Voting & Elections Fortunately, the Chancery Courts recent decision in, In re The Chemours Company Derivative Litigation. Notwithstanding anything in this section to the contrary, for purposes of this section and 160 and 170 of this title, the capital of any nonstock corporation shall be deemed to be zero. GENERAL CORPORATION LAW Subchapter V Stock and Dividends 170. speaks of the aggregate amount of the capital represented by the outstanding preferred stock, it uses, 155 F.2d 815, 816 (10th Cir. Section 170(a) of the Delaware General Corporation Law (DGCL) permits dividends, to be declared out of two legally available sources: (1) out of surplus, or (2) if there is no surplus, out of net, profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year (so-called nimble. Based on Chemours, directors are well advised to compile accurate data regarding total assets and total liabilities, and evaluate that data in a reasonable manner, including any analysis provided by experts. Liability of directors and committee members as to dividends or stock redemption. Under the MBCA, total liabilities already exceed total assets, so a distribution could not be made. $116,600,000. Given the protection a carefully-chosen expert can provide, most boards should consider utilizing one if there is any question as to the presence of surplus to cover a proposed transaction. If it is going to revalue some assets, all must be reappraised and adjusted to their fair market value. Gross paid in and contributed surplus decreased $67,000,000 during the examination period from January 1, 2010 to December 31, 2014. Accordingly, while the corporation may rely on financial statements prepared in accordance with GAAP, there is no requirement that it do so. Delaware Insurance Supplement - Examination Content Outlines May 1, 2022 *The Delaware Motor Vehicle Producer exam was retired as of October 12, 2015. window.__lo_site_id = 177402; The comments further indicate that a corporation generally may not selectively revalue assets, however. Bainbridge, Stephen M.: The Profit Motive, Stephen M. Bainbridge: Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance, Stephen M. Bainbridge: Limited Liability: A Legal and Economic Analysis, Stephen Bainbridge: The New Corporate Governance in Theory and Practice, Stephen M. Bainbridge: Corporate Governance after the Financial Crisis, Bujold, Lois McMaster: The Assassins of Thasalon (Penric & Desdemona), Dauphinais, Michael: The Wisdom of the Word, Catton, Bruce: A Stillness at Appomattox (Army of the Potomac, Vol. Laws, c. 112, 17; 67 Del. Laws, c. 186, 9; 59 Del. The question of the legality of a dividend or repurchase under Delaware law is one that often arises in leveraged recaps and other transactions involving large distributions to shareholders. Unauthorized attempts to upload information and/or change information on any portion of this site are strictly prohibited and are subject to prosecution under the Computer Fraud and Abuse Act of 1986 and the National Information Infrastructure Protection Act of 1996 (see Title 18 U.S.C. Laws, c. 376, 5; 69 Del. 8) 7MIExD0$CJcJ!a(F$wV'0 h\I)!4$!J07g4G=-A Privacy Policy S3 G. Group life insurance 1. This site is protected by reCAPTCHA and the Google, There is a newer version GENERAL CORPORATION LAW Subchapter V Stock and Dividends 154. Heres an excerpt from a Faegre Drinker memo on the decision: In this case, the board approved both dividends and stock repurchases at a time when the company also faced legacy contingent environmental liabilities that conceivably could render Chemours insolvent. 2018 Delaware Code Title 8 - Corporations CHAPTER 1. T. Even if it has been lawfully and properly declared, a stock dividend may be revoked unless it has been actually distributed . For security purposes, and to ensure that the public service remains available to users, this government computer system employs programs to monitor network traffic to identify unauthorized attempts to upload or change information or to otherwise cause damage, including attempts to deny service to users. The coronavirus (COVID-19) pandemic has forced companies to reassess their financial projections amid the rapidly shifting landscape of the global economy. 173. Next, the board of directors should determine the permitted sources for the dividend under state law. To embed, copy and paste the code into your website or blog: Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra: [Ongoing] Read Latest COVID-19 Guidance, All Aspects, [Hot Topic] Environmental, Social & Governance. DGCL, 154. Capital and surplus are not liabilities for this purpose. General Assembly Laws, c. 106, 5; 64 Del. By using this site, you are agreeing to security monitoring and auditing. To remove yourself to the list, please send an email to Normajane Davall. Your request has been identified as part of a network of automated tools outside of the acceptable policy and will be managed until action is taken to declare your traffic. Chemours was spun-off by the DuPont Company in 2015. The board of directors may direct that the portion of such net assets so transferred shall be treated as capital in respect of any shares of the corporation of any designated class or classes. If you would like to receive a copy of the Surplus Services Bulletin and other Surplus Services information via email, you can subscribe to our list. debenture or other obligation of the corporation paid by it as a dividend on shares of its stock . Under Delaware law, the corporation has no surplus and, assuming it could not pay a nimble dividend, thus could not pay a dividend. Mobile