In light of the COVID-19 pandemic, Maryland corporations and their boards of directors are reassessing previously authorized and declared distributions (aka dividends) to stockholders. Here’s what you need to know:

• If the board of directors has “authorized” the distribution, but not made any public announcement or “declared” the distribution, the distribution may be freely rescinded by board action.
• If shares of stock receiving the distribution are traded on an exchange and the ex-dividend date has passed, in addition to the state law hurdles, there are practical implications that will likely prevent rescission or revocation of the distribution.
• Most Maryland corporations confronting this issue will fall in the middle: the distribution has been authorized and declared to the stockholders (i.e., publicly announced), but the ex-dividend date has not passed and the distribution has not been paid. In that circumstance, board of directors of Maryland corporations and their advisors should consider the following:
• The general rule in most jurisdictions is that once a dividend (a kind of distribution under Maryland law) has been declared, a creditor-debtor relationship has been established between the stockholders and the corporation. While there are Maryland cases indicating that the declaration of a dividend generally creates such a debtor-creditor relationship, the Maryland General Corporation Law (MGCL) is silent on this subject and there is conflicting case law. Compare Heyn v. Fid. Tr. Co., 174 Md. 639, 646–47 (1938)(“ A dividend on preferred stock, as on common stock, does not become due and payable until it is declared, and no obligation is created until such action”) with Costa Brava Partnership III, L.P. v Telos Corp., No. 24-C-05-009296, 2008 WL 2400865, at *5 (Md. Cir. Ct. Apr. 15, 2008)(“The law is clear that a corporate board may revoke stock dividends, even if they have already been declared, up until the time they are issued.”)
• Subject to certain requirements of Maryland law and any limitations in the charter, the board of directors may consider whether to change the record date or delay the payment to a future date.
• If the distribution would render the corporation insolvent or unable to pay its debts in the ordinary course (i.e., fail the primary tests under Section 2-311 of the MGCL), even if those tests were satisfied as of the initial determination date, in the face of conflicting case law and a silent statute, a board of directors should consider rescinding or delaying the declared distribution. We believe that such a determination would be consistent with the applicable standard of conduct (MGCL § 2-405.1(c)) in the right circumstances and, notwithstanding the general rule in other jurisdictions with regard to declared dividends, defensible.
• Further, under these unusual circumstances and in the absence of clear law, there may be situations where the distribution would be permissible under Maryland law (Section 2-311 of the MGCL), but the applicable standard of conduct (MGCL § 2-405.1(c)) would compel the board of directors to rescind, delay or modify the previously declared dividend because such action would be in the best interest of the corporation. For example, if a lender has notified the corporation that it is revoking its consent to the distribution or where the distribution would now cause one or more events of default under a credit facility. In these circumstances, in light of the global pandemic and the chaos in the capital markets, we believe that Maryland law would recognize that extraordinary circumstances permit rescission or delayed payment of a declared dividend.
• While the passage of the record date is not outcome determinative, we believe that rescission, modification or delay of a distribution prior to the record date will be viewed in the most favorable light because prior to the record date no stockholder is legally entitled to the distribution.
• Notwithstanding our views, Maryland corporations rescinding or delaying dividends will find themselves in uncharted territory and stockholder lawsuits are possible.
• We are aware of conflicting advice regarding how the board of directors should conclude that funds are legally available for distribution under Maryland law in the current circumstances. Some have recommended that the board of directors implement further requirements including, for example, that the chief financial officer submit a certificate supporting the conclusion. We are generally opposed to layering additional, formal process on the actions that boards of directors will take in response to COVID-19. Not only do certificates and attestations strain limited resources, the additional stress on chief financial officers may prove suboptimal and we believe that it would be difficult for the corporation to later dispose of this additional process.
• Finally, we have also received questions pertaining to director liability for impermissible distributions. A director who authorizes a distribution in violation of Maryland law and in breach of the standard of conduct is personally liable to the corporation for the amount of the distribution that exceeds what was permissible. However, the charters of most public Maryland corporations will relieve directors from any personal liability (exculpate) for money damages except for liability resulting from the director’s receipt of an improper benefit or profit in money, property or services or a final judgment based upon a finding of active and deliberate dishonesty by the director that was material to the cause of action adjudicated. This is different than Delaware law, which does not permit exculpation of impermissible dividends.

There are numerous other practical considerations that a Maryland corporation or Maryland REIT will need to navigate in relation to previously authorized distributions. Please do not hesitate to contact us.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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