Wednesday, August 17, 2011 1:44:09 PM
Delaware State Law Issues. For companies chartered in Delaware, Section 160 of the Delaware General Corporation Law generally provides that a corporation may not repurchase its shares when the capital of the company is impaired, or when such purchase would cause any capital impairment. Under Delaware law, “impairment of capital” means the reduction of the amount of a company’s assets below the amount represented by the aggregate outstanding shares of the company’s capital stock. In addition, Delaware case law provides that a company may not repurchase its own shares of stock if the purchase diminishes the ability of the company to pay its debts or lessens the security of its creditors.
California State Law Issues. For companies chartered in California, Section 500 of the California General Corporation Law sets forth certain requirements a company must meet prior to engaging in a “distribution,” which would include a stock repurchase. Under California law, a repurchase may only be made if either: (a) the amount of the retained earnings immediately prior to the distribution equals or exceeds the amount of the proposed distribution or (b) immediately after the distribution, (i) the sum of the assets of the corporation, exclusive of certain items, is at least equal to 1 1/4 times its liabilities (exclusive of certain items) and (ii) 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 expenses for the two preceding fiscal years was less than the average of the interest expenses of the corporation for those fiscal years, at least equal to 1 1/4 times its current liabilities (provided, however, if the company does not classify its assets into current and fixed categories under GAAP, subpart (ii) is not applicable).
I must say, I think any reasonably astute board director and investor would have general understanding of these state law matters, even if the details are arcane.
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