Corporate Dividends Study Notes

Strict Definition: A distribution of a corporation’s profits to its shareholders.
Loose Definition: Any kind of payment made to shareholders.

Cash Dividend: A cash distribution made by the corporation to its shareholders.
Dividend Reinvestment Plan (DRIP): A plan that allows shareholders to immediately use cash dividends to purchase more stock.
Property Dividend: The distribution of some form of property by a corporation to its shareholders.
Share Dividend: A distribution made by a corporation of its own shares to shareholders.
Liquidation Dividend: Distributions made to shareholders when the corporation is liquidated; also referred to as dissolution dividends.

Solvency and Excess Tests: Criteria determining the ability of a corporation to pay dividends under certain conditions.
Legally Available Funds: Requirements regarding the sources from which dividends can be paid.
Tests for Distribution:
- Balance Sheet Test: Determines if dividends can be paid by confirming that equity exceeds liabilities, also known as the excess assets test.
- Equity Insolvency Test: Establishes that dividends can only be paid if the corporation can fulfill its debts as they become due.
- Nimble Dividends Test: Requires the corporation to have current profits to qualify for dividend distribution.
Contractual Limitations: Restrictions set by contracts or agreements that may affect the ability to declare dividends.
Preferences: Certain classes of shares may have preferential rights affecting dividend payments.

Earnings Tests: Some jurisdictions implement earnings tests, sometimes combining two or three tests for the payment of dividends.
Corporate Accounts: Certain state statutes mandate that dividends may only be paid from specified corporate accounts:
- Retained Earnings Account: Accounts for the net profits accumulated by the corporation.
- Surplus Account: Represents the value of the corporation's net assets exceeding its stated capital.

Definition: Dividends that are distributed when the corporation is insolvent or from unauthorized accounts, which may result in legal consequences.

Decision Making: The decision to declare a dividend must be made by the board of directors, through:
- Majority vote at a meeting.
- Unanimous written consent (action taken without a meeting).
Documentation: The decision must be recorded in the minutes or as a written resolution.

Definition: A stock split refers to the division of outstanding shares, also known as a share split.

Corporations may acquire all or some of their own outstanding shares if:
- State corporation statutes and articles of incorporation permit such an action.
- The corporation is solvent or not rendered insolvent by the transaction.
Reasons for reacquisition may include:
- Reducing the supply of stock to increase price.
- Preventing shareholders from selling shares to outside parties.
- Improving equity-debt ratio.
- Increasing earnings per share by reducing the number of outstanding shares.

A dividend is fundamentally a distribution of a corporation’s profits to its shareholders.
Forms of Dividends: Dividends can come in cash, property, or shares of the corporation.
Share Dividend: This does not increase a shareholder’s power or control since shareholders in a class will be treated uniformly.
Solvency Requirement: To distribute a dividend, a corporation must be solvent, meaning its assets must exceed its liabilities or it must be able to pay debts as they come due.

Dividends must be uniform within a class; however, they can vary between different classes of shares.
Board Oversight: The decision to declare a dividend is within the discretion of the board of directors, which also sets a record date for determining shareholders entitled to a dividend.

Generally, shareholders do not have an absolute right to receive dividends; these are declared at the discretion of the board.
Taxation:
- Shareholders receiving cash or property must pay taxes on the amount or the fair market value of the property received.
- For share dividends, taxes are not paid upon receipt but rather at the time of sale of the shares.