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DGCL Sec. 170 - Dividends; Payment
Whether and how to declare dividends is clearly a statutory power reserved to directors. Shareholders do not have a right to dividends. Directors may grant preferred shareholders to a contractual right to dividends when devising preferred rights as part of a series investment.
When boards declare dividends they may only do so "out of surplus" or "out of net profits." Boards may be liable for the value of dividends paid out in the event the business declares and pays a dividend and then subsequently becomes insolvent.
What is "surplus" is an important, but ultimately not very substantial, question that students of the corporate law should understand. It starts with understanding par value, or legal capital. Shareholders are required to make contributions of capital to the corporation in exchange for their shares. Par value represents the legal capital committed to the enterprise. Par value was a more salient concept in the early 20th century when companies were required to maintain a certain amount of legal capital. By now, contributions to a corporation's legal capital need only be nominal. The value of a corporation's equity beyond the par value (and debt) is considered "surplus." This surplus is available for dividends.
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