III. DIVIDENDS AND OTHER DISTRIBUTIONS
A. TYPES OF DIVIDENDS & OTHER DISTRIBUTIONS
The Revised Act definition of a “distribution”: “a direct or indirect transfer of
money or other property (except its own shares) or incurrence of
indebtedness, by a corporation to or for the benefit of any of its shareholders
in respect of any of its shares, whether by dividend or by purchase,
redemption or other acquisition of its shares, or otherwise.”
Cash Dividends
Most common type; paid at regular intervals from legally available funds.
Property Dividends
A distribution other than cash or stock.
Stock Dividends
Not a distribution, but a “payment” of a ratable amount of additional shares
to the current shareholders. This does not change the total assets of the
corporation or the shareholder’s relative interest.
Stock Splits
Liquidating Dividends
A distribution of capital assets.
Redemption of Shares
An option reserved by a corporation in its charter to buy back its own shares.
Acquisition of Shares
A corporation may purchase its own shares; referred to as treasury shares.
B. LEGAL RESTRICTIONS ON DIVIDENDS & OTHER
DISTRIBUTIONS
Dividends may be paid only if the cash ,ow and balance sheet tests are
satisfied. Insolvency in the equity sense means that a corporation is unable
to meet its debts as they come due. All states impose a cash ,ow test — the
Definitions
Earned surplus: Undistributed net profits, income, gains and losses from the
date of incorporation.
Surplus: Excess of net assets over stated capital.
Net Assets: Total assets less total debts.
*** Chapter Outcome***
Explain the legal restrictions imposed upon dividends and other distributions.
Legal Restrictions on Cash Dividends
Earned Surplus Test — Earned surplus that is not reserved or restricted
may be paid as dividends.
Surplus Test — Dividends may be paid out of earned or capital surplus only.
Legal Restrictions on Liquidating Distributions
Distributions in partial liquidation from capital surplus usually allowed unless
corporation is insolvent.
Legal Restrictions on Redemption and Acquisition of Shares
In most states, redemptions are not permitted if the corporation is insolvent
or would be rendered insolvent by the distribution. Reacquisitions are
usually subject to the same restrictions as cash dividends.
CASE 34-2
COX ENTERPRISES, INC. v. PENSION BENEFIT GUARANTY
CORPORATION
United States Court of Appeals, Eleventh Circuit, 2012
666 F.3D 697
http://scholar.google.com/scholar_case?
q=666+f.3d+697&hl=en&as_sdt=2,34&case=11816251525387610788&scilh=0
Cox, J.
Marc L. Davidson, Julia Davidson Truilo, Robert Truilo (the “Davidson Directors”), and the
Pension Benefit Guaranty Corporation (“PBGC”) appeal following the district court’s order
to distribute all of News-Journal Corporation’s (“News-Journal”) assets to Cox Enterprises,
Inc. (“Cox”), a long-time shareholder of the closely-held News-Journal. * * *
Cox, a minority shareholder of News-Journal, filed suit in May of 2004 seeking
relief for misuse of corporate funds and waste of corporate assets. This suit triggered
Florida’s election-to-purchase statute, Fla. Stat. § 607.1436. News-Journal elected to pursue
the option created by the statute to repurchase Cox’s shares. Because the parties could not
agree on the fair market value of Cox’s shares, the statute required that the district court
determine their value. The court set the value of Cox’s shares at $129.2 million and directed
the terms of payment in a September 27, 2006 order * * *.
* * *
The [Florida] election-to-purchase statute allows a corporation or other shareholders
to avoid dissolution by purchasing the shares of the petitioning shareholder who initiated a
dissolution proceeding. After a corporation has elected to repurchase all of the shares owned
by the petitioning shareholder, the parties may agree upon the value of the shares. [Citation.]
If the parties cannot agree on the value, then the court must determine the “fair value” and
enter an order detailing the terms for the repurchase fixed by the court. * * *
* * *
This distributions-to-shareholders statute creates a scheme focused on the
corporation’s solvency to evaluate the propriety of distributions to shareholders. It provides
in part:
No distribution may be made if, after giving it effect: (a) The corporation would not be able
to pay its debts as they become due in the usual course of business; or (b) The corporation’s
total assets would be less than the sum of its total liabilities plus (unless the articles of
incorporation permit otherwise) the amount that would be needed, if the corporation were to
be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution
of shareholders whose preferential rights are superior to those receiving the distribution.
