Meaning
A statutory provision of the Delaware General Corporation Law governs the authority of a corporation to purchase or redeem its own shares of stock. Under dgcl section 160, a corporation cannot purchase its own stock when its capital is impaired or when such purchase would cause impairment. This restriction prevents companies from distributing assets to shareholders to the detriment of creditors.
Capital Protection
Impairment occurs when the fair value of the assets of the company falls below the sum of its liabilities and its capital. By enforcing this limit, dgcl section 160 protects the financial integrity of the corporation. The board must assess the balance sheet before authorizing any share repurchase or redemption.
Voting Restriction
Shares that belong to the corporation itself or to a subsidiary where the corporation holds a majority of the voting power cannot be voted. This rule within dgcl section 160 prevents directors from voting treasury shares to entrench themselves in office. The blocked shares are also excluded from the calculation of a quorum for shareholder meetings.
Board Discretion
Directors who authorize a repurchase in violation of these rules face potential liability for breach of fiduciary duty. The statute does allow the redemption of preferred stock under specific conditions without triggering impairment claims. This exception applies only if the redeemed shares are retired and the capital of the company is reduced accordingly.
