Corporate Dividend and Distribution Requirements in Alabama
At a glance
| Governing law, entity, distribution, and scope | Alabama Business Corporation Law, Ala. Code tit. 10A, ch. 2A; ordinary domestic business corporation. Distribution includes direct/indirect cash or property except own stock, debt, dividends, purchases, redemptions, acquisitions, and liquidation; § 10A-2A-6.40 expressly excludes Article 14 liquidation distributions (§§ 10A-2A-1.40, 10A-2A-6.40) |
|---|---|
| Board, committee, shareholder, and charter authority | Board authorizes subject to certificate and § 10A-2A-6.40(c). Committee may authorize/approve only by board-prescribed formula, method, or limits. No general stockholder approval; certificate/bylaws may constrain delegation (§§ 10A-2A-6.40, 10A-2A-8.25) |
| Cash, property, shares, debt, repurchase, and redemption forms | Direct/indirect cash or other property except own stock, incurred debt, dividend payment, purchase, redemption, other acquisition, debt, liquidation, or otherwise (§ 10A-2A-1.40(6)); stock dividends under § 10A-2A-6.23; redemption may use cash, debt, securities, or property (§ 10A-2A-6.01(c)(2)) |
| Surplus, net-profit, equity, and capital-source test | No separate surplus, retained-earnings, net-profit, stated-capital, or other capital-source test in § 10A-2A-6.40; Alabama uses the dual post-distribution limits plus certificate and class/series terms |
| Liquidity, balance-sheet, liability, and preference test | After distribution: corporation must be able to pay debts as due, and assets must be ≥ liabilities plus amount needed for superior dissolution preferences unless certificate permits otherwise (§ 10A-2A-6.40(c)) |
| Financial statements, valuation, reserves, and reliance | Board may use reasonable-in-circumstances accounting statements, fair valuation, or another reasonable method (§ 10A-2A-6.40(d)); qualified reliance on reliable officers/employees, retained experts, or trusted committee absent contrary knowledge (§ 10A-2A-8.30(d)–(f)); no reserve formula |
| Record date, measurement date, payment delay, and revocation | Board may fix nonretroactive record date; default is authorization except acquisitions. Acquisition: earlier transfer/debt or status end; other debt: distribution; other payments: authorization if ≤120 days, payment if later (§ 10A-2A-6.40(b), (e)); no general revocation rule or stated forward maximum |
| Class, series, equal treatment, stock distribution, and fractions | Same-class/series terms identical except certificate may expressly vary among holders; certificate sets preferences (§ 10A-2A-6.01). Stock dividends pro rata; cross-class issue needs certificate, issuing-class majority, or no outstanding stock (§ 10A-2A-6.23). Fractions, value cash, disposition, or nonbearer scrip (§ 10A-2A-6.04) |
| Distribution debt, priority, liquidation, insolvency, and boundaries | Compliant distribution debt is at parity with general unsecured debt unless subordinated. Conditional debt may be excluded from liabilities, with principal/interest retested when paid (§ 10A-2A-6.40(f)–(g)); Article 14 liquidation excluded; liability, creditor, bankruptcy, covenant, tax, valuation, and advice issues outside scope |
Requirements one by one
Governing law, entity, distribution, and scope
Ala. Code §§ 10A-2A-1.40 and 10A-2A-6.40 apply Alabama's Business Corporation Law to an ordinary corporation under Chapter 2A. A distribution includes a direct or indirect transfer of cash or property other than the corporation's own stock, or incurred debt, to or for stockholders with respect to stock. Dividends, purchases, redemptions, other acquisitions, debt, and liquidation are named forms.
The financial section expressly does not apply to Article 14 liquidation distributions. This page covers the nonliquidating branch.
Board, committee, shareholder, and charter authority
Ala. Code § 10A-2A-6.40(a) assigns authorization to the board, subject to the certificate of incorporation and the financial tests. The surveyed provisions state no general stockholder-approval step.
Under Ala. Code § 10A-2A-8.25(d), a committee may authorize or approve a distribution only according to a formula or method, or within limits, prescribed by the board. The certificate, bylaws, or board may further define committee authority.
Cash, property, shares, debt, repurchase, and redemption forms
Ala. Code § 10A-2A-1.40(6) reaches cash, other property, incurred debt, dividend payments, purchases, redemptions, other acquisitions, debt distributions, liquidation distributions, and other forms. Section 10A-2A-6.01(c)(2) also permits the certificate to make a class or series redeemable for cash, indebtedness, securities, or other property.
The corporation's own stock is excluded from the definition's property branch and follows the separate § 10A-2A-6.23 stock-dividend rules.
