2009 California Corporations Code - Section 500-511 :: Chapter 5. Dividends And Reacquisitions Of Shares

500.  Neither a corporation nor any of its subsidiaries shall make
any distribution to the corporation's shareholders (Section 166)
except as follows:
   (a) The distribution may be made if the amount of the retained
earnings of the corporation immediately prior thereto equals or
exceeds the amount of the proposed distribution.
   (b) The distribution may be made if immediately after giving
effect thereto:
   (1) The sum of the assets of the corporation (exclusive of
goodwill, capitalized research and development expenses and deferred
charges) would be at least equal to 1 1/4 times its liabilities (not
including deferred taxes, deferred income and other deferred
credits); and
   (2) 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 expense for
the two preceding fiscal years was less than the average of the
interest expense of the corporation for those fiscal years, at least
equal to 1 1/4 times its current liabilities; provided, however, that
in determining the amount of the assets of the corporation profits
derived from an exchange of assets shall not be included unless the
assets received are currently realizable in cash; and provided,
further, that for the purpose of this subdivision "current assets"
may include net amounts which the board has determined in good faith
may reasonably be expected to be received from customers during the
12-month period used in calculating current liabilities pursuant to
existing contractual relationships obligating those customers to make
fixed or periodic payments during the term of the contract or, in
the case of public utilities, pursuant to service connections with
customers, after in each case giving effect to future costs not then
included in current liabilities but reasonably expected to be
incurred by the corporation in performing those contracts or
providing service to utility customers. Paragraph (2) of subdivision
(b) is not applicable to a corporation which does not classify its
assets into current and fixed under generally accepted accounting
principles.
   (c) The amount of any distribution payable in property shall, for
the purposes of this chapter, be determined on the basis of the value
at which the property is carried on the corporation's financial
statements in accordance with generally accepted accounting
principles.
   (d) For the purpose of applying this section to a distribution by
a corporation of cash or property in payment by the corporation in
connection with the purchase of its shares, there shall be added to
retained earnings all amounts that had been previously deducted
therefrom with respect to obligations incurred in connection with the
corporation's repurchase of its shares and reflected on the
corporation's balance sheet, but not in excess of the principal of
the obligations that remain unpaid immediately prior to the
distribution. In addition, there shall be deducted from liabilities
all amounts that had been previously added thereto with respect to
the obligations incurred in connection with the corporation's
repurchase of its shares and reflected on the corporation's balance
sheet, but not in excess of the principal of the obligations that
will remain unpaid after the distribution, provided that no addition
to retained earnings or deduction from liabilities under this
subdivision shall occur on account of any obligation that is a
distribution to the corporation's shareholders (Section 166) at the
time the obligation is incurred.
   (e) This section does not apply to a corporation licensed as a
broker-dealer under Chapter 2 (commencing with Section 25210) of Part
3 of Division 1 of Title 4, if immediately after giving effect to
any distribution the corporation is in compliance with the net
capital rules of the Commissioner of Corporations and the Securities
and Exchange Commission.

501.  Neither a corporation nor any of its subsidiaries shall make
any distribution to the corporation's shareholders (Section 166) if
the corporation or the subsidiary making the distribution is, or as a
result thereof would be, likely to be unable to meet its liabilities
(except those whose payment is otherwise adequately provided for) as
they mature.

502.  Neither a corporation nor any of its subsidiaries shall make
any distribution to the corporation's shareholders (Section 166) on
any shares of its stock of any class or series that are junior to
outstanding shares of any other class or series with respect to
distribution of assets on liquidation if, after giving effect
thereto, the excess of its assets (exclusive of goodwill, capitalized
research and development expenses and deferred charges) over its
liabilities (not including deferred taxes, deferred income and other
deferred credits) would be less than the liquidation preference of
all shares having a preference on liquidation over the class or
series to which the distribution is made; provided, however, that for
the purpose of applying this section to a distribution by a
corporation of cash or property in payment by the corporation in
connection with the purchase of its shares, there shall be deducted
from liabilities all amounts that had been previously added thereto
with respect to obligations incurred in connection with the
corporation's repurchase of its shares and reflected on the
corporation's balance sheet, but not in excess of the principal of
the obligations that will remain unpaid after the distribution;
provided, further, that no deduction from liabilities shall occur on
account of any obligation that is a distribution to the corporation's
shareholders (Section 166) at the time the obligation is incurred.

