A corporation’s board of directors must fix two dates before paying dividends: a record date and a payment date. As such, a board declares a dividend for shareholders of record as of a certain future date, and actual payment of the dividend occurs at a later date. There is case law that provides that these board actions create a debtor–creditor relationship between the corporation and its shareholders that cannot be revoked; however, there are exceptions the board can consider.

For example, if the record date discussed above has not occurred, the law of most jurisdictions, including Delaware, subject to the corporation’s governing documents (for example, its certificate of incorporation), permit the corporation’s board of directors to defer the record and payment dates for the dividend. In addition, if the record date has passed, but the payment date has not, the board can (and should) consider whether there are any impediments to the payment of the dividend, such as when there is not a sufficient surplus for the payment of the dividend or the payment of the dividend would render the corporation insolvent.

A corporation may have no choice to withhold a declared divided—even if the record date is passed—if the corporation is unable, given the present financial landscape, to determine whether the corporation has sufficient surplus to pay a dividend. After the record date has passed, Delaware law only permits a company to pay the dividend “to the extent there are funds lawfully available for the payment,” because a Delaware corporation is statutorily prohibited from paying a dividend if the corporation cannot determine whether it has available “surplus” (as that term is defined under the Delaware General Corporation Law) or if the corporation’s board of directors otherwise has a good faith belief that payment of a dividend would leave the corporation insolvent.

The fact that a Delaware corporation is precluded from issuing the dividend it has already declared creates a potential “Catch-22.” On the one hand, the corporation could be held liable under Delaware state corporation law if the dividend is issued when the corporation lacks an adequate surplus. But, on the other hand, the decision to defer dividends creates the potential that the same corporate officials determining to comply with Delaware corporate law may be exposed to liability under the federal (and potentially state) securities laws, which significantly regulate disclosures provided to stockholders, including disclosures relating to the timing of dividend payments.

The situation surrounding payment of dividends in the current environment is fluid, and the corporation’s board of directors and officers should consult with their legal advisors regarding these matters.