Sections 500-511:
Dividends and Reacquisitions of Shares

California Corporations Code > Sections 500-511
CALIFORNIA GENERAL CORPORATION LAW - CHAPTER 5


Section 500.  Neither a corporation nor any of its subsidiaries shall make any distribution to the corporation's shareholders (Section 166) except as follows:

(a)  The distribution may be made if the amount of the retained earnings of the corporation immediately prior thereto equals or exceeds the amount of the proposed distribution.

(b)  The distribution may be made if immediately after giving effect thereto:

(1)  The sum of the assets of the corporation (exclusive of goodwill, capitalized research and development expenses and deferred charges) would be at least equal to 1-1/4 times its liabilities (not including deferred taxes, deferred income and other deferred credits); and

(2)  The current assets of the corporation would be at least equal to its current liabilities or, if the average of the earnings of the corporation before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the interest expense of the corporation for those fiscal years, at least equal to 1-1/4 times its current liabilities; provided, however, that in determining the amount of the assets of the corporation profits derived from an exchange of assets shall not be included unless the assets received are currently realizable in cash; and provided, further, that for the purpose of this subdivision "current assets" may include net amounts which the board has determined in good faith may reasonably be expected to be received from customers during the 12-month period used in calculating current liabilities pursuant to existing contractual relationships obligating those customers to make fixed or periodic payments during the term of the contract or, in the case of public utilities, pursuant to service connections with customers, after in each case giving effect to future costs not then included in current liabilities but reasonably expected to be incurred by the corporation in performing those contracts or providing service to utility customers. Paragraph (2) of subdivision (b) is not applicable to a corporation which does not classify its assets into current and fixed under generally accepted accounting principles.

(c)  The amount of any distribution payable in property shall, for the purposes of this chapter, be determined on the basis of the value at which the property is carried on the corporation's financial statements in accordance with generally accepted accounting principles.

(d)  For the purpose of applying this section to a distribution by a corporation of cash or property in payment by the corporation in connection with the purchase of its shares, there shall be added to retained earnings all amounts that had been previously deducted therefrom with respect to obligations incurred in connection with the corporation's repurchase of its shares and reflected on the corporation's balance sheet, but not in excess of the principal of the obligations that remain unpaid immediately prior to the distribution. In addition, there shall be deducted from liabilities all amounts that had been previously added thereto with respect to the obligations incurred in connection with the corporation's repurchase of its shares and reflected on the corporation's balance sheet, but not in excess of the principal of the obligations that will remain unpaid after the distribution, provided that no addition to retained earnings or deduction from liabilities under this subdivision shall occur on account of any obligation that is a distribution to the corporation's shareholders (Section 166) at the time the obligation is incurred.

(e)  This section does not apply to a corporation licensed as a broker-dealer under Chapter 2 (commencing with Section 25210) of Part 3 of Division 1 of Title 4, if immediately after giving effect to any distribution the corporation is in compliance with the net capital rules of the Commissioner of Corporations and the Securities and Exchange Commission.
Section 501.  Neither a corporation nor any of its subsidiaries shall make any distribution to the corporation's shareholders (Section 166) if the corporation or the subsidiary making the distribution is, or as a result thereof would be, likely to be unable to meet its liabilities (except those whose payment is otherwise adequately provided for) as they mature.

Section 502.  Neither a corporation nor any of its subsidiaries shall make any distribution to the corporation's shareholders (Section 166) on any shares of its stock of any class or series that are junior to outstanding shares of any other class or series with respect to distribution of assets on liquidation if, after giving effect thereto, the excess of its assets (exclusive of goodwill, capitalized research and development expenses and deferred charges) over its liabilities (not including deferred taxes, deferred income and other deferred credits) would be less than the liquidation preference of all shares having a preference on liquidation over the class or series to which the distribution is made; provided, however, that for the purpose of applying this section to a distribution by a corporation of cash or property in payment by the corporation in connection with the purchase of its shares, there shall be deducted from liabilities all amounts that had been previously added thereto with respect to obligations incurred in connection with the corporation's repurchase of its shares and reflected on the corporation's balance sheet, but not in excess of the principal of the obligations that will remain unpaid after the distribution; provided, further, that no deduction from liabilities shall occur on account of any obligation that is a distribution to the corporation's shareholders (Section 166) at the time the obligation is incurred.

