Schedule a Consultation: 858.483.9200

FAQs About Stock Dividends

If you are starting a new San Diego corporation and issuing shares of corporate stock, at some point when revenue, profits, assets, and retained earnings allow, your company is going to be faced with the decision about whether to approve “dividends.” If you are investing in businesses via stock purchases, one of the basic questions is: Does the company provide quarterly or annual dividends? In this article, we provide answers to a few frequently asked questions about dividends. If you need assistance setting up your new corporation or need advice regarding dividends, a good San Diego corporate attorney can help.

San Diego Corporate Law: What is a Dividend?

A “dividend” is the common word used to describe a distribution of assets from a corporation to its shareholders/owners. In general, a corporate “share” is an ownership right to a percentage of the corporation. For example, if there are 100 shares issued, and if you own 10 shares, then you own 10% of the company. Traditionally, shares have been represented by stock “certificates” — thick, professional pieces of paper signed by the Corporation Secretary affixed with the embossed Corporate Seal — but the more recent practice is to hold shares electronically. When you buy shares in a company, you are typically buying two sets of rights: voting rights and rights to share in profits. The main mechanism for distributing profits to the shareholders is through dividends.

What is the Process?

Most commonly, dividends must be authorized by the corporation’s board of directors. The general term is “declaring dividends.” The process for declaring dividends is the same process for other decisions made by the board: The question of declaring dividends is raised and placed on the board’s agenda, the issue is researched with respect to adequate reserves, cash flow, and other financial considerations, the board votes, and dividends are declared if a majority of the board approves.

Bookkeeping

If dividends are being declared, there are a couple of bookkeeping matters that are important for investors and shareholders. There is generally a time-lag between dividends being authorized — say, December 1st — and when the dividends will be paid — say, December 31st. If you have shares in November and then sell them on December 15th, the new owners of your shares will be entitled to collect the dividend being paid on December 31st. Obviously, the issue here relates to the price being paid for the shares. While payment of the dividend is pending, the price of the shares will be higher, and the price will then retreat to the previous level after distribution.

Are Dividends Required?

No. Declaring and authorizing dividends is “at the discretion” of the board. Many corporations never authorize the issuance of dividends. Many other corporations only authorize dividends sporadically. If you are an investor, you will want to obtain historical information about authorized dividends to help determine if the stock is a good investment for you.

Are There Legal Limitations and/or Regulations?

Yes. California has enacted statutory provisions that govern when a corporation can issue dividends and can otherwise make distributions to owners. In a nutshell, the corporation has to be “solvent” with more assets than liabilities or sufficient cash/assets reserves. The concern is that issuing dividends can deplete the corporation of assets and such could be done as a fraud to creditors. See Cal. Corp. Code, §500-5011.

How Often are Dividends Declared?

It depends on the company, but if a company distributes assets via dividends, generally dividends are declared quarterly or annually.

What are the Types of Dividends?

Most often, dividends are issued as money. But anything of value can be issued as a “dividend.” A common example of a non-cash dividend is the issuance of additional shares of stock — a “stock split” — based on the number of shares currently owned.

Contact San Diego Corporate Law Today

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard has been named a “Rising Star” four years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal. Mr. Leonard’s law practice is focused on corporate, securities, contract, and intellectual property law for small and medium businesses. Mr. Leonard can assist with the formation of your business entity — corporations, LLCs, and other forms — financing through the sale of debt and equity securities, mergers and acquisitions, contract drafting and review including commercial leases, and establishment and licensing of trademarks, copyrights, and trade secrets.