Chapter 2-3 Officer and Director Liability—Wrongful Distribution of Dividends

• Jurisdiction: United States

2-3 Officer and Director Liability—Wrongful Distribution of Dividends

2-3:1 Overview

The corporate board of directors has the sole authority to make distributions to shareholders. The Business Organizations Code limits the board's authority by holding the directors personally liable for wrongful distributions.⁴⁹ A distribution in excess of the limits imposed by the Business Organizations Code is recoverable by the corporation.

2-3:1.1 Related Causes of Action

Shareholder Derivative Suits, Breach of Duty of Loyalty, Breach of Duty of Care, Fraudulent Transfer

MUST READ CASES

Henry I. Siegel Co., Inc. v. Holliday, 663 S.W.2d 824 (Tex. 1984)

Smith v. Chapman, 897 S.W.2d 399 (Tex. App.—Eastland 1995, no writ)

Renger Mem'l Hosp. v. State, 674 S.W.2d 828 (Tex. App.—Austin 1984, no writ)

2-3:2 Elements

(1) The boards of directors authorize

• A corporation's board of directors may authorize a distribution.⁵⁰
• Each director who votes for or assents to the distribution may be held liable.⁵¹
• A director who is present at the relevant meeting is deemed to have assented to the distribution, unless:

• The director's dissent has been entered in the minutes of the meeting;
• The director has filed a written dissent to the action with the person acting as the secretary of the meeting before the meeting is adjourned; or
• The director has sent a written dissent by registered mail to the secretary of the corporation immediately after the meeting has been adjourned.⁵²

(2) A distribution

• "Distribution" means a transfer of property, including cash, or issuance of debt, by a corporation to its shareholders in the form of:

• A dividend on any class or series of its outstanding shares;
• A purchase or redemption, directly or indirectly, of any of its own shares; or
• A payment by the corporation in liquidation of all or a portion of its assets.⁵³
• "Distribution" does not include:
• A split-up or division of the issued shares of a class of a corporation into a larger number of shares within the same class that does not increase the stated capital of the corporation; or
• A transfer of the corporation's own shares or rights to acquire its own shares.⁵⁴

(3) That is wrongful

• A distribution is wrongful if it:

• Exceeds the distribution limit;
• Would render the corporation insolvent; or
• Is not authorized by the corporation's certificate of formation.⁵⁵

• The distribution limit is one of the following:
• Net assets of a corporation engaging in:

• A redemption of its own shares;
• A purchase of its own shares; or
• Any action by a "consuming assets corporation;"⁵⁶ or

• Surplus of a corporation:

• For any corporation which does not qualify for the net assets distribution limit.⁵⁷

"Net assets" means the amount by which the total assets of a corporation exceed the total debts of the corporation.⁵⁸

"Surplus" means the amount by which the net assets of a corporation exceed the stated capital of the corporation.⁵⁹

"Net assets," "surplus," and a corporation's solvency are to be determined based upon:

(1) financial statements of the corporation, including financial statements that:

• Include subsidiary corporations or other corporations accounted for on a consolidated basis or on the equity method of accounting; or
• Present the financial condition of the corporation in accordance with generally accepted accounting principles;

(2) financial statements prepared using the method of accounting used to file the corporation's federal income tax

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