Apps Ch. Delaware Courts Under Section 154 of the DGCL, statutory capital is determined as follows: (1) for par value stock, the, par value of the consideration received for the issuance of such stock constitutes capital unless the Board, determines that a greater amount of the consideration received for such stock shall constitute capital; and, (2) for stock with no par value, the entire consideration received for the issuance of such stock constitutes, capital unless the directors, at the time of issuing shares for cash, or within 60 days after issuing shares for. Insurance Code Section 5005. If you would like to receive a copy of the Surplus Services Bulletin and other Surplus Services information via email, you can subscribe to our list. DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Gross Receipts Tax (2) In case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Although dividends may be paid in cash, property, or in shares of the corporations capital stock, the considerations below apply primarily to the payment of cash dividends. Current guidelines limit users to a total of no more than 10 requests per second, regardless of the number of machines used to submit requests. 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Some of these restrictions apply to the payment of dividends. For example, unless financed from current or preceding year earnings, the Delaware General Corporation Law (DGCL) prohibits and makes directors personally liable for the payment of dividends and stock repurchases if the amount of the payment exceeds the corporations surplus a term generally defined as the amount of total assets over total liabilities and the par value of the corporations issued stock (which typically is a nominal amount). Date Decided: November 1, 2021 Gregory V. Varallo, of BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, Wilmington, Delaware; OF COUNSEL: Mark Lebovitchand Daniel E. Meyer, of BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; and Robert D. Klausner and Stuart A. Kaufman, of KLAUSNER KAUFMAN JENSEN & LEVINSON, Plantation, Florida, 1,200+ attorneys and consulting professionals, Located across the U.S., and in London and Shanghai, California Business Contact Privacy Policy. Locations Directory This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. If the capital of the corporation, computed in accordance with 154 and 244 of this title, shall have been diminished by depreciation in the value of its property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, the directors of such corporation shall not declare and pay out of such net profits any dividends upon any shares of any classes of its capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired. Withholding Tax The Faegre Drinker Biddle & Reath LLP website uses cookies to make your browsing experience as useful as possible. Delaware law recognizes that a corporation is insolvent if it fails either of two tests: the "balance sheet" test or the "cash flow" test.1 These tests are not statutorily defined; rather, they developed in case law2 and the courts have not defined the tests uniformly. Ch. Faegre Drinker Biddle & Reath LLP. See a copy of our Flowchart so that you can better understand our process. Berle, Investors and the Revised Delaware Corporation Act (1929) 29 COLUMBIA LAW REV. You already receive all suggested Justia Opinion Summary Newsletters. wa.src = 'https://d10lpsik1i8c69.cloudfront.net/w.js'; this Section. The Delaware Supreme Court has held that what matters in the surplus calculation is the present value of the companys assets and liabilities, not whats reflected on the balance sheet. Transparency ; 11/21), provides some guidance to boards engaging in this process. The Delaware Surplus Services team within Government Support Services is responsible for all Federal and State surplus property programs for the State of Delaware. While thats a pretty common practice, theres not a lot of Delaware case law on how the boards valuation decisions will be assessed. Delaware State Code Employing such methods in good faith should result in a court deferring to the boards surplus calculation. this Section. In reaching this conclusion, the court rejected the argument that the directors were required to second-guess the GAAP-based reserves calculated by the experts an analysis that permitted the board to significantly reduce the size of these liabilities on Chemours balance sheet. Dividends; payment; wasting asset corporations . State Employees We also have launched a resource page to help keep you on top of developments as they unfold. 170. E-mail / Text Alerts Since thats the case, valuations are often used to determine the amount of available surplus. 1946). View our newest version here. Delaware test is different: can pay if either 1. a corp can pay cash dividends from its net profits for the current fiscal year and/r from its net profits of the prior fiscal year. Reference ID: 0.1fe5c417.1686589467.ce5c61b. In addition to state law considerations, boards of directors of public companies should keep in mind the implications of federal securities laws and national securities exchange rules governing the declaration and payment of dividends, for example, ex-dividend dates, exchange notifications, and public disclosures. Tax Center The memo goes on to provide some thoughts on the key takeaways from the decision, including the need for the board to carefully compile and review accurate data on assets and liabilities, and to retain an expert in any situation where the calculation of surplus may be an issue. Delaware's Governor Delaware