Corporate Dividend and Distribution Requirements in Tennessee

At a glance

Requirements one by one

Governing law, entity, distribution, and scope

Tenn. Code Ann. § 48-11-201 defines an ordinary domestic business corporation as a for-profit corporation incorporated under or subject to Chapters 11 through 27. A distribution reaches direct and indirect money or property transfers, other than the corporation's own shares, and direct or indirect shareholder debt, including a guaranty. Dividends, purchases, redemptions, other acquisitions, and debt distributions are named examples.

Tenn. Code Ann. § 48-16-401(a)-(g) states no liquidation exclusion. This page nevertheless follows the topic contract and covers only voluntary nonliquidating distributions, not dissolution or liquidation procedure.

Board, committee, shareholder, and governing-record authority

Section 48-16-401 assigns authorization to the board, subject to the charter and the financial limits. Tenn. Code Ann. § 48-18-206(d)-(f) permits a committee to authorize a distribution or reacquisition only according to a formula or method prescribed by the board. The current Act contains no special all-shareholder governance-override provision comparable to those in several Model Act states; ordinary charter, bylaw, and agreement rules still require transaction-specific review.

Cash, property, shares, debt, repurchase, and redemption forms

Section 48-11-201 covers direct and indirect money or other property, debt incurred directly or indirectly including through a guaranty, dividend declaration or payment, purchases, redemptions, and other acquisitions. Its property branch excludes the corporation's own shares because Tenn. Code Ann. § 48-16-204(a)-(c) separately governs share dividends. Reacquired shares generally become authorized but unissued under Tenn. Code Ann. § 48-16-302(a).

Surplus, net-profit, equity, and capital-source test

Tennessee does not add a surplus, retained-earnings, net-profit, or stated-capital source test to § 48-16-401. It instead uses the two post-distribution limits in subsection (c), together with charter restrictions and class or series terms. This describes the statutory architecture without deciding what amount may be distributed.

Liquidity, balance-sheet, liability, and preference test

After giving effect to a distribution, § 48-16-401(c) requires the corporation to remain able to pay debts as they become due in the usual course. Total assets also cannot fall below total liabilities plus the amount needed to satisfy superior dissolution preferences, unless the charter permits otherwise. Both limits apply.

Financial statements, valuation, reserves, and reliance

Section 48-16-401(d) permits financial statements based on accounting practices and principles reasonable in the circumstances, a fair valuation, or another reasonable method. Tenn. Code Ann. § 48-18-301(b)-(c) permits qualified reliance on reliable corporation or subsidiary officers or employees, professional experts, or a trusted committee unless the director knows facts making reliance unwarranted. The distribution section states no special reserve formula.

Record date, measurement date, payment delay, and revocation

If the board does not fix the distribution record date, § 48-16-401(b) makes authorization the default except for a repurchase or reacquisition. Section 48-16-204 uses the same authorization-date default for a share dividend.

The financial-test date depends on form. An own-share acquisition uses the earlier of transfer or debt incurrence and the date shareholder status ends. Another debt distribution uses the distribution or incurrence date. When debt arises through a mortgage, security interest, lien, or other asset encumbrance, the statute deems it incurred when the security instrument is executed and delivered. Other payments use authorization if completed within four months and the payment date if later. Conditional-pay debt is tested whenever principal or interest is actually paid. No general revocation rule is stated.

Class, series, equal treatment, stock distributions, and fractions

Tenn. Code Ann. § 48-16-101(a), (c) generally gives one class identical preferences, limitations, and relative rights, subject to permitted series terms, and lets the charter establish distribution and dissolution preferences. Section 48-16-204 makes a share dividend pro rata by default. Issuing one class or series as a dividend on another requires charter authorization, majority approval by the class or series being issued, or no outstanding shares of it.

Tenn. Code Ann. § 48-16-104(a), (c)-(d) permits fractions, cash for their value, a disposition arrangement, or conditional scrip. A fractional share carries shareholder rights; scrip does not unless its terms provide otherwise.

Distribution debt, priority, liquidation, insolvency, and boundaries

Section 48-16-401(f)-(g) gives compliant distribution debt parity with general unsecured debt unless an agreement subordinates it. Conditional-pay debt can be excluded from liabilities for the financial tests, but every principal or interest payment becomes a distribution measured when actually made. The secured-debt timing rule identifies when the obligation is incurred; it does not itself authorize security or decide priority beyond the statutory parity rule.

This page reports the statutory tests without applying them. It does not decide solvency or a lawful amount and excludes unlawful-distribution liability, creditor recovery, fiduciary disputes, fraudulent transfers, bankruptcy, covenants, dissolution, tax, accounting, valuation, securities, and transaction advice.

What trips people up

Tennessee says four months, not 120 days. Those periods can end on different dates. The statute also specifies when secured distribution debt is incurred: execution and delivery of the security instrument, not a later enforcement or payment event.

Committee authority is bounded as well. A committee cannot choose any amount it wants merely because it generally exercises board powers; the distribution or reacquisition must follow the board's formula or method.

Common questions

Does Tennessee use a surplus or net-profit test?

No separate source test appears in § 48-16-401. Tennessee instead applies the ability-to-pay and assets-versus-liabilities-plus-preferences tests, subject to the charter and share terms.

Can one class receive another class as a share dividend?

Only through one of § 48-16-204's routes: charter authorization, majority approval by the class or series being issued, or no outstanding shares of that class or series.

Does authorization always control the financial test?

No. Acquisitions, debt distributions, security instruments, conditional debt, and payments after four months use different measurement dates.

Is a guaranty outside the distribution definition?

Not automatically. Section 48-11-201 expressly says indirect indebtedness can include a guaranty when incurred for shareholders with respect to shares.

Statutes and sources

• Official Tennessee Code Annotated, Title 48, §§ 48-11-201, 48-16-101, 48-16-104, 48-16-204, 48-16-302, 48-16-401, 48-18-206, and 48-18-301, public-domain release 76 dated May 21, 2021, accessed September 3, 2026: https://unicourt.github.io/cic-code-tn/transforms/tn/octn/r76/gov.tn.tca.title.48.html