Wednesday, July 13, 2011

Limits on Distributions by Texas Corporation

Are there limits on the ability of a Texas corporation to distribute cash or other property to its shareholders?  As former Alaska Governor Sarah Palin might say, “You betcha.”

It’s important that the board of directors of a Texas corporation correctly determine the amount of corporate funds available for distributions because directors may be held jointly and severally personally liable for distributions in excess of the amount permitted by law (Section 21.316 of the Texas Business Organizations Code (TBOC)).

Generally, a Texas corporation may make distributions in an amount by which the value of its net assets exceeds the aggregate par value of the corporation’s outstanding stock. 

That’s the answer, but the TBOC does not make it particularly easy to get there.  Let’s walk through the daisy chain of definitions in the portion of the TBOC which provides rules for distributions from a Texas corporation, Title 2 (Corporations), Chapter 21 (For-Profit Corporations), Subchapter G (Distributions and Share Dividends)(a/k/a Section 21.301-318 of the TBOC).  

A Texas corporation may not make distributions that would make the corporation insolvent or that would exceed the corporation’s distribution limit, except upon winding up and termination of the corporation (Section 21.303 of the TBOC). 

A corporation’s “distribution limit” is generally equal to the corporation’s surplus, with certain exceptions (Section 21.301 of the TBOC). 

A corporation’s “surplus” is the amount by which the net assets of the corporation exceed the stated capital of the corporation (Section 21.002(12) of the TBOC). 

A corporation’s “net assets” is the amount by which the total assets of the corporation exceed the total debts of the corporation (Section 21.002(9) of the TBOC). 

A corporation’s “stated capital” is the sum of (a) par value of all shares issued by the corporation, plus (b) the aggregate consideration received by the corporation for the issuance of shares without par value, reduced by any portion of such consideration that the board properly allocates to surplus, plus (c) any additional amounts added to the corporation’s stated capital by share dividends or board resolution (Section 21.002(11) of the TBOC).