Corporate Director and Shareholder Liability for Unlawful Distributions in California

At a glance

Requirements one by one

Covered payments and director conduct

Cal. Corp. Code § 166 defines a distribution to include a dividend and a share purchase or redemption for cash or property. Under § 316(a)(1), directors who approve a distribution contrary to §§ 500–503 are jointly and severally liable, subject to § 309. A director present when the board or committee acts is treated as approving even if the director abstains (§ 316(b)). Section 309(a) instead tests good faith, the director's belief about the corporation's interests, and ordinary-prudent-person care with reasonable inquiry. Its reliance and no-liability rules appear in subsections (b) and (c).

Section 500(a) requires a good-faith board determination under either the retained-earnings route or the asset-and-liability route; § 501 separately bars a distribution when the corporation or distributing subsidiary is, or would likely become, unable to meet maturing liabilities. Section 503 excludes certain repurchases or redemptions funded by insurance proceeds after a shareholder's death or disability from §§ 500 and 501. The table does not apply any of these financial tests to a proposed payment.

Recovery amount and claimants

Section 316(d) measures director damages by the illegal cash amount or the fair market value of distributed property, with judgment-rate interest and reasonably incurred valuation costs. It caps recovery by nonconsenting creditor liabilities and nonconsenting shareholder injury, as applicable. Section 316(c)(1) sends a claim over an ordinary distribution to the persons entitled to sue under § 506(b): qualifying creditors with pre-distribution claims and, for the specified § 500 preference injuries, qualifying nonconsenting preference shareholders. For a post-dissolution asset distribution without provision for known liabilities, § 316(c)(2) permits prior nonconsenting creditors to sue in the corporation's name.

Recipient recovery and contribution

A shareholder who receives a prohibited distribution with knowledge of facts indicating impropriety is directly liable to the corporation under § 506(a), subject to the section's amount, interest, valuation-cost, and injury limits. A sued shareholder may seek contribution from other liable shareholders (§ 506(c)). Separately, § 316(e) permits a sued director to seek contribution from other liable directors, and § 316(f) grants liable directors subrogation to the corporation's rights against shareholders who received the distribution. That subrogation clause does not itself state a recipient-knowledge condition.

Filing period

Section 506(b) extinguishes a shareholder's obligation to return a distribution unless the action is filed within four years after the distribution. Section 316 supplies no separate filing period for a claim against a director; a different applicable limitations rule would require separate analysis. Section 166 specifies when a dividend or share repurchase counts as a distribution, including the special timing for security debt exchanged for shares.

What trips people up

Section 316(a)(2) separately reaches a distribution of assets after dissolution proceedings begin if the corporation has not paid or adequately provided for known liabilities, subject to the stated claims exclusion. That route uses the pre-action creditor standing rule in § 316(c)(2). The ordinary distribution trigger instead links to §§ 500–503 and § 506(b); treating these two routes as identical would miss who can sue.

Common questions

Does a director's abstention avoid the statutory approval rule?

Section 316(b) treats a director who is present at the board or committee meeting and abstains as approving the action. The separate § 309 performance standard still applies.

Does this provision displace other creditor remedies?

Section 506(d) expressly preserves shareholder liability under California's Civil Code fraudulent-transfer chapter. This page addresses the corporation-code recovery rules and does not decide a claim under that separate chapter.

Statutes and sources

• Cal. Corp. Code § 166, accessed September 27, 2026: “Distribution to its shareholders” includes transfers without consideration and share purchases or redemptions for cash or property.
• Cal. Corp. Code § 309, accessed September 27, 2026: a director must perform duties “in good faith” and “with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”
• Cal. Corp. Code § 316, accessed September 27, 2026: approving directors “shall be jointly and severally liable to the corporation”; a present abstainer “shall be considered to have approved the action.”
• Cal. Corp. Code § 500, accessed September 27, 2026: the board must determine in good faith that one of the statutory financial alternatives is met.
• Cal. Corp. Code § 501, accessed September 27, 2026: a distribution is barred if the corporation or distributing subsidiary is likely unable to meet liabilities as they mature.
• Cal. Corp. Code § 503, accessed September 27, 2026: specified insurance-funded death and disability share acquisitions are excepted from §§ 500 and 501.
• Cal. Corp. Code § 506, accessed September 27, 2026: a knowing recipient is liable under subsection (a); subsection (b) sets claimant categories and the four-year return deadline.