Code Title 8. hbbd``b` $= t H vu zDHVt@@bU Q d"r` endstream endobj startxref 0 %%EOF 4358 0 obj <>stream In contrast, state corporate law generally does not require adherence to GAAP in determining whether a dividend lawfully may be paid. Get free summaries of new opinions delivered to your inbox! Net assets means the amount by which total assets exceed total liabilities. Nov. 1, 2021). Laws, c. 50; 56 Del. year in which the dividend is declared and/or the preceding fiscal year, declared if the capital of the corporation, computed in accordance with sections 154 and 244 of this title, shall, have been diminished by depreciation in the value of its property, or by losses, or otherwise, to an amount less, than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having. Under Delaware law, net assets are now $16,000, which results in a surplus of $1,000, which is available for payment of a dividend. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. Business First Steps, Phone Directory Finally, boards of directors should also consult with legal counsel as to the various forms of relief available to companies under the CARES Act and any requirements that may attach to benefits they receive. Fortunately, the Chancery Courts recent decision in In re The Chemours Company Derivative Litigation, (Del. Cares Act and Federal Reserve Offer Economic Assistance to Stabilize US Economy, US Supreme Court Says Egregious Strike Misconduct Subject to Employer State Court Damages Action, Labor and Employment Considerations for Japanese Corporate Venture Capital Investors, Protecting Assets: Employer Guide for Life Sciences Startups in Japan, China, and the US, How Employers Can Address Challenges of AI in the Workplace, Net-Zero Commitments to Carbon Offsets: Current Trends in Corporate Sustainability. As for reliance on experts, the court held that, under the DGCL, utilization of and good faith reliance on experts fully protects directors from personal liability arising from their surplus calculation. This program is self-sufficient and thereby does not receive any State or Federal dollars. See also. This Note explains the applicable laws, the resources the corporation may use, and the standards of review that Delaware courts may apply when reviewing a dividend, redemption, or stock purchase transaction. As for reliance on experts, the court held that, under the DGCL, utilization of and good faith reliance on experts fully protects directors from personal liability arising from their surplus calculation. Withholding Tax Special purpose reserves. General Assembly The As the COVID-19 pandemic continues, corporations should analyze whether it is in their best interests to suspend the payment of dividends or refrain from declaring dividends. tendency to confuse the profits test of dividends with the impairment of . Read the code on FindLaw . While GAAP-compliant balance sheets are a primary resource for surplus calculations, boards also may look to other methodologies that they conclude provide better measures of fair value, including third party appraisals on assets (and liabilities) that may not appear on a GAAP balance sheet. Mobile Apps In order to have the full site experience, keep cookies enabled on your web browser. The Delaware Chancery Court recently issued an opinion addressing two issues of first impression relating to the categories of persons who can assert a claim under the state's unlawful dividend statute and the period within which such a claim must be asserted. properly paid . Stated capital- amount needed from par value. Buyer Beware: Follow Sellers Participation Right, or Else! 2022 2021 2020 2019 2018 Other previous versions. While thats a pretty common practice, theres not a lot of Delaware case law on how the boards valuation decisions will be assessed. 8 Del. This site is protected by reCAPTCHA and the Google, There is a newer version E-mail / Text Alerts Ann. Personal Income Tax The court deferred to the boards determination that there was sufficient surplus to permit these transactions, even though the board looked beyond GAAP-metrics to evaluate its contingent liabilities. Thats kind of disconcerting, particularly since directors face the prospect of personal liability for unlawful dividends or stock repurchases. (b) Subject to any restrictions contained in its certificate of incorporation, the directors of any corporation engaged in the exploitation of wasting assets (including but not limited to a corporation engaged in the exploitation of natural resources or other wasting assets, including patents, or engaged primarily in the liquidation of specific assets) may determine the net profits derived from the exploitation of such wasting assets or the net proceeds derived from such liquidation without taking into consideration the depletion of such assets resulting from lapse of time, consumption, liquidation or exploitation of such assets. Public Meetings 1001 and 1030). Dividends, Redemptions, and Stock Purchases by Practical Law Corporate and Securities Maintained Delaware, USA (National/Federal) A Practice Note discussing the actions necessary for a Delaware corporation to effect a dividend, redemption, or stock purchase (also known as a stock buyback or stock repurchase). Laws, c. 106, 2; 74 Del. If the board of directors shall not have determined (1) at the time of issue of any shares of the capital stock of the corporation issued for cash or (2) within 60 days after the issue of any shares of the capital stock of the corporation issued for consideration other than cash what part of the consideration for such shares