503.  Neither a corporation nor any of its subsidiaries shall make
any distribution to the corporation's shareholders (Section 166) on
any shares of its stock of any class or series that are junior to
outstanding shares of any other class or series with respect to
payment of dividends, and as to which senior class or series the
corporation has cumulative dividends in arrears, unless the amount of
the retained earnings of the corporation immediately prior thereto
equals or exceeds the amount of the proposed distribution plus the
aggregate amount of the cumulative dividends in arrears on all shares
having a preference with respect to payment of dividends over the
class or series to which the distribution is made; provided, however,
that for the purpose of applying this section to a distribution by a
corporation of cash or property in payment by the corporation in
connection with the purchase of its shares, there shall be added to
retained earnings all amounts that had been previously deducted
therefrom with respect to obligations incurred in connection with the
corporation's repurchase of its shares and reflected on the
corporation's balance sheet, but not in excess of the principal of
the obligations that remain unpaid immediately prior to the
distribution; provided, further, that no addition to retained
earnings shall occur on account of any obligation that is a
distribution to the corporation's shareholders (Section 166) at the
time the obligation is incurred.

503.1.  The provisions of Sections 500, 501, 502 and 503 shall not
apply to a purchase or redemption of shares of a deceased shareholder
from the proceeds of insurance on the life of such shareholder in
excess of the total amount of all premiums paid by the corporation
for such insurance, in order to carry out the provisions of an
agreement between the corporation and such shareholder to purchase or
redeem such shares upon the death of the shareholder.

503.2.  The provisions of Sections 500, 501, 502, and 503 shall not
apply to the purchase or redemption of shares of a disabled
shareholder from the proceeds of disability insurance applicable to
the disabled shareholder in excess of the total amount of all
premiums paid by the corporation for the insurance, in order to carry
out the provisions of an agreement between the corporation and the
shareholder to purchase or redeem shares upon the disability of the
shareholder as defined within that policy.
   For the purposes of this section, "disability insurance" means an
agreement of indemnification against the insured's loss of the
ability to work due to accident or illness.

504.  (a) The provisions of Section 500 do not apply to a dividend
declared by either of the following:
   (1) A regulated investment company, as defined in the federal
Internal Revenue Code, as amended, to the extent that the dividend is
necessary to maintain the status of the corporation as a regulated
investment company under the provisions of that code.
   (2) A real estate investment trust, as defined in Part II of
Subchapter M of Chapter 1 of Subtitle A of the federal Internal
Revenue Code, as amended, to the extent that the dividend is
necessary to maintain the status of the corporation as a real estate
investment trust under the provisions of that code.
   (b) The provisions of this chapter do not apply to any purchase or
redemption of shares redeemable at the option of the holder by a
registered open-end investment company under the United States
Investment Company Act of 1940, so long as the right of redemption
remains unsuspended under the provisions of that statute and the
articles and bylaws of the corporation.

505.  Nothing in this chapter prohibits additional restrictions upon
the declaration of dividends or the purchase or redemption of a
corporation's own shares by provision in the articles or bylaws or in
any indenture or other agreement entered into by the corporation.

506.  (a) Any shareholder who receives any distribution prohibited
by this chapter with knowledge of facts indicating the impropriety
thereof is liable to the corporation for the benefit of all of the
creditors or shareholders entitled to institute an action under
subdivision (b) for the amount so received by the shareholder with
interest thereon at the legal rate on judgments until paid, but not
exceeding the liabilities of the corporation owed to nonconsenting
creditors at the time of the violation and the injury suffered by
nonconsenting shareholders, as the case may be. For purposes of this
chapter, in the event that any shareholder receives any distribution
of the corporation's property that is prohibited by this chapter, the
shareholder receiving that illegal distribution shall be liable to
the corporation for an amount equal to the fair market value of the
property at the time of the illegal distribution plus interest
thereon from the date of the distribution at the legal rate on
judgments until paid, together with all reasonably incurred costs of
appraisal or other valuation, if any, of that property, but not
exceeding the liabilities of the corporation owed to nonconsenting
creditors at the time of the violation and the injury suffered by
nonconsenting shareholders, as the case may be.
   (b) Suit may be brought in the name of the corporation to enforce
the liability (1) to creditors arising under subdivision (a) for a
violation of Section 500 or 501 against any or all shareholders
liable by any one or more creditors of the corporation whose debts or
claims arose prior to the time of the distribution to shareholders
and who have not consented thereto, whether or not they have reduced
their claims to judgment, or (2) to shareholders arising under
subdivision (a) for a violation of Section 502 or 503 against any or
all shareholders liable by any one or more holders of preferred
shares outstanding at the time of the distribution who have not
consented thereto, without regard to the provisions of Section 800.
   (c) Any shareholder sued under this section may implead all other
shareholders liable under this section and may compel contribution,
either in that action or in an independent action against
shareholders not joined in that action.
   (d) Nothing contained in this section affects any liability which
any shareholder may have under Chapter 1 (commencing with Section
3439) of Title 2 of Part 2 of Division 4 of the Civil Code.

