Assembly Bill No. 571, was signed by California governor Jerry Brown on September 1, 2011. Under prior law, if a corporation had no retained earnings, it could only pay dividends (or redeem stock) under very limited circumstances (satisfaction of a balance sheet test and liquidity requirements). Directors could be held personally liable for distributions made in violation of these rules.
Under the new law a dividend is permitted if paid out of retained earnings OR if immediately after the distribution, the value of the corporation’s assets would equal or exceed the sum of its total liabilities.