There are significant statutory limitations on the ability of Oregon limited liability companies and corporations (“LLCs”) to make distributions to their shareholders and members that are often ultimately ignored at the risk of directors, managers, or other members. Distributions, including refunds, made without regard to legal limitations may result in the personal liability of directors, managers, or members responsible for an improper distribution if the company subsequently becomes insolvent.
The legal definition of a “distribution” for corporate purposes is ORS 60.001 (7) and it is broad in scope.
“Distribution” means a direct or indirect transfer of money or other property, except of the own shares of a corporation, or the contracting of any debt by a corporation to or for the benefit of the shareholders of the corporation with respect to any of the shares of the corporation. A distribution may be in the form of a declaration or payment of a dividend, a purchase, redemption or other acquisition of shares, a debt distribution, or otherwise. “
The ORS 63.001 (6) definition of “distribution” by LLCs is equally powerful.
The legal restrictions on distributions from a corporation to its shareholders and from an LLC to its members are identical. Such distributions may only be made if, in the judgment of those responsible for authorizing the distribution (the directors of the corporation or managers or, in the case of a member-managed LLC, the members of an LLC) after the distribution is effective. :
1. The corporation or LLC may pay its debts when 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 corporate limitation; ORS 63.229 (1) (a) and (b), define limitation for LLCs.
The bylaws also define the effective date on which the distribution is made for the purposes of limitations. ORS 60.181 (5) and ORS 63.229 (4).
If a redemption or other distribution is made in violation of these legal 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 is permitted subject to certain rights of contribution of others who joined the illegal authorization. SRO 60,367 (for corporations) and ORS 63.235 (for LLC) Likewise, any shareholder or member who receives an unauthorized distribution knowing that it was made in violation of the applicable statute may also have personal liability to the company to the extent that the distribution exceeds the permitted limits established by the statute.
In light of clear legal restrictions and the 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 legal requirements.
© 11/30/2010 Lawrence B. Hunt. All rights reserved.
