What restrictions are there on corporate distributions generally?

A “distribution” by a corporation to its shareholders includes both a dividend (other than a stock dividend) and the purchase or redemption by the corporation or a subsidiary of the corporation’s own shares for cash or property. Cal. Corp. Code § 166. Neither a corporation nor any of its subsidiaries can make a distribution to the corporation’s shareholders unless the board of directors has in good faith determined that either (1) the amount of the corporation’s retained earnings immediately prior to the distribution equals or exceeds the sum of (A) the amount of the proposed distribution plus (B) the preferential dividends arrears amount, or (2) immediately after the distribution, the value of the corporation’s assets would equal or exceed the sum of its total liabilities plus the preferential rights amount. Cal. Corp. Code § 500(a), (b) (defining “preferential dividends arrears amount” and “preferential rights amount”). A corporation and its subsidiaries are also prohibited from making any distribution if the corporation making the distribution is, or as a result of the distributions would be, insolvent, that is, likely to be unable to meet its liabilities as they mature. Cal. Corp. Code § 501. When determining that a distribution is not prohibited under any of these tests, the board of directors may rely on (1) financial statements prepared on the basis of accounting practices and principles that are reasonable under the circumstances, (2) a fair valuation, or (3) any other method that is reasonable under the circumstances. Directors who approve a distribution contrary to these requirements are jointly and severally liable to the corporation for the benefit of its creditors or shareholders, who may bring suit to enforce the directors’ liability. Cal. Corp. Code § 316(a)(1).