distribution equals or exceeds the sum of the amount of the proposed distribution, plus the preferential dividends arrears amount, or
- (2) Immediately after the distribution, the value of the corporation’s assets would equal or exceed the sum of its total liabilities plus the preferential rights amount.
The “preferential dividend arrears amount” means the amount, if any, of cumulative dividends in arrears on all shares having a preference with respect to payment of dividends over the class or series to which the applicable distribution is being made.
The “preferential rights amount” means the amount that would be needed if the corporation were to be dissolved at the time of the distribution to satisfy the preferential rights, including accrued but unpaid dividends, of other shareholders upon dissolution that are superior to the rights of the shareholders receiving the distribution.
The articles of incorporation, bylaws of a corporation, or other agreement entered into by the corporation or its shareholders may place restrictions on the declaration of dividends in addition to those imposed by the General Corporation Law, however, these statutory tests may not be waived or altered by such agreements.
Liability for Improper Distributions
Any shareholder who receives any distribution prohibited by statute, with knowledge of facts indicating the impropriety of the distribution, may be liable to creditors of the corporation or other shareholders for the amount of the distribution.
Directors approving a distribution prohibited by statute may also be held liable to creditors or other shareholders of the corporation. Such legal actions by shareholders against directors may include claims for breach of fiduciary duty.
Shareholder Right to Dividends
A shareholder has no right to a dividend until it has been declared by the corporation’s board of directors. Although directors must exercise their discretion fairly and honestly, generally, courts are reluctant to interfere with the board’s discretion in declaring or not declaring dividends.
However, when a dividend has been declared by the board of directors, the portion of the dividend to which each shareholder is entitled vests in the individual shareholders, creating a debtor-creditor relationship between the corporation and the shareholder. Once declared, the dividend cannot thereafter be revoked without the consent of the shareholders.
Getting Legal Help
If you are involved in a dispute concerning unlawful, unfair or fraudulent business practices, it is smart to speak with a top-rated Irvine litigation attorney. Our team of experienced business litigation attorneys and trial specialists are here to help. Contact Brown & Charbonneau, LLP today by calling 714-505-3000 to schedule your appointment or email us at inquiries@bc-llp.com.
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