Dividend Distinctions and Proxy Descriptions

Why It Matters

Investors and boards rely on accurate legal rationale for reincorporation decisions; misleading proxy language can drive costly, unwarranted corporate actions.

Key Takeaways

• Nevada permits dividend distributions with balance‑sheet test opt‑out
• Delaware requires surplus or net profit plus capital preservation
• Reincorporation rarely adds dividend flexibility beyond article amendments
• Proxy statements often copy outdated claims without verification
• LQR House settlement shows Nevada enforces fiduciary standards

Pulse Analysis

Nevada corporate law, under NRS 78.288, mirrors the Model Business Corporation Act’s Section 6.40(c) but adds a notable twist: corporations may opt out of the balance‑sheet solvency test through a tailored provision in their articles of incorporation. This opt‑out grants boards the ability to declare dividends even when assets fall below liabilities, provided the company can meet its ordinary debt obligations. The flexibility is substantial and often misunderstood, leading some companies to assume they need a Delaware charter to achieve comparable freedom.

Delaware’s dividend regime appears, at first glance, more restrictive because the statute limits payouts to "surplus" and, absent surplus, to net profits while preserving stated capital. However, the real constraint lies in the courts’ evolving cash‑flow test, which balances present solvency against forward‑looking financial health. The ambiguity surrounding whether a company is deemed insolvent at the moment of default or earlier when insolvency becomes inevitable makes Delaware’s framework less predictable than Nevada’s explicit opt‑out mechanism. Consequently, the perceived advantage of Delaware for dividend flexibility is more myth than reality.

The persistence of inaccurate proxy language has practical consequences. Boards may embark on costly reincorporation processes, overlooking the simpler route of amending articles to waive Nevada’s balance‑sheet test. Moreover, the LQR House settlement—where a Nevada‑incorporated firm paid roughly 65% of its market cap to resolve fiduciary‑duty claims—demonstrates that Nevada courts will enforce corporate governance standards when warranted. Investors should therefore scrutinize proxy statements, verify legal claims, and consider whether a jurisdictional shift truly adds value or merely replicates existing flexibility.