Bill to restrict shareholder distribution resurfaces

By CMTA Staff

Capitol Update, Feb. 8, 2007 Share this on FacebookTweet thisEmail this to a friend

AB 251 (Mark DeSaulnier, D-Concord) would prohibit any  corporation or any of its subsidiaries from making a  distribution to the corporation's shareholders if they have an outstanding pension obligation to employees.

The current language of the bill does not specify whether this prohibition would apply to California-based companies only, or to any company with a California presence. The bill also does not define the terms "failed to make a payment" and "distribution".

Additionally, the bill would make a member of the Board of Directors who receives a distribution prohibited by this provision liable to the corporation for the dividend payment, plus interest, regardless of whether he or she had knowledge of its impropriety.  Shareholder liability would kick in for the dividend and interest only if the shareholder had direct knowledge of an impropriety.  By setting up a system where shareholders with knowledge of impropriety will be treated differently than shareholders without any such knowledge, it is possible that disgruntled shareholders could make claims against Members of the Board of Directors for breach of their duty to all shareholders.

State law on this topic is misguided as current federal law governs pension funding obligations. A person who believes they have been denied a pension benefit is able to sue pursuant to ERISA.

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