[Citation.] Section 607.06401, by placing restrictions on the distribution of corporate assets,
maintains the fundamental tenet of corporate law that creditors’ claims on corporate assets
are superior to claims of shareholders. To achieve this, a distribution of corporate assets to a
shareholder must not result in the violation of one of these insolvency tests contained in Fla.
Stat. § 607.06401(3). The statute also explains when to measure the effect of a distribution;
in other words, at what point in time must a distribution pass one of these insolvency tests. It
requires:
Except as provided in subsection (8), the effect of a distribution under subsection (3) is
measured:
Fla. Stat. § 607.06401(6) (emphasis added). The exception contained in § 607.06401(8)
contains a different timing provision. It provides, “If the indebtedness is issued as a
distribution, each payment of principal or interest is treated as a distribution, the effect of
* * *
We hold that any payment to Cox based on the district court’s September 2006
repurchase order must comply with the condition of § 607.1436(8) that the payment satisfy
Florida’s distributions-to-shareholders statute. This requires that we consider the application
of that statute to this case.
As mentioned previously, Florida’s distributions-to-shareholders statute forbids
distributions by the corporation to shareholders if those distributions would render the
corporation insolvent. The parties here dispute when the court should evaluate
News-Journal’s insolvency. Cox asserts that News-Journal’s solvency should be measured as
Section 607.06401(8) provides, “If the indebtedness is issued as a distribution, each
payment of principal or interest is treated as a distribution, the effect of which is measured
on the date the payment is actually made.” Fla. Stat. § 607.06401(8). PBGC contends that
the court’s September 2006 repurchase order created an indebtedness by News-Journal to
Cox so News-Journal’s solvency should be measured on the date of payment. We agree. * *
* * *
We conclude that the district court misinterpreted Fla. Stat. § 607.1436 and in so
doing erred in its order for the distribution of News-Journal’s assets. The district court’s
order dated August 13, 2010 is VACATED in its entirety. * * *
C. DECLARATION AND PAYMENT OF DISTRIBUTIONS
The board of directors has a nondelegable power to declare dividends.
Shareholders’ Right to Compel a Dividend
If directors fail to declare a dividend, a shareholder may bring a suit against
them and the corporation to seek a mandatory injunction requiring directors
to declare a dividend if: 1) a demand for a distribution is made prior to filing
suit, 2) there is available earnings or surplus in the form of cash, 3) the
directors refusal to declare a dividend was an unreasonable abuse of
discretion the violation of the “business judgment rule”.
Courts, however, are reluctant to order such an injunction because to do so
means substituting the courts’ business judgment for that of the directors
elected by the shareholders. However, the following case, decided in 1919, is
one instance in which the courts supported shareholders by compelling a
dividend.
CASE 34-3
DODGE v. FORD MOTOR CO.
Supreme Court of Michigan, 1919
204 Mich. 459, 170 N.W. 668
Ostrander, J.
[Action in equity by John F. and Horace E. Dodge, plaintiffs, against the Ford Motor
Company and its directors to compel the declaration of dividends and for an injunction
restraining a contemplated expansion of the business. The complaint was filed in November
1916. Since 1909, the capital stock of the company has been $2,000,000, divided into
20,000 shares of a par value of $100 each, of which plaintiffs held 2,000. As of the close of
business on July 31, 1916, the end of the company’s fiscal year, the surplus above capital
was $111,960,907.53 and the assets included cash on hand of $52,550,771.92.
Plaintiffs’ complaint alleged that Henry Ford, president of the company and a member of
its board of directors, had declared it to be the settled policy of the company not to pay any
special dividends in the future but to put back into the business all future earnings in excess
of the regular quarterly dividend. Plaintiffs sought an injunction restraining the carrying out
of the alleged declared policy of Henry Ford and a decree requiring the directors to pay a
dividend of at least seventy-five percent of the accumulated cash surplus.
* * *
The case for plaintiffs must rest upon the claim, and the proof in support of it, that the
proposed expansion of the business of the corporation involving the further use of profits as
capital, ought to be enjoined because inimical to the best interests of the company and its
shareholders, and upon the further claim that in any event the withholding of the special
dividend asked for by plaintiffs is arbitrary action of the directors requiring judicial
interference.
