Meaning
State corporate codes govern the statutory powers and limitations of a corporation regarding the acquisition and redemption of its own shares. Under Delaware DGCL section 160, a corporation is granted the broad authority to redeem or otherwise acquire its own shares, provided its capital is not impaired and the transaction does not cause impairment. This statute protects creditors and stockholders from the clandestine withdrawal of the equity cushion.
It establishes the baseline rule for all repurchase transactions in the state.
Statutory Border
Capital impairment occurs when the fair value of the corporation’s assets falls below the sum of its liabilities and its statutory capital. In applying Delaware DGCL section 160, a board must determine that the post-redemption assets exceed liabilities by an amount at least equal to the capital represented by the remaining shares. This limitation is non-negotiable and cannot be waived by stockholder agreement or board charter.
It remains a strict statutory constraint on corporate liquidity.
Operational Friction
Startups often encounter this rule during employee departures or when executing investor buybacks. A company with a deficit on its balance sheet cannot lawfully repurchase shares from a departing founder, even if both parties are eager to execute the agreement and have signed a contract to do so. Under these circumstances, the purchase must be delayed until the capital is increased or the surplus is restored.
This mechanical block often surprises founders who assume contractual freedom overrides statutory law.
Strategic Protection
Contemporary corporate boards resolve this friction by maintaining clear records of capital and surplus before any share transaction. Board resolutions must explicitly refer to the surplus determination. This practice prevents subsequent invalidation of the repurchase.
