BUSINESS: Chapter 11: Corporate Dividends

Distributions paid when C is insolvent or from unauthorized accounts ___________

Illegal dividends (unlawful dividends) **directors who vote for a dividend contrary to any restrictions are personally liable, jointly and severally, for the amount of the illegal dividend that exceeded the amount that could have been lawfully distributed**

Distribution made to shareholders when a corporation liquidates

Liquidation distribution

Test to determine if dividends can be paid in which corporation may pay a dividend if it has current profits even if there is a deficit for the prior year __________

Nimble dividends test **a few jurisdictions use this test**

Net profits accumulated by a corporation __________

Retained earnings

Reduction of outstanding shares __________

Reverse stock split **opposite of a stock split** **are often used by a C to eliminate smaller shareholders** **many Cs do this to avoid paperwork, time and effort to communicate with shareholders who only hold a few shares of stock** **Some companies reverse split their stock in the hope that the higher trading price per share will lend prestige to the company**

Value of corporation's net assets that is greater than its stated capital __________

Surplus account

The decision to declare a dividend is made by the __________

board of directors

Although directors are under no obligation to declare dividends, once they have legally declared a cash or property dividend, the decision is __________, and the dividend becomes a debt owing from the corporation to the shareholder.

irrevocable

Because the corporation is a person, it pays taxes on its __________ at the applicable corporate rates

net profits **Payments made by a corporation as dividends are not deductible by the C**

If the corporation decides to distribute $500,000 in dividends, the __________ shareholders are entitled to receive their dividends first

preferred shareholders

Corporate real or personal property or products, such as cosmetics or discount coupons, can be distributed are called __________

property dividends

A date selected in advance of a meeting or event __________

record date **Many bylaws provide that the record date will be 30 days before the meeting**

The directors will usually establish a __________ for determining the shareholders who are eligible to receive dividends

record date **Those shareholders who own stock on the record date fixed by the directors receive the dividends**

Statutes provide that dividends may be paid only from the __________ account or its __________.

retained earnings account or its surplus account

Distribution by a corporation of its own shares __________

share dividend

Share Dividends: Tax is paid not when the stock dividend is received but when it is later __________

sold

The equity insolvency test states that a corporation may pay a dividend only if the corporation is __________, meaning that is must be able to pay its debts as they come due in the usual course of business.

solvent

Division of outstanding shares __________

stock split **the result is to decrease the price per share** **a C often splits its stock to increase the attractiveness of its shares** **there is no guarantee that a stock will rise in price after a split**

Stock reacquired by a C that is considered issued but not outstanding __________

treasury stock

Cash dividends: Shareholders must declare and pay taxes on cash dividends received for any dividend in excess of __________ cents

50

Test to determine if dividends can be paid in which equity or assets exceed liabilities

Balance sheet test

There are three (3) types of dividends: 1. 2. 3.

1. Cash Dividends **most common type of dividend** **usually sent to shareholders in the form of a check** 2. Property Dividends **least common and may consist of a product the company makes** 3. Share Dividends

Cash distribution made by a corporation __________

Cash dividend

Used strictly to refer to payments to shareholders that are not a sharing of profits; used loosely to refer to any type of payment to shareholders __________

Distribution

Used strictly to refer to a distribution of a corporation's profits to its shareholders; used loosely to refer to any type of payment made to shareholders

Dividend

Plan allowing shareholders to immediately use their cash dividends to purchase more shares

Dividend reinvestment plan **these dividends are immediately reinvested at no fee to the shareholder**

Test to determine if dividends may be paid in which corporation must be solvent __________

Equity insolvency test

Status of a shareholder or share without the right to receive a declared dividend __________

Ex-dividend **meaning that the seller of the stock, not the buyer, will receive the latest declared dividend** **the ex-dividend date is two business days before the record date**

Exchange of cash for shares __________

Exchange **repurchase of stock** **because the C is exchanging its cash for shares** **a repurchase or buyback is generally treated as a distribution to shareholders**

There are four critical dates to know when considering dividends 1. 2. 3. 4.

1. Declaration date **The date the corporation's board announcs payment of a dividend** 2. Record date **the date set by the C to determine which shareholders will receive a dividend; one must own shares on the record date to receive a dividend** 3. Ex-dividend date: **The date after which shares purchased no longer carry a right to previously announced dividend** 4. Payment date **the date the dividend is sent to a shareholder**

There are two basic principals that are applicable to dividends: 1. 2.

1. Dividends are allocated to shareholders in direct proportion to their respective ownership interest in the corporation 2. Shareholders within a class must be treated uniformly **Thus, all Common A shareholders must be treated the same**

Two alternate tests to determine whethter a corporation can legally pay a dividend: 1. 2.

1. The equity insolvency test 2. The balance sheet test **all state statutes specify the manner by which a corporation may distribute dividends as well as restrictions on the payment of dividends** **if the corporation is able to satisfy either of these tests, it may pay the dividend** **the primary purpose of these restrictions is to protect the rights of third-party creditors**