As a general proposition, payment of dividends may be made only out of surplus and not out of the capital stock of a corporation. Though the cases evidence considerable confusion as to the meaning of "surplus" and "capital," it is clear that these terms do not indicate a res. Rather, they are convenient designations for legislatively prescribed limits as to when dividend payments are proper. The capital stock rule, that the aggregate consideration received for no par stock plus the aggregate value of issued par stock may not be tapped for shareholder distribution, is founded, loosely speaking, on the notion that that amount should be "pledged" for the payment of corporate debts, since creditors of a corporation may look only to corporate assets for payment.
If the directors of a corporation do pay dividends out of capital, they are subject to common law and statutory redress for their action. Usual remedies for wrongful dividend payment are of three varieties: (1) injunction to restrain the illegal declaration of dividends, (2) damage suit against the directors for their breach of fiduciary obligations, or (3) suit against the shareholders who have received payment to compel them to return the dividends. The obligations and liabilities of shareholders who have received. wrongful dividend payments are the primary concern of this comment.
Theodore Sachs S.Ed.,
CORPORATIONS-RIGHT OF CORPORATION TO PAY DIVIDENDS TO COMMON SHAREHOLDERS TO EQUALIZE PRIOR WRONGFUL PAYMENT TO PREFERRED SHAREHOLDERS,
Mich. L. Rev.
Available at: https://repository.law.umich.edu/mlr/vol49/iss1/5