shall be capital, the capital of the corporation in respect of such shares shall be an amount equal to the aggregate par value of such shares having a par value, plus the amount of the consideration for such shares without par value. You're all set! In reaching this conclusion, the court rejected the argument that the directors were required to second-guess the GAAP-based reserves calculated by the experts an analysis that permitted the board to significantly reduce the size of these liabilities on Chemours balance sheet. The last few weeks have seen corporations in the auto, aerospace, cruise line, entertainment, hospitality, mining, and restaurant industries, to mention a few, suspend dividends. Corporations Because assets generally are carried on the books at their historical cost, and land tends to appreciate in value, it is a fair supposition that the land may be worth much more than $9,000. (function() { Heres an excerpt from a Faegre Drinker memo on the decision: Proxy Disclosure & 20th Annual Executive Compensation Conferences. Accordingly, you may not write up assets to reflect an increase in their fair market value, but must write them down to reflect depreciation. Enter your email address and gain instant access to this article. In each such case the board of directors shall specify in dollars the part of such consideration which shall be capital. (2) By repurchasing shares. Thats kind of disconcerting, particularly since directors face the prospect of personal liability for unlawful dividends or stock repurchases. 174. +P[ After the two-week period, the property is available to be sold to the general public. Determination of amount of capital; capital, surplus and net assets defined. We reserve the right to block IP addresses that submit excessive requests. In this case, the board approved both dividends and stock repurchases at a time when the company also faced legacy contingent environmental liabilities that conceivably could render Chemours insolvent. For more information, contact opendata@sec.gov. var wa = document.createElement('script'); wa.type = 'text/javascript'; wa.async = true; If a board is unable to determine that, at the payment date, the corporation has sufficient "surplus" (as defined in the DGCL) available for the payment of the dividend, or if the board believes payment of the . [1], The principal wrinkle in theChemours case is that, instead of suing directors for departing from GAAP, the plaintiffs here are suing the directors for "relying on GAAP-based accounting reserves to calculate surplus, which the Plaintiffs argue exclude contingent environmental liabilities.". delaware dividend surplus test; dgcl bylaws; dgcl 158; dgcl 160; 228(e) notice requirements; Use this template to keep record of your initial shareholder meeting.This form can be used to record the issued shares of corporate stock for your . Under Delaware law, net assets are now $16,000, which results in a surplus of $1,000, which is available for payment of a dividend. You can explore additional available newsletters here. Help Center Specifically, the proviso uses the term capital in two different contexts. By browsing our site with cookies enabled, you are agreeing to their use. 172. The Delaware Surplus Services team within Government Support Services is responsible for all Federal and State surplus property programs for the State of Delaware. In practice, to pay a dividend the board of directors must first declare a dividend and set record and payment dates. Fortunately, the Chancery Courts recent decision in In re The Chemours Company Derivative Litigation, (Del. In reaching this conclusion, the court rejected the argument that the directors were required to second-guess the GAAP-based reserves calculated by the experts an analysis that permitted the board to significantly reduce the size of these liabilities on Chemours balance sheet. For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. Issuing Dividends Under Delaware Corporate L, Under Delaware law, the power and authority to declare dividends resides with the board of directors of the, corporation (Board). To allow for equitable access to all users, SEC reserves the right to limit requests originating from undeclared automated tools. This LawFlash highlights a few considerations corporations and their board of directors should keep top of mind as they contemplate the declaration/payment of dividends, including state law considerations under California, Delaware, New York, and Pennsylvania corporate law, and is one of a series focused on COVID-19s impact on corporate governance, including the duties and actions of boards and committees, and mergers and acquisitions. Corporations 170. Voting & Elections You can also sign up for email updates on the SEC open data program, including best practices that make it more efficient to download data, and SEC.gov enhancements that may impact scripted downloading processes. 