This lesson focuses on state corporation law restrictions on distributions to shareholders. It does not cover restrictions on distributions arising from other sources, such as contractual restrictions, the law of fraudulent conveyance, or federal bankruptcy law.
The lesson begins with a brief look at the required procedure to approve corporate distributions, then turns to the types of distributions covered by the legal restrictions, focusing primarily on the definition of "distribution" in the revised Model Business Corporation Act. The majority of the lesson deals with the various cash flow and balance sheet tests used to restrict distributions. The focus is on the revised MBCA and Delaware law, but earned surplus restrictions are also discussed. A separate section of the lesson discusses complications: revaluation of assets and liabilities, restating the corporate capital accounts, the effect of preferential rights, and timing issues that arise primarily when debt is distributed. The lesson also discusses the possible liability of directors for authorizing, and shareholders for accepting, unlawful distributions.
No prior knowledge of accounting is necessary for this lesson. The lesson includes a brief, minimalist introduction to the necessary accounting concepts; that material may be bypassed by students with sufficient knowledge of accounting concepts.