Shareholder Payments: New Rules

Effective January 1, 2012, the financial tests that a corporation must meet before lawfully making payments to shareholders have been simplified. Previously, payments to shareholders were permissible under either a retained earnings test or an unnecessarily complicated and rigid balance sheet-liquidity test. Running afoul of the financial tests causes considerable angst because directors approving the payments as well as shareholders receiving the payments could have personal liability--ultimately to corporate creditors-- for the prohibited payments. The new law maintains the retained earnings test, but replaces the complicated balance sheet-liquidity test with a simpler net asset value test and allows a board of directors to base its decision on certain financial statements, a fair valuation or other reasonable methods. Please contact our business service attorneys for additional information concerning the new law.