Legal Question in Securities Law in California

Re: Stockholder Rights

There is no such requirement in the statutes or case law that I know of, imposing a duty to make distributions or pay dividends to make shareholders whole for theirshare of the tax on an S corporation's earnings. Often, a shareholders' agreement will contain a provision effectively requiring the board to distribute profits at the highest marginal individual income-tax rate, or something of this ilk, to protect shareholders who don't control the purse strings. Absent such an agreement, it MIGHT be possible to sue and make a case based upon general minority-shareholder rights principles. I doubt it would work, absent a showing that the insider or controlling shareholders weredoing something else that was unfair, such as having the corporation employ them at excessive salaries (so they could pay their taxes), but research might turn up other examples where a no-payout policy was attacked and defeated.