May The Board Cancel A Declared Dividend?

A dividend involves three steps.  First, the dividend is declared by the board of directors, second a record date is determined by the board (or by corporate law), and lastly the dividend is paid.  Occasionally, the question arises whether a board may cancel a dividend after it has been declared and before either the record or payment dates.

The Court of Appeal in Smith v. Taeker, 133 Cal. App. 351, 352, 24 P.2d 182 (1933), found that it was "universally held" that the mere declaration of a dividend creates debts against the corporation in favor of the stockholders as individuals.  The Court went on to suggest that the board could by resolution fix this right no later than the record date.  The California Supreme Court, citing Smith, subsequently stated: "Each holder of common stock acquired a vested right to the payment of the dividend, which cannot be defeated by later revocation of the dividend without his consent."  Meyers v. El Tejon Oil and Refining Co., 29 Cal. 2d 184, 188, 174 P.2d 1, 3 (1946).   Both of these cases are admittedly long in the tooth.  However, the California Supreme Court has subsequently cited both opinions for these propositions in Stephenson v. Drever, 16 Cal. 4th 1167, 1177, 947 P.2d 1301, 1307 (1997).