An administrator must act in good faith and cannot declare a dividend that operates a disguised liquidation contrary to the company's bylaws.
By allowing the formation of a company, the law has certainly limited the liability of shareholders, but in return it has established certain rules that both the company and the directors and shareholders must adhere to.
A father wishing to retire transfers the shares he holds in a tannery to 2 management companies owned by his 2 sons who have been working with him for over 30 years. In return, each management company issues him 1000 non-voting shares, redeemable at a commercially reasonable fair price and eligible for a dividend of $0.50 per share. The father, ignoring his 2 sons, bequeaths his freeze shares to his other children.
In the years following the father's death, the 2 management companies declare 2 dividends, one of $0.50 per freeze share and another of $845 per "A" share owned by the 2 sons. The other children then turn to the court and demand, among other things, that the declared dividends be cancelled.
Even though the courts recognize "the validity of a provision authorizing a discretionary dividend," "such a provision does not eliminate the obligation of directors to act in good faith and in the best interests of the company."
The Court of Appeal* comes to the conclusion that the declared dividend cannot be justified in the interest of the companies. "They are carrying out a disguised liquidation contrary to the companies' bylaws." The court therefore orders that the dividends be returned to the management companies.
Some company directors tend to forget their obligations. Why do we have to turn to the courts to remind them?
*C.A. 500-09-001513-928 and 500-09-001517-929, 1998-06-18
