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How To Eliminate Accrued Dividends

The existence of accrued and unpaid dividends can hang like an ominous cloud over a corporation's future financings.  Are these accrued but unpaid dividends in the nature of a debt that cannot be erased by an amendment of the articles?  

The California General Corporation Law allows corporations to dispel this nimbus by the simple expedient of amending the articles of incorporation.  Section 903(a)(7) authorizes an amendment that would "[c]ancel or otherwise affect dividends on the shares of such class which have accrued but have not been paid".  The fly in the ointment (See Ecclesiastes 10:1) is that the amendment must be approved by the outstanding shares (Section 152) of a class, whether or not such class is entitled to vote thereon by the provisions of the articles.  

Thus, there are no "vested rights" to accrued but unpaid dividends.  Although the Delaware Supreme Court once held otherwise (Keller v. Wilson, 21 Del. Ch. 391, 190 A. 115 (1936)), the Delaware General Corporation law now permits an amendment of the certificate to "To cancel or otherwise affect the right of the holders of the shares of any class to receive dividends which have accrued but have not been declared".  8 Del. Code § 242(a)(4).  Note, however, that the California statute refers to accrued but unpaid dividends whilst the Delaware statute refers to dividends that have accrued but not been declared.

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XI, Number 189
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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