Colorado § 7-106-401 - Distributions to shareholders.

§ 7-106-401. Distributions to shareholders.

(1) A board of directors may authorize, and the corporation may make, distributions to its shareholders subject to any restriction in the articles of incorporation and subject to the limitations set forth in subsection (3) of this section.

(2) The bylaws or, in the absence of an applicable bylaw, the board of directors may fix a future date as the record date for determining shareholders entitled to a distribution, other than one involving a purchase, redemption, or other acquisition of the corporation's shares. If a record date is necessary but no future record date is so fixed, the record date is the date the board of directors authorizes the distribution.

(3) No distribution may be made if, after giving it effect:

(a) The corporation would not be able to pay its debts as they become due in the usual course of business; or

(b) The corporation's total assets would be less than the sum of its total liabilities plus (unless the articles of incorporation permit otherwise) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

(4) The board of directors may base a determination that a distribution is not prohibited under subsection (3) of this section either on financial statements prepared on the basis of accounting practices and principles that are reasonable under the circumstances or on a fair valuation or other method that is reasonable under the circumstances.

(5) Except as provided in subsection (6) of this section, the time for measuring the effect of a distribution under subsection (3) of this section is:

(a) In the case of distribution by purchase, redemption, or other acquisition of the corporation's shares, as of the earlier of:

(I) The date money or other property is transferred or debt is incurred by the corporation; or

(II) The date the shareholder ceases to be a shareholder with respect to the acquired shares;

(b) In the case of any other distribution of indebtedness, as of the date the indebtedness is distributed; and

(c) In all other cases, as of either:

(I) The date the distribution is authorized, if the payment occurs within one hundred twenty days after the date of authorization; or

(II) The date the payment is made, if it occurs more than one hundred twenty days after the date of authorization.

(6) Indebtedness of a corporation, including indebtedness issued as a distribution, is not considered a liability for purposes of determinations under subsection (3) of this section if its terms provide that payment of principal and interest thereon are made only if and to the extent that payment of a distribution to shareholders could then be made under this section. If the indebtedness is issued as a distribution, each payment of principal or interest thereon is treated as a distribution the effect of which is measured on the date the payment is actually made.

(7) Unless otherwise expressly provided in the articles of incorporation or bylaws, a statement of par value for shares shall not impose any limitation on distributions and shall not require any separate designation, restriction, reservation, or other segregation of any capital account of a corporation.

Source: L. 93: Entire article added, p. 762, § 1, effective July 1, 1994.

ANNOTATION

Law reviews. For article, "Corporate Dividend Limitations", see 27 Dicta 99 (1950). For note, "Surpluses Which May Be Used For Paying Dividends under the New Colorado Corporation Act", see 31 Rocky Mt. L. Rev. 49 (1958). For article, "1959 Amendments to the Colorado Corporation Code", see 36 Dicta 489 (1959). For article, "Depreciation Policy and Its Effect in Determining Earnings Available for Dividends", see 36 U. Colo. L. Rev. 143 (1963). For article, "Corporate Director Liability", see 65 Den. U. L. Rev. 59 (1988). For article, "Counseling the Corporation In Financial Crisis", see 17 Colo. Law. 631 (1988). For article, "Corporate Director Liability", see 65 Den. U. L. Rev. 59 (1988).

Annotator's note. Since § 7-106-401 is similar to § 7-5-110 as it existed prior to the 1993 recodification of the "Colorado Business Corporation Act", articles 101 to 117 of title 7, cases construing that provision and its predecessors have been included in the annotations to this section.

Directors expressly made personally liable to corporation. This section and §§ 7-3-102 and 7-5-114 (1)(d) expressly make directors personally liable to the corporation. Sec. Nat'l Bank v. Peters, Writer & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (1977).

Absolute liability. Liability under this section and §§ 7-3-102 and 7-5-114 (1)(d) is absolute. Sec. Nat'l Bank v. Peters, Writer & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (1977).

A showing of fraud is not required to impose liability under this section and §§ 7-3-102 and 7-5-114 (1)(d). Sec. Nat'l Bank v. Peters, Writer & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (1977).

Payments made to sole shareholder by sole shareholder that renders business unable to pay debts violates this section. Paratransit Risk Retention Group Ins. Co. v. Kamins, 160 P.3d 307 (Colo. App. 2007).

A corporation may "freeze out" minority shareholders by a reverse stock split and fractional share buyout. Goldman v. Union Bank & Trust, 765 P.2d 638 (Colo. App. 1988).

This section does not impose a fiduciary duty within the meaning of 11 U.S.C.A. § 523 (a)(4) of the bankruptcy code. In re Anzman, 73 B.R. 156 (Bankr. D. Colo. 1986).

Two tests applicable in determining whether corporation may make valid distribution to shareholder. The first test, the "equity insolvency test", considers whether a distribution will impair the corporation's ability to pay its debts as they become due in the usual course of business. The second test is the "balance sheet test". Paratransit Risk Retention Group Ins. Co. v. Kamins, 160 P.3d 307 (Colo. App. 2007).

The court must consider whether the business can continue as a going concern and can maintain or replace financing necessary to pay debts as they come due and what the business can do in the future, including whether it will or will not be able pay its debts in the future. Paratransit Risk Retention Group Ins. Co. v. Kamins, 160 P.3d 307 (Colo. App. 2007).

The court shall make its findings and conclusions by comparing the number of debts unpaid, taking into account that the payments of smaller debts did not necessarily mean the company was solvent; determining the amount of the company's delinquency and considering any contingent liabilities as an element of the total debt; determining the materiality of the nonpayments, taking into account any unpaid premiums and future dates when payments will have to be paid on the outstanding claims; evaluating the company's conduct of its financial affairs, including whether the company is still operational and any sources of income; and limiting its measure of the effect of the distributions to the date each distribution was authorized. Paratransit Risk Retention Group Ins. Co. v. Kamins, 160 P.3d 307 (Colo. App. 2007).

Although it is a question of fact, taking profit from a corporation without paying shareholders may be considered theft. When majority shareholder used profits for personal uses, the majority shareholder, in essence, declared a distribution. Although a distribution was not formally announced, the trier of fact may find that this is theft from the minority shareholders, who are entitled to their share. Tisch v. Tisch, 2019 COA 41, 439 P.3d 89.