DGCL Section 170: Dividend Sources and Wasting Asset Rule

Section 170 of the Delaware General Corporation Law lets a corporation’s board declare and pay dividends from only two sources: the corporation’s surplus, or, when no surplus exists, its net profits for the current or immediately preceding fiscal year. DGCL Section 170 also blocks that second option whenever the corporation’s capital has been reduced below the amount owed to any class of stock with a preference on asset distribution.¹

Dividend decisions belong to the board, not the shareholders. The statute says directors “may” declare dividends, so shareholders cannot ordinarily force a payout. Every decision is also “subject to any restrictions contained in [the corporation’s] certificate of incorporation,” which means the charter sits on top of the statutory rules.

The Two Lawful Funding Sources

Surplus is the primary and safest source. Under Delaware law, surplus equals the corporation’s net assets (total assets minus total liabilities) minus its stated capital. Stated capital is the amount the board has formally designated as capital when issuing shares, at minimum the aggregate par value of the outstanding par-value stock.

The surplus calculation is not locked to historical cost. A Delaware board may revalue assets to current fair market value when computing surplus, which can turn a company sitting on appreciated real estate or intellectual property from a no-surplus balance sheet into one with real room to pay. A board can also reduce stated capital under Section 244 and move the excess into surplus, creating additional capacity for distributions.² Either move requires documentation. Appraisals, financial analysis, and board minutes matter because a dividend paid without a legitimate surplus can expose directors personally.

When the surplus column is empty, Section 170 opens a second pathway. The board may pay out of the corporation’s net profits for the current fiscal year, the preceding fiscal year, or both combined. This is the “nimble dividend.” It exists so that a company with accumulated losses but recent profitability, think of a startup that burned through capital early and only now turned the corner, can still reward shareholders. The window is tight. Only the current and prior fiscal years count; the board cannot reach further back to assemble enough profit.

Net profits for this purpose must reflect actual earnings after expenses, not projections. Audited statements are ideal. Reliable internal accounting records can carry the determination when audited figures aren’t yet available.

When Nimble Dividends Are Blocked

The nimble dividend comes with a guardrail that catches boards off guard. If the corporation’s capital has been reduced by depreciation, losses, or any other cause below the total capital represented by all classes of stock carrying a preference on asset distribution, the board cannot pay nimble dividends at all. The block stays in place until the capital deficiency is repaired.

The point is to protect preferred stockholders. Say a company has $5 million in preferred stock with liquidation preferences but only $3 million in capital. The board cannot use current-year profits to pay dividends on any class of stock, common or preferred, until that $2 million gap is closed. Nobody gets paid from net profits while the preference cushion is impaired.

The test compares the corporation’s actual capital against the capital represented by all preference stock, not just the shares that would receive the proposed dividend. Overlooking a small preferred class in the calculation is a common way to inadvertently declare an unlawful dividend.

Special Rule for Wasting Asset Corporations

Section 170(b) carves out a different rule for corporations formed to exploit wasting assets. The category covers natural resource extraction (mining, oil and gas), businesses whose principal asset is a patent or similar time-limited right, and entities organized primarily to liquidate a specific pool of assets.

These companies have a built-in problem under the ordinary rules: their core assets lose value through depletion, which steadily erodes surplus and makes lawful dividends harder to support over time. Section 170(b) addresses this by letting the board compute net profits without deducting depletion. A mining company can distribute profits from ore sales without first charging the diminishing reserves against those earnings.

The wasting-asset provision remains subject to any restrictions in the certificate of incorporation. A charter can impose stricter requirements or eliminate the exception, so boards relying on 170(b) still have to check their governing documents.

Charter Restrictions Always Apply

Every dividend under Section 170 is subject to the terms of the certificate of incorporation, and those terms often establish priority among stock classes. Preferred stock typically carries a right to a fixed dividend before anything flows to common shareholders. Cumulative preferred rights mean missed dividends accumulate and must be paid in full before any distribution to common.

Delaware courts treat the certificate of incorporation as a contract between the corporation and its shareholders. When disputes arise over priorities, particularly in downturns when not every class can be paid, courts look to the plain language of the charter. Directors who skip a preferred class to pay common shareholders face claims for breach of the charter on top of any statutory exposure.

The practical consequence is a two-step analysis before any dividend. First, confirm a lawful source exists under Section 170. Second, confirm the proposed payment satisfies every priority and restriction in the certificate.

What Happens If the Board Gets It Wrong

Section 173 of the DGCL requires that “No corporation shall pay dividends except in accordance with this chapter.”³ Section 174 then creates personal liability for directors who authorize dividends in violation of Section 173. The chain is direct: paying a dividend without a lawful surplus or qualifying net profits violates Section 170, which violates Section 173’s compliance mandate, which triggers Section 174.⁴

Directors who approved the unlawful dividend are jointly and severally liable for the full amount paid, plus interest. The corporation, and its creditors in insolvency or dissolution, can bring claims for up to six years after the payment. That window is long enough that decisions made during one board’s tenure can land on successor directors who inherited the problem.

Section 174 offers three ways out for an individual director. A director who was absent or dissented avoids liability by recording that dissent in the corporate minutes at the time of the vote or immediately after learning about it. A director held liable can seek contribution from every other director who voted for or concurred in the dividend. And a director who pays on a claim can step into the corporation’s shoes and recover from shareholders who received the dividend knowing it was unlawful, in proportion to what each received.

Practical Steps Before Declaring

Section 173 also lists the forms a dividend can take: cash, property, or shares of the corporation’s own capital stock. When the board declares a stock dividend out of previously unissued shares, it must designate as capital at least the aggregate par value of those shares, or, for no-par shares, whatever amount the board determines.

Once the board decides to declare, it needs to identify which shareholders get paid. Section 213 of the DGCL lets the board fix a record date for that purpose. The record date cannot be earlier than the date of the resolution and cannot be more than 60 days before the payment.⁵ If no record date is set, the default is the close of business on the day the board adopts the resolution. For publicly traded companies, the record date also drives the ex-dividend date under SEC settlement rules, currently one business day before the record date under T+1 settlement.

The lesson for any board is to document the funding analysis before voting. If there is a real question about whether surplus exists or whether net profits qualify under the nimble dividend rule, put that analysis in writing and into the minutes. Directors who can show they relied in good faith on reasonable financial data are in a much stronger position if the numbers are later challenged.