Meaning
Statutory provisions governing a corporation’s power to buy back or redeem its own shares prevent companies from distributing cash to equity holders to the detriment of creditors. Under section 160 dgcl, a Delaware corporation is prohibited from purchasing its own shares if the purchase would impair its capital. This rule protects senior claims by ensuring that the corporation’s assets exceed its liabilities and paid-up capital before equity is retired.
Capital Impairment
Legal capital must remain intact to serve as a buffer for the organization’s debts. A purchase of shares violates section 160 dgcl if the remaining net assets of the corporation are less than the aggregate amount of its preferred stock and common stock capital. This restriction forces companies to evaluate their balance sheet before executing share repurchases or redeeming venture capital shares.
Director Liability
Board members face severe consequences if they authorize an illegal share redemption. If a transaction violates section 160 dgcl, directors can be held personally liable for the funds illegally distributed to shareholders. This risk makes directors cautious when negotiating redemption clauses with investors, requiring formal solvency opinions to document their decision-making process.
Balance Sheet
Courts do not look solely at the book value of assets when assessing capital impairment.
