Chapter 5 of the Corporations Code establishes various limitations on distributions by California corporations. The term “distributions to its shareholders” is itself defined in Section 166. The question of appropriate limitations on dividends and other corporate distributions is not new. Even Samuel Clemens (aka Mark Twain) wrote about “cooked dividends” and got into a great deal of trouble for his efforts (A topic that I covered last year in “‘Cooked Dividends’ Leads to Bloody Massacre“).

When the legislature enacted Chapter 5, it abolished the antiquated concepts of “legal capital” and “surplus”. In general, the legislature’s approach was to use accounting concepts (albeit with some adjustments). Last week, the legislature took a big step in loosening some of the constraints on distributions imposed by Chapter 5 by enacting AB 571 (Hagman). This bill was sponsored by the Corporations Committee of the Business Law Section of the California State Bar.