2016 Delaware Code . The court deferred to the boards determination that there was sufficient surplus to permit these transactions, even though the board looked beyond GAAP-metrics to evaluate its contingent liabilities. Thank you for your interest in the U.S. Securities and Exchange Commission. Help Center Laws, c. 326, 4; 77 Del. Section 170 (a) of the Delaware General Corporation Law (DGCL) permits dividends to be declared out of two legally available sources: (1) out of surplus, or (2) if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year (so-called "nimble dividends"). However, dividends may not be declared out of net profits if the capital of the corporation, computed in accordance with sections 154 and 244 of [the DGCL], shall have been diminished by depreciation, in the value of its property, or by losses, or otherwise, to an amount less than the aggregate amount of the, capital represented by the issued and outstanding stock of all classes having a preference upon the distribution, Section 170(a)(1) of the DGCL permits payment of dividends out of a corporations surplus, the excess of net. This SEC practice is designed to limit excessive automated searches on SEC.gov and is not intended or expected to impact individuals browsing the SEC.gov website. State Employees We want to work with you to make sure your property needs are met. The court held that it will defer to the Boards surplus calculation so long as [the directors] evaluate assets and liabilities in good faith, on the basis of acceptable data, by methods that they reasonably believe reflect present values, and arrive at a determination of the surplus that is not so far off the mark as to constitute actual or constructive fraud. This standard is consistent with the courts prior guidance that the DGCL does not require any particular method of calculating surplus, but simply prescribes factors, total assets and total liabilities, that any such calculation must include.. 3), Noll, Mark A.: Protestantism: A Very Short Introduction, Bainbridge, Stephen: Mergers and Acquisitions (Concepts and Insights), Stephen Bainbridge: Insider Trading Law and Policy (Concepts and Insights), Stephen Bainbridge: Agency, Partnerships & LLCs (Concepts and Insights), Stephen M. Bainbridge: Corporate Law (Concepts and Insights), Using Non-GAAP Accounting to Determine the Legality of a Dividend, States with Limited Liability Limited Partnership Statutes as of 2021, Dear Securities and Exchange Commission: I Do Not Want to Know How my Funds Vote , Morris v. Standard Gas & Electric, 63 A.2d 577, 582 (Del.Ch.1949), Randall v. Bailey, 23 N.Y.S.2d 173, 183 (N.Y.Sup.1940), Klang v. Smiths Food & Drug Centers, Inc., 702 A.2d 150 (Del.1997), As an Amazon Associate I earn from qualifying purchases. RSS Feeds. Sign up for our free summaries and get the latest delivered directly to you. The court held that it will defer to the Boards surplus calculation so long as [the directors] evaluate assets and liabilities in good faith, on the basis of acceptable data, by methods that they reasonably believe reflect present values, and arrive at a determination of the surplus that is not so far off the mark as to constitute actual or constructive fraud. This standard is consistent with the courts prior guidance that the DGCL does not require any particular method of calculating surplus, but simply prescribes factors, total assets and total liabilities, that any such calculation must include.. Universal Citation: 8 DE Code 170 (2018) As I explain in my book Corporate Law: Consider a relatively simple balance sheet: This corporation could not pay a dividend under either the MBCA or Delaware approach. The Delaware Court of Chancery gave important guidance on what boards may do in determining surplus in In re The Chemours Co. Universal Citation: 8 DE Code 154 (2018) Dividends; payment; wasting asset corporations. If we write up the value of the land to $30,000, the corporation will have total assets of $54,000, and now may pay a dividend. Boards should give careful consideration to these recapitalizations, buybacks and dividends. 8 Del. Determination of amount of capital; capital, surplus and net assets defined. Delaware Topics of F. Supp. In general, under Delaware law, a dividend may only be paid to the extent there are funds lawfully available for the payment. a preference upon the distribution of assets . DGCL 170(a)(2). As for reliance on experts, the court held that, under the DGCL, utilization of and good faith reliance on experts fully protects directors from personal liability arising from their surplus calculation. You're all set! (a) The directors of every corporation, subject to any restrictions contained in its certificate of incorporation, may declare and pay dividends upon the shares of its capital stock either: (1) Out of its surplus, as defined in and computed in accordance with 154 and 244 of this title; or. State Agencies Surplus Assets minus (debts +stated capital). In light of the recent passing of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which provides economic relief to various organizations facing financial challenges due to the COVID-19 pandemic, boards of directors considering the payment of dividends should analyze whether they will be taking advantage of any of the many economic relief programs offered through the CARES Act. Required provisions Cities & Towns Vehicle Bulletin - List is updated monthly. Revaluing Assets and Liabilities When Paying Dividends or Repurchasing Shares Delaware Provides New Guidance for Boards | Faegre Drinker Biddle & Reath LLP, https://www.faegredrinker.com/-/media/images/professionals/no_photo_placeholder.jpg?rev=42a477b430684becad7270629ed0f748&hash=B1464A1F719441188BC5225203A8C221. While thats a pretty common practice, theres not a lot of Delaware case law on how the boards valuation decisions will be assessed. Under Delaware law, for the purposes of determining legally available funds for the payment of dividends and the repurchase of shares, the amount of "surplus" of a corporation is the amount by which the net assets of the corporation (defined in Section 154 of the General Corporation Law as the amount by which total assets exceed total . For more information, please see the SECs Web Site Privacy and Security