In Delaware, boards of directors can be personally liable for approving and paying an unlawful dividend. Board members can demonstrate that they have fulfilled their fiduciary duties in dividend recapitalization transactions by obtaining opinions from third-party solvency opinion experts. Solvency opinions provide critical information to the board in assessing the company’s ability to pay a special dividend.
The use of solvency opinions has arisen from requirements under state law governing a company’s capacity to pay a dividend as well as fraudulent conveyance law governing dividends and other transfers without adequate consideration. A solvency opinion consists of a set of analyses that address solvency requirements under these laws. Specifically, these analyses look at whether the company (i) assets exceed liabilities pro forma for the payment of the dividend, (ii) will not be left with unreasonably small capital to operate the business and (iii) if it is reasonable to believe the company will be able to pay its debts as they come due.
Obtaining a solvency opinion may also be advisable in other types of transactions including share repurchase programs, LBOs, refinancings, spin-offs and restructurings.