Corporate Dividend and Distribution Requirements in Vermont

At a glance

Requirements one by one

Governing law, entity, distribution, and scope

11A V.S.A. § 1.40(4), (6) defines the ordinary domestic corporation as a Vermont corporation for profit and gives “distribution” a broad scope. It includes direct or indirect money or other-property transfers and debt incurred for shareholders with respect to their shares. The listed forms are a declared or paid dividend, purchase, redemption, other share acquisition, distributed debt, and another form. The corporation's own shares are excluded from the definition and use the separate share-dividend section.

Board, committee, shareholder, and charter authority

Under 11A V.S.A. § 6.40, the board may authorize and the corporation may make a distribution, subject to article restrictions and the two financial limits. 11A V.S.A. § 8.01(a)-(b) supplies the board-centered governance default.

Vermont's committee rule is stricter than the board-formula approach in many Model Act states. 11A V.S.A. § 8.25(a) permits the board to create a committee subject to the articles and bylaws, but § 8.25(d)-(f) bars the committee from authorizing distributions. It may approve a reacquisition only under a board- prescribed formula or method.

Section 7.32(a)(2) permits a qualifying shareholder agreement to govern authorization or making, including a distribution not proportional to share ownership, but expressly keeps that arrangement subject to § 6.40.

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

The § 1.40(6) definition reaches direct and indirect money or other-property transfers, incurred shareholder debt, declared or paid dividends, purchases, redemptions, other share acquisitions, distributed debt, and other forms. It excludes the corporation's own shares; 11A V.S.A. § 6.23 governs those share dividends separately.

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

Section 6.40 states no separate surplus, retained-earnings, net-profit, stated- capital, or other lawful-source test. Its financial limits are the two post- distribution tests in subsection (c), together with article restrictions and applicable class or series terms.

Liquidity, balance-sheet, liability, and preference test

Both § 6.40(c) tests apply after giving the distribution effect. First, the corporation must remain able to pay its debts as they become due in the usual course of business. Second, total assets may not fall below total liabilities plus the amount needed on a hypothetical dissolution to satisfy preferences superior to those of the recipients, unless the articles permit otherwise.

Financial statements, valuation, reserves, and reliance

Section 6.40(d) permits the board to base its determination on financial statements prepared using generally accepted accounting practices and principles, professional appraisals, or another method reasonable under the circumstances. The section states no separate reserve formula or generic fair- valuation wording.

Under § 8.30(b)-(c), a director may rely on qualifying information, opinions, reports, statements, financial statements, or financial data from reasonably trusted and competent officers or employees, professionals within reasonably believed expertise, or a board committee reasonably believed worthy of confidence. Knowledge making reliance unwarranted defeats that route.

Record date, measurement date, payment delay, and revocation

The board may set the distribution record date. For a distribution other than a repurchase or reacquisition, § 6.40(b) makes the authorization date the default when the board sets none. Section 6.23(c) uses the same authorization-date default for a share dividend.

Section 6.40(e) measures a purchase, redemption, or other share acquisition at the earlier of the money or property transfer or debt incurrence and the end of the seller's shareholder status. Other distributed debt is tested when distributed. An ordinary distribution paid within 120 days is tested when authorized; one paid later is tested when paid. The section states no general distribution-revocation rule.

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

11A V.S.A. § 6.01(a) ordinarily gives shares within a class identical preferences, limitations, and relative rights. 11A V.S.A. § 6.01(c) permits the articles to authorize cumulative, noncumulative, or partly cumulative dividends and distribution or dissolution preferences.

Section 6.23 makes a share dividend pro rata by default. Issuing one class or series on another requires authorization in the articles, approval by a majority of votes entitled to be cast by the class or series being issued, or no outstanding shares of the class or series being issued. 11A V.S.A. § 6.04 permits fractional shares, value cash, shareholder disposition arrangements, or scrip in registered or bearer form; scrip lacks shareholder rights unless its terms provide them.

Distribution debt, priority, liquidation, insolvency, and boundaries

Section 6.40(f) puts compliant distribution debt at parity with general unsecured debt unless an agreement subordinates it. Unlike later Model Act variants, § 6.40 states no conditional-debt exclusion from liabilities, no payment-by-payment retest, and no express liquidation-distribution exclusion.

This survey covers voluntary nonliquidating distributions and does not decide liquidation, insolvency, creditor, fiduciary, accounting, tax, or valuation questions.

What trips people up

Committee authority and reacquisition authority are different. Section 8.25 bars a committee from authorizing distributions but permits a committee to approve a reacquisition under a formula or method the board prescribed.

Professional appraisals are expressly named. Section 6.40(d) does not use the generic “fair valuation” wording found in newer Model Act provisions.

The 120-day period changes the measurement date. An ordinary distribution paid within that period is tested at authorization; a later payment is tested when made.

Common questions

Must a Vermont distribution come from surplus or retained earnings?

No separate source test appears in § 6.40. The board still must apply both post- distribution tests, the articles, and the affected share terms.

May a committee authorize the distribution?

No. Section 8.25(e)(1) expressly bars a committee from authorizing distributions. Its separate reacquisition exception is limited to a board- prescribed formula or method.

May one class receive a different class as a share dividend?

Section 6.23 permits that only if the articles authorize it, a majority of votes entitled to be cast by the class or series being issued approves it, or no shares of that class or series are outstanding.

Does a shareholder agreement avoid the financial tests?

No. Section 7.32(a)(2) permits a qualifying agreement to govern distributions, including disproportional distributions, but expressly keeps the arrangement subject to § 6.40.

Statutes and sources

• 11A V.S.A. § 1.40(4), (6) — covered corporation and distribution definition. Vermont Legislature Chapter 1, accessed September 4, 2026.
• 11A V.S.A. §§ 6.01, 6.04, 6.23, 6.40 — class rights, fractions and scrip, share dividends, and the ordinary distribution framework. Vermont Legislature Chapter 6, accessed September 4, 2026.
• 11A V.S.A. § 7.32(a)(2) — shareholder-agreement authority and retained financial limits. Vermont Legislature Chapter 7, accessed September 4, 2026.
• 11A V.S.A. §§ 8.01, 8.25, 8.30 — board authority, committee limits, and director reliance. Vermont Legislature Chapter 8, accessed September 4, 2026.