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Capital Requirements in United States Corporation Law

Richard A. Booth

Villanova University Charles Widger School of Law

November 2005

U of Maryland Legal Studies Research Paper No. 2005-64

This paper focuses on corporation law in the United States as it relates to capital contributions and capital maintenance. In other words, the paper addresses the provisions of corporation law relating to (1) the obligation of investors to contribute to the corporation a specified amount of capital and (2) the obligation of the corporation to maintain a specified amount of capital (and not to pay it back to the stockholders in the form of dividends or payments to repurchase or redeem shares). Traditionally, the amount of capital that must be contributed to and maintained by a corporation is called the legal capital of the corporation. Thus, I refer here to the rules relating to these matters as legal capital rules.

The paper is divided into three parts. First, I outline the history and evolution of legal capital rules in the United States. Although these rules have been de-emphasized in recent years, particularly in the Model Business Corporation Act (MBCA) and the states that follow it, the legal capital rules remain on the books of numerous states and continue to be litigated from time to time. Second, I describe and analyze the legal capital rules currently in force in the major commercial jurisdictions, including Delaware, New York, and California. In addition, I will describe the rules as currently set forth in the MBCA. Third, I describe the various rules that have taken the place of the legal capital rules in the United States. These include federal securities law, fraudulent transfer statutes, bulk sale statutes, veil piercing doctrine, successor liability doctrine, fiduciary duty doctrine relating to corporations operating on the edge of insolvency, and a variety of corporation statutes relating to particular transactions such as sales of assets and dissolution. I do not address any industry-specific capital rules such as those relating to banks, brokers, or insurance companies.

This paper was written at the request of the Working Group on Legal Capital in Europe, a group of German legal scholars chaired by Professor Marcus Lutter of the University of Bonn. The group was formed to study the abolition of legal capital rules as contemplated by the Commission of the European Union under the Second Directive on Company Law. This paper will be published together with other papers prepared for the group in both English and German in a free standing volume.

Number of Pages in PDF File: 31

Keywords: capital requirements, corporation law

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Date posted: December 13, 2005  

Suggested Citation

Booth, Richard A., Capital Requirements in United States Corporation Law (November 2005). U of Maryland Legal Studies Research Paper No. 2005-64. Available at SSRN: http://ssrn.com/abstract=864685 or http://dx.doi.org/10.2139/ssrn.864685

Contact Information

Richard A. Booth (Contact Author)
Villanova University Charles Widger School of Law ( email )
299 North Spring Mill Road
Villanova, PA 19085
United States
6105197068 (Phone)
610595672 (Fax)
HOME PAGE: http://www1.villanova.edu/villanova/law/staffadmin/Faculty%20Directory/biodetail.html?mail=booth@law
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