Section 503.  Neither a corporation nor any of its subsidiaries shall make any distribution to the corporation's shareholders (Section 166) on any shares of its stock of any class or series that are junior to outstanding shares of any other class or series with respect to payment of dividends, and as to which senior class or series the corporation has cumulative dividends in arrears, unless the amount of the retained earnings of the corporation immediately prior thereto equals or exceeds the amount of the proposed distribution plus the aggregate amount of the cumulative dividends in arrears on all shares having a preference with respect to payment of dividends over the class or series to which the distribution is made; provided, however, that for the purpose of applying this section to a distribution by a corporation of cash or property in payment by the corporation in connection with the purchase of its shares, there shall be added to retained earnings all amounts that had been previously deducted therefrom with respect to obligations incurred in connection with the corporation's repurchase of its shares and reflected on the corporation's balance sheet, but not in excess of the principal of the obligations that remain unpaid immediately prior to the distribution; provided, further, that no addition to retained earnings shall occur on account of any obligation that is a distribution to the corporation's shareholders (Section 166) at the time the obligation is incurred.

Section 503.1.  The provisions of Sections 500, 501, 502 and 503 shall not apply to a purchase or redemption of shares of a deceased shareholder from the proceeds of insurance on the life of such shareholder in excess of the total amount of all premiums paid by the corporation for such insurance, in order to carry out the provisions of an agreement between the corporation and such shareholder to purchase or redeem such shares upon the death of the shareholder.

Section 503.2.  The provisions of Sections 500, 501, 502, and 503 shall not apply to the purchase or redemption of shares of a disabled shareholder from the proceeds of disability insurance applicable to the disabled shareholder in excess of the total amount of all premiums paid by the corporation for the insurance, in order to carry out the provisions of an agreement between the corporation and the shareholder to purchase or redeem shares upon the disability of the shareholder as defined within that policy. For the purposes of this section, "disability insurance" means an agreement of indemnification against the insured's loss of the ability to work due to accident or illness.

Section 504:

(a)  The provisions of Section 500 do not apply to a dividend declared by either of the following:

(1)  A regulated investment company, as defined in the federal Internal Revenue Code, as amended, to the extent that the dividend is necessary to maintain the status of the corporation as a regulated investment company under the provisions of that code.

(2)  A real estate investment trust, as defined in Part II of Subchapter M of Chapter 1 of Subtitle A of the federal Internal Revenue Code, as amended, to the extent that the dividend is necessary to maintain the status of the corporation as a real estate investment trust under the provisions of that code.
(b)  The provisions of this chapter do not apply to any purchase or redemption of shares redeemable at the option of the holder by a registered open-end investment company under the United States Investment Company Act of 1940, so long as the right of redemption remains unsuspended under the provisions of that statute and the articles and bylaws of the corporation.

Section 505.  Nothing in this chapter prohibits additional restrictions upon the declaration of dividends or the purchase or redemption of a corporation's own shares by provision in the articles or bylaws or in any indenture or other agreement entered into by the corporation.

Section 506:

(a)  Any shareholder who receives any distribution prohibited by this chapter with knowledge of facts indicating the impropriety thereof is liable to the corporation for the benefit of all of the creditors or shareholders entitled to institute an action under subdivision (b) for the amount so received by the shareholder with interest thereon at the legal rate on judgments until paid, but not exceeding the liabilities of the corporation owed to nonconsenting creditors at the time of the violation and the injury suffered by nonconsenting shareholders, as the case may be. For purposes of this chapter, in the event that any shareholder receives any distribution of the corporation's property that is prohibited by this chapter, the shareholder receiving that illegal distribution shall be liable to the corporation for an amount equal to the fair market value of the property at the time of the illegal distribution plus interest thereon from the date of the distribution at the legal rate on judgments until paid, together with all reasonably incurred costs of appraisal or other valuation, if any, of that property, but not exceeding the liabilities of the corporation owed to nonconsenting creditors at the time of the violation and the injury suffered by nonconsenting shareholders, as the case may be.

