This post discusses the process by which a corporation may declare a dividend. This is part of Dana Shultz’s Canonical Questions on the Law™ series of questions and answers about legal issues, concepts and terminology.
Please note that this post assumes that the corporation will pay a cash dividend to its shareholders. If, instead, the corporation wishes to pay a stock dividend (issue more shares to existing shareholders), then somewhat different rules will apply.
Please note, too, that this post assumes that there is one class of common shares. If there are multiple classes, or if there are preferred shares, then legal requirements will be substantially more complicated.
Financial Tests to Declare a Dividend
Before a corporation may pay a dividend, the board must determine that any legal restrictions on paying the dividend will be satisfied.
Those restrictions vary from state to state. For example, California Corporations Code Sections 500 and 501 (simplified a bit) require that:
- Before the corporation pays the dividend, retained earnings must equal or exceed the amount of the dividend, or after the corporation pays the dividend, assets will equal or exceed liabilities; and
- After the corporation pays the dividend, the corporation will be able to meet its liabilities as they mature.
In making these determinations, the board typically relies on representations by the corporation’s Chief Financial Officer.
Once the board receives the CFO’s representations, it approves resolutions that declare a dividend and authorize the corporation’s officers to pay that dividend. I have adapted the following from resolutions that I recently prepared for a client:
WHEREAS the Board has determined that it is in the best interests of this corporation pay a cash dividend of $______ per share to the shareholders of this corporation; and
WHEREAS the Board has determined that this corporation can pay the total amount of such dividend (i.e., $__________) in compliance with [citation to applicable statute];
IT IS RESOLVED that the sum of $_________ is hereby set aside to be distributed to the shareholders of this corporation by a declaration of a dividend of $______ per share of common stock; and
RESOLVED, FURTHER, that a cash dividend is hereby declared in the amount of $______ per share of common stock; and
RESOLVED, FURTHER, that the close of business on [date] is hereby fixed as the record date for the determination of shareholders entitled to receive payment of such dividend; and
RESOLVED, FURTHER, that [date] is hereby fixed as the dividend payment date; and
RESOLVED, FURTHER, that the officers of this corporation are authorized and directed to execute any documents and take any other actions that they deem necessary, desirable or appropriate to carry out the intent of the foregoing resolutions.
Once the board approves the resolutions, the corporation’s officers may pay the dividend accordingly.
Check out all posts about board resolutions.
Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.