A property transfer to a charity's board never should have been a dividend

The situation

The letter arrived on a Tuesday, addressed to the foundation's board and signed by the majority shareholder of a private company the foundation had held shares in for close to a decade. It announced, in three brisk paragraphs, that the company was declaring a dividend in kind: rather than cash, each shareholder would receive a proportional interest in a commercial property the company had held as an investment. The foundation's share worked out to a fractional, undivided interest in a building it had no use for and no practical way to sell on its own.

Tesfay, an actuary who chaired the foundation's investment committee, and Rahel, a physiotherapist who sat on the board alongside him, had inherited the shareholding from a bequest years earlier. The foundation existed to fund community health initiatives across the region, and its endowment included a modest minority stake in a private company controlled by Sylvain, a shareholder with a controlling interest and considerably deeper resources than the foundation or its other minority holders.

Sylvain's company was mid-sized, generating revenue in the range of five to twenty million dollars a year, and had accumulated a portfolio of real estate alongside its core operations. The letter framed the in-kind dividend as a routine step to simplify the company's balance sheet ahead of a planned sale of the operating business, distributing the real estate to shareholders now rather than carrying it through a transaction that did not need it.

Tesfay's first instinct, reading the letter with an actuary's habit of checking the arithmetic before the narrative, was to ask a simple question: had the company confirmed it could still pay its own obligations after giving away a piece of real estate to every shareholder at once. Nothing in the letter addressed that at all, and the foundation's own counsel of record had retired the year before without a clear successor. Tesfay brought the letter to us the same week it arrived.

Rahel's concern was more practical than technical. As a physiotherapist rather than a finance professional, she was less interested in the mechanics of the solvency test than in what an undivided fractional interest in a commercial building actually meant for a charitable endowment built to fund community programs, not to manage real estate the foundation had never asked for and had no capacity to maintain, insure or eventually sell on its own.

The legal question

A dividend, whether paid in cash or in kind, is not simply a company deciding to give shareholders something of value. The Business Corporations Act requires the directors of a company to confirm, before declaring any dividend, that the company is and will remain able to pay its liabilities as they come due, and that the realizable value of its remaining assets will still be at least equal to the value of its remaining liabilities plus the stated capital of all its shares once the dividend is paid. That second branch is stricter than a simple assets-exceed-liabilities comparison: the money originally recorded as paid in for the company's shares counts against the company for this purpose, so a company can clear a plain solvency check and still fail the real test. This is often called the solvency test, and it applies with equal force whether the dividend is a cheque or a share of a building.

The test exists to protect the company's creditors, but it also protects shareholders who might otherwise receive an asset that later has to be clawed back if the company becomes insolvent shortly after the distribution. An in-kind dividend of real estate raises a further wrinkle that a cash dividend does not: the directors need to be confident of the property's actual value at the time of the declaration, not an outdated appraisal, because overstating the value can make a company that looks solvent on paper actually insolvent once the dividend is properly accounted for.

When we reviewed the company's declaration, no current appraisal of the property existed. The board resolution referenced a valuation completed three years earlier, before a shift in the local commercial market that Tesfay's own professional experience told him had likely moved the number meaningfully. More importantly, no solvency confirmation appeared anywhere in the minute book. The directors appeared to have declared the dividend based on the transaction's convenience ahead of the planned sale, not on a documented finding that the company could safely make the distribution.

This put the foundation in an unusual position for a minority shareholder. It was not trying to block a dividend it disliked; it was pointing out that the dividend itself might not be validly declared, which was a problem for every shareholder receiving it, including Sylvain, not just the foundation. That distinction shaped the whole approach: the goal was not a fight over entitlement, but a request that the company do what the law already required of it before anyone accepted an asset that might have to be returned later.

There was also a timing element worth understanding. The letter had described the in-kind dividend as a step ahead of a planned sale of the company's operating business, which meant the property transfer was likely happening on a schedule driven by that larger transaction rather than by any urgency specific to the shareholders. That gave the foundation more room to insist on getting the process right than it might have had if the property were about to change hands imminently for reasons outside anyone's control.

