There are important statutory limitations on the ability of Oregon corporations and limited liability companies (“LLC’s”) to make distributions to their shareholders and members which are often ignored ultimately at the risk of the directors, managers or other members. Distributions, including redemptions, made disregarding the statutory limitations may result in personal liability of those directors, managers or members responsible for an improper distribution if the company subsequently becomes insolvent.
The statutory definition of a “distribution” for purposes of corporations is ORS 60.001(7) is wide in its scope.
“Distribution” means a direct or indirect transfer of money or other property, except of a corporation’s own shares, or incurrence of any indebtedness by a corporation to or for the benefit of the corporation’s shareholders in respect of any of the corporation’s shares. A distribution may be in the form of a declaration or payment of a dividend, a purchase, redemption or other acquisition of shares, a distribution of indebtedness, or otherwise.”
ORS 63.001(6) defining “distribution” by LLC’s is equally far reaching.
The statutory restrictions on distributions by a corporation to its shareholders and by an LLC to its members are identical. Such distributions can only be made if, in the judgment of those responsible for authorizing the distribution (the corporation’s directors or the managers or, in the case of a member managed LLC, the members of an LLC) after giving effect to the distribution:
1. The corporation or LLC will be able to pay its debts as they come due in the ordinary course of the entity’s business; and,
2. The corporation’s total assets will be at least equal to its total liabilities.
ORS 60.181(3)(a) and (b), defining the corporate limitation; ORS 63.229(1)(a) and (b), defining the limitation for LLC’s.
The statutes also define the effective date on which the distribution is made for purposes of the limitations. ORS 60.181(5) and ORS 63.229(4).
If a redemption or other distribution is made in violation of these statutory restrictions, the directors, managers or members responsible for authorizing the distribution may incur personal liability to the company for the amount of the distribution in excess of what was permissible subject to certain rights of contribution from others who joined in the wrongful authorization. ORS 60.367 (for corporations) and ORS 63.235 (for LLC’s) Likewise, any shareholder or member who receives an impermissible distribution knowing it was made in violation of the applicable statute may also have personal liability to the company to the extent the distribution exceeded the permissible limits set by statute.
In light of the clear statutory restrictions and potential for personal liability, it is important that those responsible for authorizing any distributions to equity owners consider and document the exercise of their judgment in deciding to make such distributions in accordance with the statutory requirements.
©11/30/2010 Lawrence B. Hunt of Hunt & Associates, PC
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