Which statement correctly describes a board's ability to declare distributions?

Which statement correctly describes a board's ability to declare distributions?

• A. The board cannot declare distributions if it would render the corporation insolvent
• B. The board may declare distributions even if insolvent
• C. Shareholders can unilaterally declare distributions
• D. Dividends must always be equal among all shareholders

Answer: (A)

Distributions are allowed only if the company remains solvent after they’re paid. The main idea is that directors must protect the corporation’s creditors and its ongoing ability to pay debts. If a proposed distribution would leave the company insolvent or unable to meet its obligations as they come due, the directors cannot approve it. This solvency safeguard is what makes the board’s power to declare distributions limited rather than absolute. Shareholders don’t have unilateral power to declare distributions; typically, the board makes that decision, guided by profits, surplus, and solvency. And dividends aren’t required to be equal among all shareholders—different classes or rights can receive different amounts, and distributions are usually made from surplus, not indiscriminately from capital.

Distributions are allowed only if the company remains solvent after they’re paid. The main idea is that directors must protect the corporation’s creditors and its ongoing ability to pay debts. If a proposed distribution would leave the company insolvent or unable to meet its obligations as they come due, the directors cannot approve it. This solvency safeguard is what makes the board’s power to declare distributions limited rather than absolute.

Shareholders don’t have unilateral power to declare distributions; typically, the board makes that decision, guided by profits, surplus, and solvency. And dividends aren’t required to be equal among all shareholders—different classes or rights can receive different amounts, and distributions are usually made from surplus, not indiscriminately from capital.