(b)  Suit may be brought in the name of the corporation to enforce the liability (1)  to creditors arising under subdivision (a) for a violation of Section 500 or 501 against any or all shareholders liable by any one or more creditors of the corporation whose debts or claims arose prior to the time of the distribution to shareholders and who have not consented thereto, whether or not they have reduced their claims to judgment, or (2)  to shareholders arising under subdivision (a) for a violation of Section 502 or 503 against any or all shareholders liable by any one or more holders of preferred shares outstanding at the time of the distribution who have not consented thereto, without regard to the provisions of Section 800.

(c)  Any shareholder sued under this section may implead all other shareholders liable under this section and may compel contribution, either in that action or in an independent action against shareholders not joined in that action.

(d)  Nothing contained in this section affects any liability which any shareholder may have under Chapter 1 (commencing with Section 3439) of Title 2 of Part 2 of Division 4 of the Civil Code. 507. Each dividend other than one chargeable to retained earnings shall be identified in a notice to shareholders as being made from a source other than retained earnings, stating the accounting treatment thereof. The notice shall accompany the dividend or shall be given within three months after the end of the fiscal year in which the dividend is paid.

Section 508.  This chapter does not apply in connection with any proceeding for winding up and dissolution under Chapter 18 or 19.

Section 509:

(a)  A corporation may redeem any or all shares which are redeemable at its option by

(1)  giving notice of redemption, and

(2)  payment or deposit of the redemption price of the shares as provided in its articles or deposit of the redemption price pursuant to subdivision (d).
(b)  Subject to any provisions in the articles with respect to the notice required for redemption of shares, the corporation may give notice of the redemption of any or all shares subject to redemption by causing a notice of redemption to be published in a newspaper of general circulation in the county in which the principal executive office of the corporation is located at least once a week for two successive weeks, in each instance on any day of the week, commencing not earlier than 60 nor later than 20 days before the date fixed for redemption. The notice of redemption shall set forth all of the following:

(1)  The class or series of shares or part of any class or series of shares to be redeemed.

(2)  The date fixed for redemption.

(3)  The redemption price.

(4)  If the shares are certificated securities, the place at which the shareholders may obtain payment of the redemption price upon surrender of their share certificates.
(c)  If the corporation gives notice of redemption pursuant to subdivision (b), it shall also mail a copy of the notice of redemption to each holder of record of shares to be redeemed as of the date of mailing or record date fixed in accordance with Section 701, addressed to the holder at the address of such holder appearing on the books of the corporation or given by the holder to the corporation for the purpose of notice, or if no such address appears or is given at the place where the principal executive office of the corporation is located, not earlier than 60 nor later than 20 days before the date fixed for redemption. Failure to comply with this subdivision does not invalidate the redemption of the shares.

(d)  If, on or prior to any date fixed for redemption of redeemable shares, the corporation deposits with any bank or trust company in this state as a trust fund, (1)  a sum sufficient to redeem, on the date fixed for redemption thereof, the shares called for redemption, (2)  in the case of the redemption of any uncertificated securities, an officer's certificate setting forth the holders thereof registered on the books of the corporation and the number of shares held by each, and (3)  irrevocable instructions and authority to the bank or trust company to publish the notice of redemption thereof (or to complete publication if theretofore commenced) and to pay, on and after the date fixed for redemption or prior thereto, the redemption price of the shares to their respective holders upon the surrender of their share certificates, in the case of certificated securities, or the delivery of the officer's certificate in the case of uncertificated securities, then from and after the date of the deposit (although prior to the date fixed for redemption) the shares called shall be redeemed and the dividends on those shares shall cease to accrue after the date fixed for redemption. The deposit shall constitute full payment of the shares to their holders and from and after the date of the deposit the shares shall no longer be outstanding and the holders thereof shall cease to be shareholders with respect to the shares and shall have no rights with respect thereto except the right to receive from the bank or trust company payment of the redemption price of the shares without interest, upon surrender of their certificates therefor, in the case of certificated securities, and any right to convert the shares which may exist and then continue for any period fixed by its terms. In determining the holders of uncertificated securities, the bank or trust company shall be entitled to rely on any officer's certificate deposited with it in accordance with this subdivision.

