Corporate Dividend and Distribution Requirements in Texas

At a glance

Requirements one by one

Governing law and transaction forms

Section § 21.002(5)-(6), (9)-(12) defines the surveyed corporation and the financial vocabulary. A distribution includes property, cash, or issued debt in the form of a class or series dividend, a direct or indirect purchase or redemption of the corporation's own shares, or a liquidation payment. It excludes a same-class split that does not increase stated capital and a transfer of the corporation's own shares or rights to acquire them. Share dividends therefore follow the separate §§ 21.310-21.313 route.

Board, committee, and shareholder-agreement authority

Under §§ 21.101(a)(5), 21.302, the board may authorize a distribution and may set a maximum amount, distribution period, and formula. The authorization may also permit another person to make a determination or take an action within the stated maximum and period. A unanimous shareholder agreement may govern the authorization or making of distributions, including disproportionate treatment, but remains subject to § 21.303.

Section § 21.416(a)-(d) lets a properly authorized board committee approve a distribution or share issuance when the designating resolution, certificate of formation, or bylaws grants that authority. Those governing records still must be read before treating a committee resolution as sufficient.

Surplus, net assets, stated capital, and the distribution limit

For an ordinary dividend, §§ 21.301, 21.303 make surplus the distribution limit. Section 21.002 defines surplus as net assets minus stated capital and net assets as total assets minus total debts. The corporation may not distribute more than that limit or violate its certificate of formation.

The statute switches to a net-assets ceiling for defined transactions: purchases or redemptions that eliminate fractions, collect or compromise indebtedness, or pay dissenting holders; non-purchase distributions by a consuming assets corporation; and qualifying purchases or redemptions by an open-end investment company whose certificate permits use of stated capital. Texas supplies no current-or-prior-year net-profit alternative.

The insolvency and preference boundaries

Section § 1.002(39)-(40) defines insolvency as inability to pay debts as they become due in the usual course. Section 21.303 separately bars a distribution that would leave the corporation insolvent, even if the amount otherwise fits the applicable surplus or net-assets ceiling.

The certificate also controls class and series preferences under §§ 21.152-21.154, and a distribution cannot violate the certificate. Texas does not add a separate superior-liquidation-preference amount to the statutory surplus or net-assets formula.

Financial information, valuation, and reserves

Section §§ 21.314-21.315 permits a broad evidence set: GAAP or IFRS statements, tax-return accounting or other reasonable accounting, condensed or summary information, reasonable projections and forecasts, fair valuation, another reasonable method, or a combination. The statute does not select a method for a particular corporation or state that a particular valuation is reasonable.

Under §§ 21.308-21.309, the board may create a reserve from surplus or designate or allocate surplus for a proper purpose, then increase, decrease, or abolish it by resolution. The distribution subchapter states no separate rule authorizing reliance on a particular officer, employee, or adviser.

Record date, delayed measurement, and revocation

Section § 6.101(a)-(d) allows the governing documents or governing authority to set the record date for an ordinary distribution, but no earlier than 60 days before the action. If neither supplies a date, the default is the date the board adopts the resolution declaring the distribution. That rule excludes a purchase or redemption of the entity's own securities.

If payment occurs within 120 days, § 21.315 measures on the authorization date. For a later payment, the board may designate a date no earlier than 120 days before payment; without one, the payment date controls. Incurring indebtedness or a deferred payment obligation counts as making the distribution when incurred, while a contractual redemption or acquisition uses either the contract's date or the actual acquisition date at the corporation's option.

The cited provisions state no general revocation power for a declared dividend. For redemptions, §§ 21.304-21.307 instead expressly allow irrevocable instructions to the transfer agent to send notice or pay the redemption price.

Class, series, share-dividend, and fraction rules

Shares of the same class must be identical unless divided into series, and all shares within the same series must be identical. Class and series designations, preferences, limitations, and relative rights belong in the certificate of formation (§§ 21.152-21.154).

Under §§ 21.310-21.313, the board may authorize a share dividend subject to the certificate. A dividend of unissued shares to holders of another class or series requires either certificate authority or majority approval of the outstanding shares of the class or series being distributed. The corporation must also transfer the required par value or board-set no-par value from surplus to stated capital.

Sections §§ 21.163-21.164 permit fractional shares, arrangements among the persons entitled to fractions, fair-value cash, or aggregating scrip. A fractional share carries distribution rights; scrip does not unless its terms provide them.

Distribution debt and separate liquidation branch

Section 21.308 expressly places declared-distribution debt and indebtedness issued in a distribution at parity with general unsecured debt. Binding agreements can require subordination or security, and the recipient may agree to subordination. Section 21.315 treats the debt or deferred obligation as distributed when incurred.

The definition of distribution includes liquidation payments, but § 21.303 separately recognizes a Chapter 11-compliant branch. This page does not apply the ordinary distribution rules to winding up, or address wrongful-distribution liability, creditor recovery, fraudulent transfer, bankruptcy, covenants, fiduciary duties, taxes, or accounting advice.

What trips people up

Surplus and cash flow are separate limits. An ordinary distribution must stay within surplus and must not leave the corporation unable to pay debts as they come due. A single label such as "solvent" does not preserve both statutory questions.

The 120-day rule changes the measurement date, not the test. A later payment does not automatically fail, but it moves the determination to a qualifying board-designated date or the payment date under § 21.315.

A share dividend has its own capital mechanics. It is outside § 21.002(6)'s distribution definition, yet it still requires certificate review, possible class approval, and a transfer from surplus to stated capital under §§ 21.310-21.313.

Common questions

Can a Texas board delegate dividend decisions to a committee?

Yes, if the designating resolution, certificate, or bylaws authorizes the committee under § 21.416(d). That delegation does not displace the certificate, distribution limit, or insolvency rules.

Does Texas let a corporation issue debt instead of paying cash now?

Issued debt can itself be a distribution. Section 21.308 generally places it at parity with general unsecured debt, subject to binding subordination or security terms, and § 21.315 treats it as distributed when incurred.

May the corporation use a forecast instead of a conventional balance sheet?

Section 21.314 allows a reasonable projection, forecast, or other forward-looking information, as well as the other listed methods. The statute does not establish that a particular forecast is reasonable or that the corporation passes either financial limit.

Statutes and sources

• Tex. Bus. Orgs. Code § 1.002(39)-(40) — insolvency and insolvent definitions. Official Texas Legislative Council text, accessed September 3, 2026.
• Tex. Bus. Orgs. Code § 6.101 — ordinary distribution record date and default. Official Texas Legislative Council text, accessed September 3, 2026.
• Tex. Bus. Orgs. Code §§ 21.002, 21.101, 21.152-21.164, and 21.301-21.315 — definitions, shareholder agreement, class and fraction rules, authorization, financial limits, redemptions, debt priority, reserves, share dividends, valuation, and measurement. Official Texas Legislative Council text, accessed September 3, 2026.
• Tex. Bus. Orgs. Code § 21.416 — board-committee authority. Official Texas Legislative Council text, accessed September 3, 2026.