Distributions are constrained by statute to protect creditors, and directors who approve unlawful ones are personally exposed.

Corporate tests. Most statutes prohibit a distribution if, after giving effect to it, the corporation could not pay its debts as they become due in the usual course of business — the equity insolvency test — or if total assets would be less than total liabilities plus the amount needed to satisfy preferential rights on dissolution — the balance sheet test.

Limited liability companies are subject to substantially similar tests in most statutes.

Valuation basis. Directors may rely on financial statements prepared on reasonable accounting practices, or on a fair valuation or other reasonable method — which permits reliance on current fair value rather than book value.

Timing. Measured at the date of authorization or of payment, as the statute specifies.

Director liability for the amount of an unlawful distribution, with contribution from other directors and from recipients who knew.

Reliance defense on financial statements, on officers, and on advisers, in good faith.

Contractual limits. Credit agreements almost always restrict distributions more tightly than the statute, and the covenant rather than the statute is usually the binding constraint.

Documentation. A board resolution reciting the tests and the basis.