What we did

1. Reviewed the dividend resolution and the company's minute book to confirm no current solvency confirmation or updated property valuation supported the declaration. We went back through every board resolution touching the property, cross-checked against the appraisal on file, to establish exactly what was missing, which gave Tesfay's initial instinct a documented factual basis before we raised anything formally with the company.
2. Wrote to the company's counsel setting out the specific gap, framing the letter around the solvency test the Business Corporations Act requires rather than around the foundation's preference for cash. Keeping the objection technical, tied to a specific statutory requirement rather than a complaint about the form of payment, made it considerably harder for the company to dismiss the foundation as a minority shareholder simply being difficult.
3. Requested that the property transfer be paused pending an updated valuation and a documented solvency confirmation. This was the most urgent step in the file, because once any shareholder actually took title to a fractional interest in the building, unwinding that transfer later would have meant real legal cost and delay for everyone involved, including shareholders who had done nothing wrong.
4. Commissioned an independent review of the company's financial position on the foundation's own initiative, using publicly available corporate filings and information the company was required to share with shareholders. This let us assess honestly, before escalating further, whether the concern had real substance or was merely a paperwork gap unlikely to matter to the company's actual solvency.
5. Coordinated informally with two other minority shareholders who held smaller stakes and shared the same concern once they learned of it. Bringing them into the conversation, without any formal joint action, strengthened the foundation's position considerably, since Sylvain's company clearly preferred to negotiate with a single holder rather than face an organized bloc of shareholders raising the same point.
6. Prepared a formal notice outlining the foundation's options if the company declined to address the gap voluntarily, including an application to court for relief against oppressive conduct under the Business Corporations Act. Setting that option out clearly, in writing and with the specific statutory language attached, gave the negotiation real weight without committing the foundation to litigation it had never wanted to pursue in the first place, and it signalled the concern was being taken seriously rather than raised as an idle complaint.
7. Negotiated directly with Sylvain's counsel for the dividend to be reversed and redeclared only after a current appraisal and a proper solvency confirmation were completed, rather than pursuing the oppression application. This was faster and considerably cheaper than a court process would have been, and it delivered the same practical result the foundation actually needed: a distribution the directors could properly stand behind.
8. Reviewed the redeclared dividend once the company completed the required steps, confirming the updated valuation and solvency confirmation were properly documented and internally consistent, before advising the foundation's board it could safely accept the distribution going forward without exposing itself to a future clawback claim from the company's creditors if the business later ran into financial trouble.
9. Updated the foundation's own investment policy to require a documented legal review of any distribution notice received from a portfolio holding above a set size, before the board accepts or acts on it. This closed the internal gap that had let the original letter sit unreviewed for a week before anyone on the board realized what was actually missing from it.

The outcome

Sylvain's company agreed to reverse the original dividend declaration before the property transfer completed, avoiding what could have become a much harder problem if the foundation and other shareholders had already taken title to fractional interests that later needed to be clawed back through a separate legal process. The company commissioned a current appraisal, which came in meaningfully below the three-year-old figure the original declaration had relied on, confirming Tesfay's instinct that the numbers no longer reflected reality on the ground.

The redeclared dividend, once solvency was properly confirmed, proceeded on adjusted terms that reflected the updated valuation. The foundation still ended up holding a fractional interest in a commercial property it had limited practical use for, which was not the outcome Tesfay or Rahel would have chosen if the foundation's own preferences had driven the transaction from the start. That part of the original plan did not change; only the process behind it did, and the foundation later arranged, separately, to sell its fractional interest back to the company for cash on ordinary commercial terms.

What did change was that the distribution now rested on a documented, current record rather than an outdated valuation and an assumption that nobody would check the numbers closely. Sylvain, whose resources and leverage in the relationship were never in doubt and who could easily have outlasted the foundation in a prolonged dispute, chose instead to absorb the cost and delay of redoing the valuation and solvency work rather than contesting the point through litigation.

The foundation's board read that choice as confirmation that the concern had been well-founded rather than merely inconvenient to the majority shareholder. Tesfay and Rahel also used the episode to update the foundation's own governance policy, requiring any future distribution notice from a portfolio holding to be reviewed against the underlying statutory requirements before the board simply accepted it at face value.

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