Policy. Once the rate of requests has dropped below the threshold for 10 minutes, the user may resume accessing content on SEC.gov. The standard the Delaware courts will use to review the transaction. -John Jenkins, DealLawyers.com November 10. Issuing Dividends Under Delaware Corporate Law, Corporate Matters: the Value of Par Value, For Immediate Release Insignia Systems, Inc. As such, corporations and their boards of directors should carefully consider any restrictive covenants in the CARES Act prior to availing themselves of its benefits. RSS Feeds, Enter your current email address into the box below, and select the button labeled Sign Up., Once the verification process is complete, a final confirmation email from. Generally accepted accounting principles (GAAP) require that most assets be carried on the books at historical cost less depreciation. The answer usually depends on whether the company has sufficient surplus within the meaning of Section 154 of the DGCL. However, applying for loans or other forms of relief may come with a whole host of eligibility requirements, restrictions, and covenants. As the COVID-19 pandemic continues and corporations face greater financial challenges, boards of directors should be mindful of the various statutory schemes that govern the declaration of dividends, their payment and suspension, and the liability that may attach for unlawful distributions. The question of the legality of a dividend or repurchase under Delaware law is one that often arises in leveraged recaps and other transactions involving large distributions to shareholders. assets over the corporations capital as determined pursuant to Section 154 of the DGCL. Our goal is to simplify all of our services for our customers: declaring excess property, transferring excess property to another agency or fire company, removal of excess property, or disposal of excess property. DGCL 154. In general, under Delaware law, a dividend may only be paid to the extent there are funds lawfully available for the payment. The Delaware Supreme Court . Or 2. Under Sections 170 and 173 of the Delaware General Corporation Law (the DGCL), dividends may only be paid out of either the corporation's "surplus" (as defined in the DGCL) or when there is . hb```b``a`a`| @1V 8 The resources a Delaware corporation can use to effect a dividend, redemption or stock purchase. Any corporation may, by resolution of its board of directors, determine that only a part of the consideration which shall be received by the corporation for any of the shares of its capital stock which it shall issue from time to time shall be capital; but, in case any of the shares issued shall be shares having a par value, the amount of the part of such consideration so determined to be capital shall be in excess of the aggregate par value of the shares issued for such consideration having a par value, unless all the shares issued shall be shares having a par value, in which case the amount of the part of such consideration so determined to be capital need be only equal to the aggregate par value of such shares. Delaware Topics Notwithstanding the limitation stated in the foregoing proviso: (1) Any stock of a regulated investment company registered under the Investment Company Act of 1940 [15 U.S.C. Heres an excerpt from this Faegre Drinker memo on the decision: In this case, the board approved both dividends and stock repurchases at a time when the company also faced legacy contingent environmental liabilities that conceivably could render Chemours insolvent. %PDF-1.7 % 80 a-1 et seq. Delaware Courts See Wittenberg v. 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(A Wholly Owned Subsidiary of Huntington Bancshares Incorporated), Net Capital Requirements for Brokers and Dealers. Franchise Tax Learn more about Practical Law Company | practicallaw.com 5 For best practices on efficiently downloading information from SEC.gov, including the latest EDGAR filings, visit sec.gov/developer. Generally accepted accounting principles (GAAP) require that most assets be carried on the books at historical cost less depreciation. Build a Morning News Digest: Easy, Custom Content, Free! For corporations considering issuing dividends or that have already declared a dividend, the board of directors should consider the following actions if there are concerns about liquidity, whether due to the COVID-19 pandemic or otherwise: Boards of directors should be mindful of the potential for personal liability that comes with declaring and paying dividends, particularly under circumstances where there is potential for a corporations assets to deplete rapidly, such as during the COVID-19 pandemic. Elected Officials , (Del. 1THEORY OF ANGLO-AMERICAN DIVIDEND LAW: SURPLUS AND PROFITS . Determine Proper Sources for the Dividend. from the current value of the corporations total assets (see Valuing Net Assets of a Corporation, below). A Practice Note discussing the actions necessary for a Delaware corporation to effect a dividend, redemption, or stock purchase (also known as a stock buyback or stock repurchase). Corporations Transparency Sign up for our free summaries and get the latest delivered directly to you. Franchise Tax In response, there has been a rapid uptick in the number of corporations that have suspended dividend payments to preserve assets and capital. 