The rule which will govern courts in deciding these questions is not in dispute * * *. In
[citation], it is stated:
Profits earned by a corporation may be divided among its shareholders; but it is not a
violation of the charter if they are allowed to accumulate and remain invested in the
company’s business. The managing agents of a corporation are impliedly invested with a
discretionary power with regard to the time and manner of distributing its profits. They
may apply profits in payment of floating or funded debts, or in development of the
company’s business; and so long as they do not abuse their discretionary powers, or
When plaintiffs made their complaint and demand for further dividends the Ford Motor
Company had concluded its most prosperous year of business. The demand for its cars at the
price of the preceding year continued. It could make and could market in the year beginning
August 1, 1916, more than 500,000 cars. Sales of parts and repairs would necessarily
increase. The cost of materials was likely to advance, and perhaps the price of labor, but it
reasonably might have expected a profit for the year of upwards of $60,000,000. It had
assets of more than $132,000,000, a surplus of almost $112,000,000, and its cash on hand
and municipal bonds were nearly $54,000,000. Its total liabilities, including capital stock,
was a little over $20,000,000. It had declared no special dividend during the business year
except the October, 1915, dividend. It had been the practice, under similar circumstances, to
accumulate a large surplus to pay for the proposed expansion of plant and equipment, and
perhaps to build a plant for smelting ore. It is hoped, by Mr. Ford, that eventually 1,000,000
cars will be annually produced. The contemplated changes will permit the increased output.
The plan, as affecting the profits of the business for the year beginning August 1, 1916, and
It is the contention of plaintiffs that the apparent effect of the plan is intended to be the
continued and continuing effect of it and that it is deliberately proposed, not of record and
not by official corporate declaration, but nevertheless proposed, to continue the corporation
henceforth as a semi-eleemosynary institution and not as a business institution. In support of
this contention they point to the attitude and to the expressions of Mr. Henry Ford.
Mr. Henry Ford is the dominant force in the business of the Ford Motor Company. No
plan of operations could be adopted unless he consented, and no board ofdirectors can be
elected whom he does not favor. One of the directors of the company has no stock. One
share was assigned to him to qualify him for the position, but it is not claimed that he owns
* * *
The record, and especially the testimony of Mr. Ford, convinces that he has to some
extent the attitude towards shareholders of one who has dispensed and distributed to them
large gains and that they should be content to take what he chooses to give. His testimony
creates the impression, also, that he thinks the Ford Motor Company has made too much
money, has had too large profits, and that although large profits might still be earned, a
sharing of them with the public, by reducing the price of the output of the company, ought to
be undertaken. We have no doubt that certain sentiments, philanthropic and altruistic,
creditable to Mr. Ford, had large influence in determining the policy to be pursued by the
Ford Motor Company—the policy which has been herein referred to. * * *
These cases, after all, like all others in which the subject is treated, turn finally upon the
point, the question, whether it appears that the directors were not acting for the best interest
of the corporation * * *. The difference between an incidental humanitarian expenditure of
corporation is organized and carried on primarily for the profit of the stockholders. The
powers of the directors are to be employed for that end. The discretion of directors is to be
exercised in the choice of means to attain that end and does not extend to a change in the end
itself, to the reduction of profits or to the nondistribution of profits among stockholders in
order to devote them to other purposes. * * *
We are not, however, persuaded that we should interfere with the proposed expansion of
the business of the Ford Motor Company. In view of the fact that the selling price of
products may be increased at any time, the ultimate results of the larger business cannot be
certainly estimated. The judges are not business experts. It is recognized that plans must
often be made for a long future, for expected competition, for a continuing as well as an
immediately profitable venture. The experience of the Ford Motor Company is evidence of
capable management of its affairs. * * *
Effect of Declaration
Once lawfully declared, a cash dividend is considered a debt of the
corporation which cannot be rescinded without the shareholders’ consent.
D. LIABILITY FOR IMPROPER DIVIDENDS & DISTRIBUTIONS
A director is personally liable to the corporation and its creditors if she votes
in favor of a dividend in direct violation of the corporate statute or the
articles of incorporation. A director will not be liable for an illegal dividend