Chapter 5 of the California Corporations Code imposes specific limitations on distributions to shareholders. Because California chartered banks are formed under the California General Corporation Law, one would expect that Chapter 5 applies to distributions by banks. Financial Code Section 1131, however, provides that Section 500 of the Corporations Code does not apply to "the making by a bank or by any majority-owned subsidiary of a bank of any distribution to the shareholders of such bank". Section 500, as amended in 2011, prohibits distributions to shareholders unless either of two tests are met.
Section 1131 does not exempt banks from the application of Section 501 of the Corporations Code which prevents a corporation or any of its subsidiaries from making a distribution if the corporation or subsidiary is, or as a result thereof would be, likely to be unable to meet its liabilities (except those whose payment is otherwise adequately provided for) as they mature. In addition, Section 1132 prohibits a bank or any of its majority-owned subsidiaries from making a distribution in an amount which exceeds the lesser of:
- The retained earnings of the bank; or
- The net income of the bank for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary of the bank to the shareholders of the bank during such period.