There are significant legal limitations on the ability of Oregon corporations and limited liability companies (“LLCs”) to make distributions to their shareholders and members, which are often ultimately ignored at the risk of directors, managers or other members. Distributions, including redemptions, made without regard to legal limitations may result in the personal liability of the directors, officers or members responsible for an improper distribution if the company subsequently becomes insolvent.
The legal definition of a “distribution” for corporate purposes is ORS 60.001(7) and is broad in scope.
“Distribution” means a direct or indirect transfer of money or other property, except from a corporation’s own stock, or any indebtedness of a corporation for the benefit of the corporation’s stockholders with respect to any of the corporation’s stock. A distribution may be in the form of a declaration or payment of a dividend, a purchase, redemption or other acquisition of stock, a distribution of debt, or otherwise.”
ORS 63.001(6) defining “distribution” by LLCs is equally broad in scope.
The legal restrictions on distributions from a corporation to its shareholders and from an LLC to its members are identical. Such distributions may only be made if, in the judgment of those responsible for authorizing the distribution (the directors or managers of the company or, in the case of a member-managed LLC, the members of an LLC) after the distribution is effected:
1. The corporation or LLC may pay its debts as they fall due in the ordinary course of business of the entity; Y,
2. The total assets of the company will be at least equal to the total of its liabilities.
ORS 60.181(3)(a) and (b), defining corporate limitation; ORS 63.229(1)(a) and (b), defining the limitation for LLCs.
The statutes also define the effective date on which the distribution is made for purposes of the limitations. ORS 60.181(5) and ORS 63.229(4).
If a redemption or other distribution is made in violation of these legal restrictions, the directors, officers or members responsible for authorizing the distribution may incur personal liability to the company for the amount of the distribution in excess of that permitted subject to certain rights of distribution. contribution of others who joined the improper authorization. ORS 60,367 (for corporations) and ORS 63.235 (for LLCs) In addition, any shareholder or member who knowingly receives an impermissible distribution in violation of applicable statute may also have personal liability to the company to the extent that the distribution exceeds the permissible limits established by law.
In light of clear legal restrictions and the possibility of personal liability, it is important that those responsible for authorizing any distribution to shareholders consider and document the exercise of their judgment in deciding to make such distributions in accordance with legal requirements.
©11/30/2010 Lawrence B. Hunt. All rights reserved.