When are Shareholders Entitled to Corporate Distributions?
A corporate distribution to its shareholders (or “dividend") is the transfer of cash or property from a corporation to its shareholders, without consideration, by virtue of the fact that the shareholders own shares in the corporation. Corp. Code § 166.
Distributions are Discretionary
The most important rule underlying corporate distributions to its shareholders is that the distributions are discretionary. Zellerbach v. Allenberg, 99 Cal. 57 (1893). This means that the directors of a corporation have exclusive authority to declare distributions.Gibbons v. Mahon, 136 U.S. 549, 558 (1890). Corporate directors have the ultimate say on when and how such distributions are made.
Potential Corporate Liability for Improper Distributions
Corporations, however, cannot simply make whatever distribution they see fit. Instead, a corporation may not even be able to legally make a distribution unless their retained earnings or remaining assets meet certain standards. Corp. Code§ 500. Additionally, if a corporation’s dividend would make it insolvent, the distribution cannot be legally made.Corp. Code§ 501. Corporate directors that make such improper distributions can be held personally liable for their actions.
Pre-Declaration = No Vested Right!
If a corporation is financially sound enough to make a distribution, the directors still do not have to declare a dividend. There may be other reasons to keep certain cash holdings within the corporation. In fact, a shareholder has no vested right to a dividend until it is declared by the corporation’s board of directors. Miller v. McColgan, 17 Cal.2d 432, 436 (1941). In absence of a declaration of dividends by a corporation’s board of directors, shareholders have no direct proprietary interest in corporate earnings, there being no dividend in earnings until one is declared. Gibbons v. Mahon, 136 U.S. 549, 558, 568 (1890). Put simply, there are no requirements for when a corporation must issue a shareholder distribution.
After Dividend is Declared = Vested Right!
Once a corporation passes a resolution declaring a dividend, though, a corporate shareholder has a right to receive their proportionate share of the corporate distribution. At this point, the right to receive a dividend has “vested" with the shareholder , and a failure to distribute the declared dividend can form the basis for a lawsuit.
Whether you are a shareholder of a closely-held corporation or own stock in a Fortune 500 company, it is important to know your basic rights to corporate dividends. Please keep these basic rules in mind if a dispute arises as to a party’s right to corporate dividends.