Par Value Stuff
Limitations of Distributions DGCL Surplus Test
Surplus = Net assets - stated capital (capital stock) so, if the surplus > distribution, you are good DGCL 170
Three Consequences of Par Value
Stock cannot be sold for less than par value when a corporation issues PV shares, it puts a $ amount on its books as legal capital AND Corporate law limits what what corps can do do with legal capital (cannot pay dividends, cannot repurchase own shares out of it) initial filing fees and taxes payable to the state of incorporation are often based on par value
Limitations on Distributions MBCA Balance Sheet Test (net asset test)
Assets - liabilites = net assets If distribution < net assets, you are good to make the distribution 6.40(c)(2)
Legal Capital Basic Idea
Corp law requires that the corp hold a minimum level of equity capital that the board of directors assigns as a fixed stock value, and this minimum level cannot be distributed to shareholders This statutory minimum value is the par value
Limitations on Distributions MBCA Cash Flow Test
No distribution may be made if it means the corp cannot pay its debts as they come due Look at the money the corp expects to receive, all the money it expects to pay out to creditors, and then ask if it has the cash to make the distributions
Are shareholders liable for unlawful ditsibutions
No, but if they knew it was an unlawful distribution they might have to give the money back to the creditors. If they didn't they get to keep the money
Is a corp bound to their own balance sheet in making judgement calls about distributions?
Not necessarily. Courts might defer to board's measurement if it acts in good faith and on the basis of acceptable data
Legal Capital Determining Corps Legal Capital
Par Value x Shares issued = legal capital the aggregate of the part value of shares issued forms the legal capital that affixes a minimum stockvalue and establishes a minimum level of the corp's equity capital
If you are an equityholder in a close corp, and the corp will not pay out dividends, do you have a remedy?
Yes, if they are doing it arbitrarily or in bad faith, a court might step in Dodge
Does BJR cover decisions on whether and in what form/manner to pay dividends?
Yes. Courts will not interfere with decisions made by directors unless there is fraud/illegality/etc. errors of judgment are not sufficient grounds for interference by court
Restrictions on Reddeming Stock in DE
cannot redeem stock if it impairs capital (uses more than the surplus)
Are directors liable for unlawful distributions
if the directors assents to the distribution, they are personally liable for the amount the distribution exceeds what could have been lawfully distributed if the party asseting liability establishes that the BJR was not followed But if they complied with the BJR, they should be could
What can a shareholder who wants dividends do if the corp won't payout
publicly traded, just sell your stock and buy a new one Close corp enter into an agreement beforehand requiring that the corp pay dividends under defined circumstances
How to increase surplus
reduce capital by board resolution reduce par value by amending AOI Revalue assets/liabilities like Klang
What does a corp have to have done if it wants to redeem shares?
reserve the right in the AOI
How does share redemption work
the shares have a set price that the corp has agreed to pay upon redemption pays in either cash or property can be done in the open market or directly from shareholders
Why limit dividends and redemptions?
to prevent boards from draining corps of assets to the detriment of creditors (Klang)