Corporate Dividend and Distribution Requirements in Virginia

At a glance

Requirements one by one

Governing law, entity, distribution, and scope

Va. Code § 13.1-603 defines a domestic corporation for the Stock Corporation Act as a corporation authorized to issue shares and organized or otherwise domesticated under the chapter. Its distribution definition reaches direct or indirect cash or property transfers, other than the corporation's own shares, and debt incurred for shareholders with respect to their shares. It expressly includes dividends, purchases, redemptions, other acquisitions, indebtedness, and liquidation distributions.

The definition contains a narrow exception for an insurance-funded acquisition from a deceased shareholder's estate or personal representative, or another shareholder, to the extent the life-insurance proceeds fund it and the board approved the policy and redemption terms before death. For the ordinary nonliquidating transactions surveyed here, § 13.1-653 supplies the limits and expressly excludes Article 16 liquidation distributions from that section.

Board, committee, shareholder, and governing-record authority

Under § 13.1-653(A)-(H), the board may authorize a distribution, subject to the articles and the financial limits. Va. Code § 13.1-689(D)(6) narrows committee power: a committee may authorize or approve a distribution only according to a formula or method, or within limits, prescribed by the board. An open-ended delegation is therefore not enough.

Virginia also recognizes a compliant all-shareholder agreement under § 13.1-671.1(A)-(B). It may eliminate or restrict the board and govern authorization, making, and proportionality of distributions, but it remains subject to § 13.1-653. The agreement must use the statutory articles/bylaws approval route or be a writing signed by every current shareholder and made known to the corporation.

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

Section 13.1-603 covers direct and indirect cash or other property, distribution debt, dividends, purchases, redemptions, other share acquisitions, and other shareholder transfers. The property branch excludes the corporation's own shares because § 13.1-645 treats those separately as share dividends. Under § 13.1-652(A), acquired shares generally become authorized but unissued shares of the same class, undesignated as to series.

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

Virginia does not add a surplus, retained-earnings, net-profit, or stated-capital source test to § 13.1-653. The operative limits are instead the two post-distribution tests in subsection C, together with restrictions in the articles and class or series terms under § 13.1-638(A), (C), (E). That does not mean a particular amount is distributable; it means this statutory architecture asks different questions than a surplus-source statute.

Liquidity, balance-sheet, liability, and preference test

After giving effect to a distribution, § 13.1-653 requires the corporation to remain able to pay debts as they become due in the usual course of business. Total assets also cannot fall below total liabilities plus the amount needed to satisfy superior dissolution preferences, unless the articles permit otherwise. Both tests apply; the alternatives in the valuation provision do not turn the financial limits into alternative tests.

Financial statements, valuation, reserves, and reliance

Section 13.1-653 lets the board use accounting statements prepared on practices and principles reasonable in the circumstances, a fair valuation, or another reasonable method. Its separate public-corporation GAAP safe harbor falls outside this private-corporation cell. Section 13.1-690 permits qualified reliance on corporate officers or employees, professional experts, or a trusted committee under § 13.1-690(B) when the director lacks information making reliance unwarranted. The surveyed distribution section states no special reserve formula.

Record date, measurement date, payment delay, and revocation

The board may fix the distribution record date under § 13.1-653. If it does not, the default for a distribution other than an own-share acquisition is the authorization date. Section 13.1-645 uses the same authorization-date default for a share dividend.

The financial-test date depends on form. An own-share purchase, redemption, or other acquisition is measured at the earlier of the cash/property transfer or shareholder-debt date and the date status ends for the acquired shares. Another distribution of indebtedness is measured when the debt is distributed. In other cases, authorization controls if payment follows within 120 days; payment controls after that. Section 13.1-653 states no general revocation rule.

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

Section 13.1-638 ordinarily gives all shares within a class or series identical terms, including distribution rights and preferences, while allowing variations expressly stated in the articles. Under § 13.1-645, a share dividend is pro rata by default. Issuing one class or series as a dividend 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 that class or series.

Va. Code § 13.1-641(A), (C)-(E) permits fractional shares, cash for their value, registered or bearer scrip, or an arrangement to dispose of fractions. A fractional share carries shareholder rights; scrip does not unless its terms provide them. The board's good-faith valuation of a cash-paid fraction is conclusive under that section.

Distribution debt, priority, liquidation, insolvency, and boundaries

Under § 13.1-653, compliant distribution debt ranks at parity with general unsecured debt unless an agreement subordinates it. Debt whose terms make principal and interest payable only when a distribution could then lawfully be made is excluded from liabilities for the section's financial tests; every principal or interest payment is itself retested on its actual payment date. The section does not state a special security rule and expressly excludes Article 16 liquidation distributions.

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

What trips people up

A debt distribution is not measured like an ordinary cash dividend. Section 13.1-653 measures the debt when it is distributed, while an ordinary payment within 120 days ordinarily uses authorization and a later payment uses its own date. Conditional-pay debt adds another layer because every principal and interest payment is retested when actually made.

Committee authority is also narrower than board authority. The board may authorize under § 13.1-653, but § 13.1-689 confines a committee to a board-prescribed formula, method, or limits.

Common questions

Does Virginia use a surplus or net-profit test?

No separate one appears in § 13.1-653. Virginia instead uses the ability-to-pay and assets-versus-liabilities-plus-preferences tests, while the articles and class or series terms may add restrictions.

Can shareholders agree to non-pro-rata distributions?

Section 13.1-671.1 permits a compliant unanimous shareholder agreement to govern distributions regardless of ownership proportions, but expressly keeps the § 13.1-653 financial limits in place.

Can one class receive shares of another class as a dividend?

Only through a § 13.1-645 route: the articles authorize it, a majority of votes entitled to be cast by the class or series being issued approves it, or that class or series has no outstanding shares.

Does the 120-day rule select the record date?

No. The record-date rule identifies entitled shareholders. The 120-day rule selects the financial-test date for ordinary distributions.

Statutes and sources

• Virginia Stock Corporation Act, Va. Code §§ 13.1-638 through 13.1-653, complete current Article 7 text dated September 3, 2026: https://law.lis.virginia.gov/vacodefull/title13.1/chapter9/article7/
• Va. Code § 13.1-603 — current corporation and distribution definitions dated September 3, 2026: https://law.lis.virginia.gov/vacode/title13.1/chapter9/section13.1-603/
• Va. Code § 13.1-671.1 — current shareholder-agreement rule dated September 3, 2026: https://law.lis.virginia.gov/vacode/title13.1/chapter9/section13.1-671.1/
• Va. Code § 13.1-689 — current committee-authority rule dated September 3, 2026: https://law.lis.virginia.gov/vacode/title13.1/chapter9/section13.1-689/
• Va. Code § 13.1-690 — current director-reliance rule dated September 3, 2026: https://law.lis.virginia.gov/vacode/title13.1/chapter9/section13.1-690/