Making Distributions - No Need To Mind The GAAP

Allen Matkins

Allen Matkins

UCLA Law School Professor Stephen Bainbridge recently commented Vice Chancellor Glasscock's recent memorandum opinion in In re The Chemours Co. Deriv. Litig., (Del. Ch. Case No. 2020-0786-SG, Nov. 1, 2021).  Professor Bainbridge notes that the Chemours case provides some guidance on how to boards of directors should make valuation decisions in determining whether a dividend may be paid under Delaware law.  He notes that state corporate laws generally does not require adherence to Generally Accepted Accounting Principles (GAAP) when determining whether a dividend can be paid.  I can't speak to other states' laws, but Professor Bainbridge is correct with respect to California.

In 2011, California rewrote Section 500 of the California Corporations Code to substantially change the conditions that must be met for a corporation to make a distribution to shareholders.  As explained by one treatise:

The most important change the 2011 amendments made to Section 500 of the 1977 Law was abandoning the determination of retained earnings under generally accepted accounting principles.  New Section 500(c) provides that the board of directors of a corporation may make a determination that a distribution is not prohibited under subdivisions (a) of Section 500 based 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".  This new standard is also applicable to the insolvency restriction upon dividends contained in Section 501 of the 1977 Law which was not otherwise affected.

2 Harold Marsh, Jr., R. Roy Finkle & Keith Paul Bishop, Marsh's California Corporation Law § 14.07 (4th Edition 2000).

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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.

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