Corporate Dividends and Distributions

A corporation that issues stocks, or has shareholders, must follow applicable regulations in how it distributes its profits. Any money a shareholder earns for providing services, such as a salary or loan repayments, is entirely different from the money a shareholder earns simply by virtue of owning stock in a corporation. Furthermore, both of these are distinguishable from the profits that come from the dissolution of a corporation. All three sorts of “payments” require separate sets of considerations and legal responsibilities. At the Law Offices of Salar Atrizadeh, an attorney with extensive skill and knowledge in all areas of corporate litigation and transactional work can provide invaluable guidance regarding the legal considerations facing the financial aspects of corporations.

California Corporations Code governs all of the following as “distributions to shareholders” under Corporations Code section 166: (1) transfers of cash or other property without consideration, (2) redemptions of corporate shares, (3) purchases of corporate shares, and (4) any such transfers through a corporate subsidiary. These regulations do not apply to dividends a corporation distributes to shareholders from stock revenues. Ultimately, any distribution to shareholders that effectively divides corporate profits is subject to regulation. Loans and compensation do not constitute a division of corporate profits. This standard applies whether the corporation is a large entity, a small or closely-held corporation.

The purpose and intent of California Corporations Code is to protect creditors and shareholders against unjust distributions of corporate profits. Pursuant to California Corporations Code § 500(a), the board of directors of a corporation has a duty to make a good faith determination that distributions meet the applicable statutory standards. In the event that corporate officers or directors fail to satisfy this responsibility, engaging in unlawful distributions, both can be held responsible under applicable laws and guidelines. For example, under California Corporations Code § 316(a), directors who approve distributions to shareholders in violation of California Corporations Code §§ 500–501 may be liable to the corporation for the value of each distribution. All directors who vote for the unlawful distribution may be liable. Additionally, any board members who were present for the vote and failed to vote against the distribution may also be liable. Furthermore, any shareholders who knowingly receive unlawful corporate distributions may be personally liable for the value of each distribution. The courts will not consider whether the shareholder still owns the shares when it considers potential liability. However, shareholders will only be liable to the extent they were informed and aware of the potential wrongful distribution. Shareholders do not need to explicitly know that the distribution was unlawful. In general, the courts will find that it is enough that shareholders were aware of the factual background surrounding the distribution, and as such, should have been aware of the potentially unlawful nature of the distribution.

To protect your corporate interests and ensure compliance with all such legal standards, contact the Law Offices of Salar Atrizadeh today to consult with an attorney regarding the specific financial and legal considerations surrounding your organization.