563; WICKERSHAM, STOCK WITHOUT PAR VALUE (1927), c. 5; Weiner, . ; 11/21), provides some guidance to boards engaging in this process. Cities & Towns Get free summaries of new opinions delivered to your inbox! Derivative Litigation, 2021 WL 5050285 (Del. Net assets is the amount by which total assets exceed total liabilities,. In the spin-off, DuPont transferred environmental liabilities to Chemours, which Chemours subsequently . While permissible, utilizing non-GAAP balance sheet methodologies raises concerns about whether a court would question the boards surplus analysis. dividends). In case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. var s = document.getElementsByTagName('script')[0]; s.parentNode.insertBefore(wa, s); For a more detailed discussion of some of the restrictions imposed on organizations participating in economic relief programs under the CARES Act, read our recent LawFlash, Cares Act and Federal Reserve Offer Economic Assistance to Stabilize US Economy. Litig., which can provide guidance for directors performing this analysis, particularly directors whose companies face contingent future liabilities, such as an environmental exposure or outstanding litigation, or when there may be questions about the value of certain assets, including new technologies. Delaware and New York reach the same result through case law. The capital of the corporation may be increased from time to time by resolution of the board of directors directing that a portion of the net assets of the corporation in excess of the amount so determined to be capital be transferred to the capital account. Weather & Travel, Contact Us Declaration and payment of dividends. of four ways: (1) As dividends, that is, by making pro rata distributions of cash, securities, or interests in other kinds of property. The Delaware Court of Chancery gave important guidance on what boards may do in determining surplus in In re The Chemours Co. However, State law requires that we advertise available property for purchase to State agencies and volunteer fire companies for a two-week period. Thus, the funds available for a lawful dividend under the surplus test are calculated by subtracting the. 802, 810 (N.D. Ill. 1980). consideration other than cash, allocate a smaller portion of the total consideration to capital. States with Limited Liability Limited Partnership Statutes as of 2021 | Maryland expressly permits a corporation to issue stock withoutIn Delaware, reduction of capital by . Suppose the fair market value of the land in fact is $30,000. You already receive all suggested Justia Opinion Summary Newsletters. The board should together with its experts and other advisors, prepare a complete record of its valuation deliberations, as well as of how they chose the experts to advise them. Locations Directory Receipt of this communication does not establish an attorney-client relationship. Chancery Addresses Stockholder Covenant Not to Sue, 8911 N Capital of TX Hwy, Suite 4200-110, Austin, TX 78759. Delaware Marketplace [1]See, e.g., Morris v. Standard Gas & Electric, 63 A.2d 577, 582 (Del.Ch.1949) (the board of directors has a duty to evaluate the assets on the basis of acceptable data and by standards which they are entitled to believe reasonably reflect present values); Randall v. Bailey, 23 N.Y.S.2d 173, 183 (N.Y.Sup.1940)(rejecting contention that cost and not value must be used in determining whether or not there exists a surplus out of which dividends can be paid); see also Klang v. Smiths Food & Drug Centers, Inc., 702 A.2d 150 (Del.1997) (authorizing revaluation of assets for purposes of determining whether a repurchase of shares complied with DGCL 160). The Delaware Supreme Court has held that what matters in the surplus calculation is the present value of the companys assets & liabilities, not whats reflected on the balance sheet. Even if not profitable it can pay dividends of its "surplus". Personal Income Tax Generally, the board of directors of a corporation, subject to any additional restrictions in the corporations governance documents or to covenants in agreements to which it is a party, has the power to declare and pay dividends. Section 170 of the DGCL, subject to other restrictions, limits dividends to amounts not in excess of either (a) surplus or, (b) if there is no surplus, the corporation's net profits for the . Ch. Thats kind of disconcerting, particularly since directors face the prospect of personal liability for unlawful dividends or stock repurchases. Laws, c. 253, 18. For more discussion on corporate governance, mergers and acquisitions, securities and a myriad of other issues companies and individuals face during the crisis, visit our Coronavirus COVID-19 resource page. Note: We do not offer technical support for developing or debugging scripted downloading processes. Please enable JavaScript if you would like to comment on this blog. The amount of the consideration so determined to be capital in respect of any shares without par value shall be the stated capital of such shares. C. 1953, 154; 56 Del. Dividends; payment; wasting asset corporations. though capital and surplus are excluded in determining net assets. })(); The question of the legality of a dividend or repurchase under Delaware law is one that often arises in leveraged recaps and other transactions involving large distributions to shareholders. Delaware Title 18. N36ypoA,J6fWG3xd&1/(p">9lulHp``Hhk3LkHo"u_XF|q_Yg4$e3Y6g|6(69ry95#v3iHMnRv|T }YM,;ZZGqFYLJ f 5 B,nij@}JLiT " g` ,|X11dgbNg^|#Dv q4L F endstream endobj 4305 0 obj <>/Metadata 108 0 R/OpenAction 4306 0 R/PageLayout/SinglePage/Pages 4302 0 R/StructTreeRoot 121 0 R/Type/Catalog/ViewerPreferences 4322 0 R>> endobj 4306 0 obj <> endobj 4307 0 obj <>/MediaBox[0 0 612 792]/Parent 4302 0 R/Resources<>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI]>>/Rotate 0/StructParents 