Dividend recapitalization activitiy continues to increase due to impending tax laws and low borrowing rates. Certain considerations can be taken to safeguard against liability.

Under Delaware law, a dividend can only be paid out of “surplus”. The Board of Directors bears the burden of determining whether the corporation has sufficient surplus to pay the dividend under consideration.

To make this determination, net assets must be valued by examining the books of the corporation. However, the books often do not reflect the current values of the corporation’s assets or liabilities. The Delaware courts have recognized this issue and have permitted directors to “revalue” assets and liabilities to reflect their current value in order to determine the amount of surplus available for dividends.

Directors bear potential personal liability for a payment which improperly impairs the corporation’s capital. However, Delaware law does provide protection to directors who rely, in good faith, upon, among other things, opinions or reports of independent experts selected with care. A Board of Directors considering a special dividend is often well-advised to seek a capital surplus opinion.

Houlihan Lokey has been recognized as a leader in providing capital surplus tests. Please contact one of the individuals listed to learn more.