507.  Each dividend other than one chargeable to retained earnings
shall be identified in a notice to shareholders as being made from a
source other than retained earnings, stating the accounting treatment
thereof. The notice shall accompany the dividend or shall be given
within three months after the end of the fiscal year in which the
dividend is paid.

508.  This chapter does not apply in connection with any proceeding
for winding up and dissolution under Chapter 18 or 19.

509.  (a) A corporation may redeem any or all shares which are
redeemable at its option by (1) giving notice of redemption, and (2)
payment or deposit of the redemption price of the shares as provided
in its articles or deposit of the redemption price pursuant to
subdivision (d).
   (b) Subject to any provisions in the articles with respect to the
notice required for redemption of shares, the corporation may give
notice of the redemption of any or all shares subject to redemption
by causing a notice of redemption to be published in a newspaper of
general circulation in the county in which the principal executive
office of the corporation is located at least once a week for two
successive weeks, in each instance on any day of the week, commencing
not earlier than 60 nor later than 20 days before the date fixed for
redemption. The notice of redemption shall set forth all of the
following:
   (1) The class or series of shares or part of any class or series
of shares to be redeemed.
   (2) The date fixed for redemption.
   (3) The redemption price.
   (4) If the shares are certificated securities, the place at which
the shareholders may obtain payment of the redemption price upon
surrender of their share certificates.
   (c) If the corporation gives notice of redemption pursuant to
subdivision (b), it shall also mail a copy of the notice of
redemption to each holder of record of shares to be redeemed as of
the date of mailing or record date fixed in accordance with Section
701, addressed to the holder at the address of such holder appearing
on the books of the corporation or given by the holder to the
corporation for the purpose of notice, or if no such address appears
or is given at the place where the principal executive office of the
corporation is located, not earlier than 60 nor later than 20 days
before the date fixed for redemption. Failure to comply with this
subdivision does not invalidate the redemption of the shares.
   (d) If, on or prior to any date fixed for redemption of redeemable
shares, the corporation deposits with any bank or trust company in
this state as a trust fund, (1) a sum sufficient to redeem, on the
date fixed for redemption thereof, the shares called for redemption,
(2) in the case of the redemption of any uncertificated securities,
an officer's certificate setting forth the holders thereof registered
on the books of the corporation and the number of shares held by
each, and (3) irrevocable instructions and authority to the bank or
trust company to publish the notice of redemption thereof (or to
complete publication if theretofore commenced) and to pay, on and
after the date fixed for redemption or prior thereto, the redemption
price of the shares to their respective holders upon the surrender of
their share certificates, in the case of certificated securities, or
the delivery of the officer's certificate in the case of
uncertificated securities, then from and after the date of the
deposit (although prior to the date fixed for redemption) the shares
called shall be redeemed and the dividends on those shares shall
cease to accrue after the date fixed for redemption. The deposit
shall constitute full payment of the shares to their holders and from
and after the date of the deposit the shares shall no longer be
outstanding and the holders thereof shall cease to be shareholders
with respect to the shares and shall have no rights with respect
thereto except the right to receive from the bank or trust company
payment of the redemption price of the shares without interest, upon
surrender of their certificates therefor, in the case of certificated
securities, and any right to convert the shares which may exist and
then continue for any period fixed by its terms.
   In determining the holders of uncertificated securities, the bank
or trust company shall be entitled to rely on any officer's
certificate deposited with it in accordance with this subdivision.

