Section 166 of the California Corporations Code defines “distribution to its shareholders”. Knowing what constitutes a distribution to shareholders is important because Chapter 5 of the General Corporation Law imposes various restrictions on such distributions. Shareholders and directors may be liable when these restrictions are violated. Cal. Corp. Code §§ 316 & 506. Under Section 166, a corporation will generally be considered to have made a distribution to its shareholders when it repurchases or redeems its shares.
Although the rescission of a share issuance may be considered to be the economic equivalent of a share repurchase or redemption, not all rescissions constitute a distribution under Section 166. The statute excludes a rescission by a corporation of the issuance of its shares if the board of directors determines all of the following:
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it is reasonably likely that the holder or holders of the shares in question could legally enforce a claim for the rescission,
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the rescission is in the best interests of the corporation, and
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the corporation is likely to be able to meet its liabilities (except those for which payment is otherwise adequately provided) as they mature.
In a further wrinkle, the statute indicates that a director who is, or would be a party to the transaction, is not entitled to vote.