0/Tabs/S/Type/Page>> endobj 4308 0 obj <>stream Types of groups Ref: 3101, 3106, 3107, 3109, 3110 2. Notice, however, that the corporation owns real property being carried on the balance sheet at $9,000. State Agencies GENERAL CORPORATION LAW Subchapter V Stock and Dividends 154. The material contained in this communication is informational, general in nature and does not constitute legal advice. | Dear Securities and Exchange Commission: I Do Not Want to Know How my Funds Vote . Privacy Policy Delaware Marketplace Section 170(a) of the Delaware General Corporation Law (DGCL) permits dividends to be declared out of two legally available sources: (1) out of surplus, or (2) if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year (so-called "nimble dividends"). This standard is consistent with the court's prior guidance that the DGCL "does not require any particular method of calculating surplus, but simply prescribes factors," total assets and total liabilities, "that any such calculation must include." Tax Center The drafters comments on 6.40, moreover, go on to state that the statute authorizes departures from historical cost accounting in determining the funds available for distribution. Recently, the Delawre Court of Chancery ruled on In re Chemours Deriv. hXmo6+~NJ@6@ 0A5Gm&~w$KdnAx#sg))aDI!"b C`N% V1! 607. . And what is the effect of the directors reliance on experts when calculating surplus? 4304 0 obj <> endobj 4321 0 obj <>/Filter/FlateDecode/ID[<604266B25BAE664FBC4BC71FE4A87E5E><4698AA30D0D14B75B3D226754B0A7EAB>]/Index[4304 55]/Info 4303 0 R/Length 86/Prev 507758/Root 4305 0 R/Size 4359/Type/XRef/W[1 2 1]>>stream Indeed, MBCA 6.40(d) expressly authorizes a corporation to use a fair valuation or other method that is reasonable under the circumstances in determining the amount of total assets and total liabilities. The answer usually depends on whether the company has sufficient surplus within the meaning of Section 154 of the DGCL. Ch. Delaware State Code %Ev>1L$z8{H;o1'2z$_9^4[EK:ys>>F4.Gh t!OD1N/8Y. The board has declared a final gross cash dividend of 27.0 cents per ordinary share (21.6 cents net of dividend withholding tax) for the year ended 31 March 2023 (2022: 20.0 cents per ordinary share). Dividends and other distributions.--Except as otherwise provided by law, a domestic insurer may not declare or pay a dividend or other distribution from any source other than earned surplus without the Commissioner's prior approval. Public Meetings Review Faegre Drinker Biddle & Reath LLP's cookies information for more details. ], as heretofore or hereafter amended, may be made subject to redemption by the corporation at its option or at the option of the holders of such stock. (Fla. Stat. The court deferred to the boards determination that there was sufficient surplus to permit these transactions, even though the board looked beyond GAAP-metrics to evaluate its contingent liabilities. Gross Receipts Tax C. 1953, 170; 56 Del. Boards of directors often seek to return cash to stockholders in the form of dividends or stock buybacks. . ; 11/21), provides some guidance to boards engaging in this process. There are no eligibility requirements for State property. The answer usually depends on whether the company has sufficient "surplus" within the meaning of Section 154 of the DGCL. Posted at 03:30 PM in Corporate Law | Permalink. This should not be a surprising result. Dividends to Stockholders On October 3, 2012, the Company notified the Delaware Department of Insurance requesting approval of payment of dividends in the amount of $40,000,000 to its parent. Business First Steps, Phone Directory Laws, c. 61, 3; 72 Del. How Are Municipal Bonds Quoted and Priced? Derivative Litigation, 2021 WL 5050285 (Del. In particular, directors should be focused on these transactions because, under the laws of most states, directors can be personally liable for dividends or share repurchases that strip out too much equity. Ch. Main Despite the first use, which refers to capital as computed under sections 154 and 244 of the DGCL (that is, statutory capital, a legal, accounting concept that bears no relationship to value), this use of the term has been interpreted to mean. Section 170(a)(2) of the DGCL permits payment of dividends out of a corporations net profits for the fiscal. Chemours was spun-off by the DuPont Company in 2015. After sign up, well get in touch to help you find the resources that will benefit you the most. of The most restrictive test for the issuance of dividends by a corporation is the net assets test. The court held that it will defer to the Boards surplus calculation so long as [the directors] evaluate assets and liabilities in good faith, on the basis of acceptable data, by methods that they reasonably believe reflect present values, and arrive at a determination of the surplus that is not so far off the mark as to constitute actual or constructive fraud. This standard is consistent with the courts prior guidance that the DGCL does not require any particular method of calculating surplus, but simply prescribes factors, total assets and total liabilities, that any such calculation must include.. Since thats the case, valuations are often used to determine the amount of available surplus. If a board is unable to determine that, at the payment date, the corporation has sufficient "surplus" (as defined in the DGCL) available for the payment of the dividend, or if the board believes payment of the . There is a newer version of the Delaware Code . For purposes of this section . 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