Par Value Stuff

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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)


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