Jul 23

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Capital Impairment Rule

See Also:
Dividend Payout Ratio
Dividend Yield
Capital Structure Management
Balance Sheet

Capital Impairment Rule

The capital impairment rule is a state-level legal restriction on corporate dividend policy. The rule applies in most U.S. states. It basically limits the amount of dividends a company can pay out to shareholders. The limit is described as either a limit per capital stock or per the par value of the firm. Essentially, for a given amount of capital stock or a given firm value, there is a maximum limit to the value of dividends that a company can distribute to stockholders.

The purpose of the rule is to protect claims of creditors who have lent money to the firm in question. The idea is that a troubled firm, one that is in default or on the brink of bankruptcy, must not be able to unload cash to owners and shareholders before going out of business. Doing so would leave debt holders and creditors high and dry, or at least diminish the amount of value they could recoup from their loans. The capital impairment rule, by limiting the dividend payout, ensures that creditors will be able to reclaim a larger portion of their loans in the event of default or liquidation.

capital impairment rule

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