510.  (a) When a corporation reacquires its own shares, those shares
are restored to the status of authorized but unissued shares, unless
the articles prohibit the reissuance thereof.
   (b) When a corporation reacquires authorized shares of a class or
series and the articles prohibit the reissuance of those shares:
   (1) If all of the authorized shares of that class or series, as
the case may be, are reacquired, then (A) that class or series is
automatically eliminated, (B) in the case of reacquisition of all of
the authorized shares of a series, the authorized number of shares of
the class to which the shares belonged is reduced by the number of
shares so reacquired, and (C) the articles shall be amended to
eliminate any statement of rights, preferences, privileges, and
restrictions relating solely to that class or series.
   (2) If less than all of the authorized shares but all of the
issued and outstanding shares of that class or series, as the case
may be, are reacquired, the authorized number of shares of the class
or series is automatically reduced by the number of shares so
reacquired, and the board shall determine either (A) to eliminate
that class or series, whereupon the articles shall be amended to
eliminate any statement of rights, preferences, privileges, and
restrictions relating solely to that class or series, or (B) not to
eliminate that class or series, whereupon the articles shall be
amended to reflect that reduction of the number of authorized shares
of that class or series by the shares so reacquired.
   (3) If less than all of the authorized shares and less than all of
the issued and outstanding shares of a class or series, as the case
may be, are reacquired, the authorized number of shares of that class
or series shall be automatically reduced by the number of shares
reacquired, and the articles shall be amended to reflect that
reduction.
   (c) When a corporation reacquires authorized shares of a series of
shares and the articles only prohibit the reissuance of those shares
as shares of the same series:
   (1) If all of the authorized shares of that series are reacquired,
then that series is automatically eliminated, the articles shall be
amended to eliminate any statement of rights, preferences,
privileges, and restrictions relating solely to that series, and the
board shall determine either (A) to return those shares to the status
of authorized but undesignated shares of the class to which they
belong or (B) to eliminate those shares entirely, whereupon the
articles in either case shall be amended to reflect the reduction in
the authorized shares of that series and the effect, if any, on the
class to which that series belongs.
   (2) If all of the issued and outstanding shares of that series
(but less than all of the authorized shares of that series) are
reacquired, the board shall determine either (A) to eliminate that
series, whereupon the articles shall be amended to eliminate any
statement of rights, preferences, privileges, and restrictions
relating solely to that series, or (B) not to eliminate that series,
whereupon the articles shall be amended to reflect the return of the
reacquired shares to the status of authorized but undesignated shares
of the class to which they belong.
   (3) If less than all of the issued and outstanding shares of that
series are reacquired, the authorized number of shares of that series
shall be automatically reduced by the number of shares reacquired,
and the board shall determine either (A) to return those shares to
the status of authorized but undesignated shares of the class to
which they belong, or (B) to eliminate those shares entirely,
whereupon the articles in either case shall be amended to reflect the
reduction in the authorized shares of that series and the effect, if
any, on the class to which that series belongs.
   (d) "Reacquires" as used in this section means that a corporation
purchases, redeems, acquires by way of conversion to another class or
series, or otherwise acquires its own shares or that issued and
outstanding shares cease to be outstanding.
   (e) The provisions of this section are subject to any contrary or
inconsistent provision in the articles.
   (f) A certificate of amendment shall be filed in accordance with
the requirements of Chapter 9 (commencing with Section 900)
reflecting any elimination or reduction of authorized shares set
forth in subdivisions (b) and (c), and any related elimination from
the articles of the designation and the rights, preferences,
privileges, and restrictions of any series or class of stock that is
eliminated, except that approval by the outstanding shares (Section
152) shall not be required to adopt any such amendment. Nothing
contained in this section is intended to alter or otherwise affect
the powers of the board to amend the articles as contemplated in
Sections 202 and 401.

511.  Notwithstanding the provisions of this chapter, a negotiable
instrument issued by a corporation for the purchase or redemption of
shares shall be enforceable by a holder in due course (Section 3302
of the Commercial Code) without notice that it was issued for that
purpose or by a person who acquired the instrument through such a
holder.