ALP: Are there financial standards that must be met before an Ohio corporation’s directors may declare a cash dividend to shareholders?
Yes. The Ohio General Corporation Law specifies the standards that should be satisfied before the directors of an Ohio corporation declare and pay a cash dividend to the corporation’s shareholders. The directors may only pay cash dividends out of the corporation’s surplus. Consequently, the directors must determine the amount of the corporation’s surplus, if any, before they may declare a cash dividend on outstanding shares.
The surplus of a corporation is determined by the following formula: Surplus = Asset Value – (Liability Value + Stated Capital). The determination of a corporation’s surplus may be based upon “financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances.” A surplus must exist on two key dates: the date the directors declare the dividend and the date the dividend is paid to the shareholders.
Because Ohio is a “surplus profits” jurisdiction, an Ohio corporation is not required to have net earnings in a period in order to declare and pay a cash dividend in that period if the corporation has a surplus. If it has a surplus, a corporation may pay a dividend and may even borrow money to pay such a dividend if its surplus is not in the form of cash or other liquid investments. However, the amount of the dividend must be limited so that the payment of the dividend does not render the corporation insolvent as of either the date the dividend is authorized by the directors or the date it is paid to the shareholders.
If the directors of an Ohio corporation improperly declare a dividend, the directors that voted for such dividend or abstained from such vote may be held liable, jointly and severally, to the corporation for the amount of the improper dividend. The statute of limitations for a claim against a director brought by, or on behalf of, the corporation for the payment of an improper dividend is two years.