Section 510:

(a)  When a corporation reacquires its own shares, those shares are restored to the status of authorized but unissued shares, unless the articles prohibit the reissuance thereof.

(b)  When a corporation reacquires authorized shares of a class or series and the articles prohibit the reissuance of those shares:

(1)  If all of the authorized shares of that class or series, as the case may be, are reacquired, then (A)  that class or series is automatically eliminated, (B)  in the case of reacquisition of all of the authorized shares of a series, the authorized number of shares of the class to which the shares belonged is reduced by the number of shares so reacquired, and (C)  the articles shall be amended to eliminate any statement of rights, preferences, privileges, and restrictions relating solely to that class or series.

(2)  If less than all of the authorized shares but all of the issued and outstanding shares of that class or series, as the case may be, are reacquired, the authorized number of shares of the class or series is automatically reduced by the number of shares so reacquired, and the board shall determine either (A)  to eliminate that class or series, whereupon the articles shall be amended to eliminate any statement of rights, preferences, privileges, and restrictions relating solely to that class or series, or (B)  not to eliminate that class or series, whereupon the articles shall be amended to reflect that reduction of the number of authorized shares of that class or series by the shares so reacquired.

(3)  If less than all of the authorized shares and less than all of the issued and outstanding shares of a class or series, as the case may be, are reacquired, the authorized number of shares of that class or series shall be automatically reduced by the number of shares reacquired, and the articles shall be amended to reflect that reduction.
(c)  When a corporation reacquires authorized shares of a series of shares and the articles only prohibit the reissuance of those shares as shares of the same series:

(1)  If all of the authorized shares of that series are reacquired, then that series is automatically eliminated, the articles shall be amended to eliminate any statement of rights, preferences, privileges, and restrictions relating solely to that series, and the board shall determine either (A)  to return those shares to the status of authorized but undesignated shares of the class to which they belong or (B)  to eliminate those shares entirely, whereupon the articles in either case shall be amended to reflect the reduction in the authorized shares of that series and the effect, if any, on the class to which that series belongs.

(2)  If all of the issued and outstanding shares of that series (but less than all of the authorized shares of that series) are reacquired, the board shall determine either (A)  to eliminate that series, whereupon the articles shall be amended to eliminate any statement of rights, preferences, privileges, and restrictions relating solely to that series, or (B)  not to eliminate that series, whereupon the articles shall be amended to reflect the return of the reacquired shares to the status of authorized but undesignated shares of the class to which they belong.

(3)  If less than all of the issued and outstanding shares of that series are reacquired, the authorized number of shares of that series shall be automatically reduced by the number of shares reacquired, and the board shall determine either (A)  to return those shares to the status of authorized but undesignated shares of the class to which they belong, or (B)  to eliminate those shares entirely, whereupon the articles in either case shall be amended to reflect the reduction in the authorized shares of that series and the effect, if any, on the class to which that series belongs.
(d)  "Reacquires" as used in this section means that a corporation purchases, redeems, acquires by way of conversion to another class or series, or otherwise acquires its own shares or that issued and outstanding shares cease to be outstanding.

(e)  The provisions of this section are subject to any contrary or inconsistent provision in the articles.

(f)  A certificate of amendment shall be filed in accordance with the requirements of Chapter 9 (commencing with Section 900) reflecting any elimination or reduction of authorized shares set forth in subdivisions (b) and (c), and any related elimination from the articles of the designation and the rights, preferences, privileges, and restrictions of any series or class of stock that is eliminated, except that approval by the outstanding shares (Section 152) shall not be required to adopt any such amendment. Nothing contained in this section is intended to alter or otherwise affect the powers of the board to amend the articles as contemplated in Sections 202 and 401.

Section 511.  Notwithstanding the provisions of this chapter, a negotiable instrument issued by a corporation for the purchase or redemption of shares shall be enforceable by a holder in due course (Section 3302 of the Commercial Code) without notice that it was issued for that purpose or by a person who acquired the instrument through such a holder.

California Corporations Code > Sections 500-511
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