AB 571

Bill Subjects

Abstract

Existing law provides for the formation and governance of corporations. Existing law allows a corporation to make a distribution of cash or property to shareholders, including a dividend or a repurchase or redemption of shares, only if either the corporation has retained earnings prior to the distribution equal to or exceeding the amount of the distribution or the corporation can satisfy specified balance sheet test and liquidity requirements after giving effect to the distribution, and the distribution will not render the corporation insolvent. This bill would allow a corporation to distribute cash or property to shareholders, including a dividend or repurchase or redemption of shares, if the amount of the corporation's retained earnings prior to the distribution equals or exceeds the sum of the distribution and the cumulative dividends in arrears on certain preferred stock and, after giving effect to the distribution, the value of the corporation's assets equals or exceeds the sum of its liabilities and the liquidation preference of any preferred stock, except as specified. The bill would provide that a board of directors may base a determination that the value of its assets exceeds the amount of liabilities on financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances, a fair valuation, or any other method that is reasonable under the circumstances. Existing law provides that a shareholder who knowingly receives an improper distribution is liable to the corporation's creditors and holders of preferred shares, as specified, and that those parties may bring suit in the name of the corporation to enforce those liabilities. This bill would provide that holders of shares having preferential rights with respect to cumulative dividends in arrears shall not have the right to bring suit with respect to an improper distribution unless the amounts owed those holders, as specified, is greater than zero. The bill would also provide that a cause of action with respect to an obligation to return an improper distribution shall be extinguished unless brought within 4 years of the distribution date. Existing law requires a corporation to provide notice, as specified, to shareholders, with respect to a dividend other than one chargeable to retained earnings, stating that the dividend is being made from a source other than retained earnings, and stating the accounting treatment of the dividend. This bill would eliminate that requirement. The bill would make technical, conforming amendments.