Dividends and Reacquiring Shares

Corporations Code Title 1, Division 1, Chapter 5 deals with dividends and reacquisitions of shares in California.

Section 500 provides that nether a corporation nor any of its subsidiaries are allowed to make any distribution to the corporation’s shareholders unless the board of directors has determined in good faith either of the specified conditions. The term “preferential dividends arrears amount” is defined.

Section 501 provides that neither a corporation nor any of its subsidiaries are to make any distribution to the corporation’s shareholders if the corporation or the subsidiary making the distribution is, or as a result thereof would be, likely to be unable to meet its liabilities as they mature.

Section 503 explains that the provisions of Sections 500 and 501 do not apply to a purchase or redemption of shares of a deceased shareholder from the proceeds of insurance on the life of that shareholder in excess of the total amount of all premiums paid by the corporation for that insurance, in order to carry out the provisions of an agreement between the corporation and that shareholder to purchase or redeem those shares upon the death of the shareholder.

Section 504 specifies that the provisions of Section 500 do not apply to a dividend declared by either a RIC or a REIT. The provisions of this chapter do not apply to any purchase or redemption of shares redeemable at the option of the holder by a registered open-end investment company under the United States Investment Company Act of 1940, so long as the right of redemption remains unsuspended under the provisions of that statute and the articles and bylaws of the corporation.

Section 505 explains that nothing in this chapter prohibits additional restrictions upon the declaration of dividends or the purchase or redemption of a corporation’s own shares by provision in the articles or bylaws or in any indenture or other agreement entered into by the corporation.

Section 506 says that any shareholder who receives any distribution prohibited by this chapter with knowledge of facts indicating the impropriety thereof is liable to the corporation for the benefit of all of the creditors or shareholders entitled to institute an action for the amount received by the shareholder with interest thereon at the legal rate on judgments until paid.

Section 508 explains that this chapter does not apply in connection with any proceeding for winding up and dissolution.

Section 509 allows a corporation to redeem any shares which are redeemable at its option by giving notice of redemption or as otherwise provided in its articles of incorporation, and payment or deposit of the redemption price of the shares as provided in its articles or deposit of the redemption price.

Section 510 provides that, when a corporation reacquires its own shares, those shares are restored to the status of authorized but unissued shares, unless the articles prohibit the reissuance thereof. When a corporation reacquires authorized shares of a class or series and the articles prohibit the reissuance of those shares in three specified instances. The term “reacquires” is defined.

Section 511 provides that a negotiable instrument issued by a corporation for the purchase or redemption of shares is enforceable by a holder in due course without notice that it was issued for that purpose or by a person who acquired the instrument through such a holder.