Surplus, net-profit, equity, and capital-source test
Ala. Code § 10A-2A-6.40 states no separate surplus, retained-earnings, net- profit, stated-capital, or other source test. Alabama instead uses the two post- distribution limits in subsection (c), together with certificate restrictions and class or series preferences.
This reports the statutory test without applying it to a corporation's numbers.
Liquidity, balance-sheet, liability, and preference test
Ala. Code § 10A-2A-6.40(c) bars a distribution that would leave the corporation unable to pay debts as they become due in the usual course. It also bars a distribution that would leave assets below liabilities plus the amount needed for superior dissolution preferences.
The certificate may permit departure from the preference add-on, but the exception does not extend to the debts-as-due or basic assets-versus-liabilities parts.
Financial statements, valuation, reserves, and reliance
Ala. Code § 10A-2A-6.40(d) permits financial statements prepared under accounting practices and principles reasonable in the circumstances, or a fair valuation or another reasonable method. The distribution section supplies no reserve formula.
Under Ala. Code § 10A-2A-8.30(d)–(f), qualified reliance may extend to reliable and competent officers or employees, retained experts, or a trusted board committee. Knowledge making reliance unwarranted defeats that route.
Record date, measurement date, payment delay, and revocation
Ala. Code § 10A-2A-6.40(b) permits the board to fix a record date that is not retroactive. For a nonacquisition distribution, authorization is the default if the board fixes none. The subsection states no maximum future interval.
For a purchase, redemption, or other acquisition, subsection (e) uses the earlier of property transfer or stockholder-debt incurrence and the end of stockholder status. Other debt distributions are measured when distributed. Other payments use authorization when paid within 120 days and payment when later. The section states no general revocation power.
Class, series, equal treatment, stock distributions, and fractions
Ala. Code § 10A-2A-6.01 ordinarily makes terms identical within a class or series, but the certificate may expressly vary terms among holders. It may also establish cumulative or noncumulative dividends, redemption terms, and distribution or dissolution preferences.
Under Ala. Code § 10A-2A-6.23, stock dividends are pro rata and without consideration. A cross-class or cross-series dividend requires certificate authorization, majority approval by the class or series to be issued, or no outstanding stock of that class or series. Ala. Code § 10A-2A-6.04 permits fractions, value cash, holder disposition, or certificated/uncertificated nonbearer scrip; fractions carry dividend rights, while scrip does so only if its terms provide.
Distribution debt, priority, liquidation, insolvency, and boundaries
Ala. Code § 10A-2A-6.40(f) places compliant distribution debt at parity with general unsecured debt unless subordinated by agreement. Under subsection (g), debt payable only when a distribution could then be made is excluded from liabilities; if issued as a distribution, each principal or interest payment is retested when actually paid.
Subsection (h) excludes Article 14 liquidation distributions. Liability, recovery, fraudulent transfer, bankruptcy, covenants, fiduciary duties, tax, accounting, and valuation advice remain outside scope.
What trips people up
- The record date cannot be retroactive. Alabama states that limitation expressly even though it gives no maximum forward interval in § 10A-2A-6.40.
- Committee authority is bounded. The committee must stay within a board- prescribed formula, method, or limit.
- Terms can vary within a class or series. They may do so only when the certificate expressly states the variations.
- Conditional debt is retested. Each actual principal or interest payment on debt issued as a distribution becomes a new distribution measured then.
Common questions
Does Alabama require surplus or current net profits?
No separate source test appears in Ala. Code § 10A-2A-6.40. The operative limits are the debts-as-due and assets-versus-liabilities-plus-preferences tests.
May the certificate remove both financial tests?
No. The certificate exception reaches the superior-preference add-on, not the debts-as-due requirement or the basic assets-versus-liabilities comparison.
Does § 10A-2A-6.40 govern liquidation distributions?
No. Subsection (h) expressly excludes distributions in liquidation under Article 14.
Statutes and sources
- Ala. Code § 10A-2A-1.40(4), (6) — corporation and distribution definitions. Official ALISON code text (accessed 2026-09-03).
- Ala. Code §§ 10A-2A-6.01 and 10A-2A-6.04 — class/series terms, preferences, redemption forms, and fractions. Official § 6.01 and § 6.04 (accessed 2026-09-03).
- Ala. Code § 10A-2A-6.23 — stock dividends and record dates. Official text (accessed 2026-09-03).
- Ala. Code § 10A-2A-6.40 — authority, solvency, valuation, timing, distribution debt, and liquidation exclusion. Official text (accessed 2026-09-03).
- Ala. Code §§ 10A-2A-8.25 and 10A-2A-8.30 — bounded committee authority and qualified reliance. Official § 8.25 and § 8.30 (accessed 2026-09-03).
Source links
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