How To Eliminate Accrued Dividends

Allen Matkins
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Allen Matkins

The existence of accrued and unpaid dividends can hang like an ominous cloud over a corporation's future financings.  Are these accrued but unpaid dividends in the nature of a debt that cannot be erased by an amendment of the articles?  

The California General Corporation Law allows to corporations to dispel this nimbus by the simple expedient of amending the articles of incorporation.  Section 903(a)(7) authorizes an amendment that would "cancel or otherwise affect dividends on the shares of such class which have accrued but have not been paid".  The fly in the ointment (See Ecclesiastes 10:1) is that the amendment must be approved by the outstanding shares (Section 152) of a class, whether or not such class is entitled to vote thereon by the provisions of the articles.  

Thus, there is no "vested rights" to accrued but unpaid dividends.  Although the Delaware Supreme Court once held otherwise (Keller v. Wilson, 21 Del. Ch. 391, 190 A. 115 (1936)), the Delaware General Corporation law now permits an amendment of the certificate to "To cancel or otherwise affect the right of the holders of the shares of any class to receive dividends which have accrued but have not been declared".  8 Del. Code § 242(a)(4).  Note, however, that the California statute refers to accrued but unpaid dividends whilst the Delaware statute refers dividends that have accrued but not been declared.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

© Allen Matkins

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