MicroTek, Inc., a 2-year old start-up company headquartered in San Francisco and

Question

MicroTek, Inc., a 2-year old start-up company headquartered in San Francisco and specializing in GPS software development, has outstanding 400 shares of $100 par value common stock, which has been issued and sold at $105 per share for a total of $42,000. The State of Delaware, where MicroTek is incorporated, has adopted the earned surplus test for all distributions. MicroTek is aggressively courting a multi-million dollar venture capital investment from Angel Capital Investors, LLP, to commercialize a number of patents that are among MicroTek’s assets, which amount to $65,000. MicroTek’s liabilities to creditors total $10,000. At the same time, MicroTek’s board learns that Amanda Richardson, an original investor who holds 100 of the 400 shares of stock, is planning to sell her shares on the open market for $10,500. Believing that this will not be in the best interest of the corporation, MicroTek’s board offers to buy the shares for $10,500 and Amanda agrees. About six months later, when the assets of the corporation have decreased to $50,000 and its liabilities, not including its liability to Amanda, have increased to $20,000, the directors use $10,000 to pay a dividend to all of the shareholders. The corporation later becomes insolvent.

(a) Does Amanda have any liability to the corporation or its creditors in connection with the corporation’s reacquisition of the 100 shares?

(b) Was the payment of the $10,000 dividend proper?

Explanation / Answer

a) As soon as Amanda sold her shares she does not have any liability to the corporation or its creditors in connection with the corporation’s reacquisition of the 100 shares. In a corporation the liability of the shareholders is limited to the value of shares they hold in the corporation.

b) The payment of $10000 as dividend is not proper as the company has not generated enough profits and as is provided in the statement above, the assets have decreased ad the liability has increased which shows that the financial position of the company is not good and it should noot distribute any dividend.

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