Elective distributions in cash or shares: Overview, definition, and example
What are elective distributions in cash or shares?
Elective distributions in cash or shares refer to the option provided to shareholders or members of an organization to choose between receiving a distribution of profits or dividends in the form of cash or shares (equity) in the company. This option is typically available in corporate settings where the organization offers flexibility to its shareholders on how they would like to receive their share of the company’s profits. Shareholders may elect to take their distribution in the form of additional company stock (shares), which increases their equity stake in the company, or in cash, which provides immediate liquidity.
Why are elective distributions in cash or shares important?
Elective distributions in cash or shares are important because they offer flexibility to shareholders, allowing them to choose the form of payment that best suits their financial goals or investment strategy. For example, some shareholders may prefer to reinvest in the company by receiving additional shares, while others may prefer cash distributions for personal use or to cover expenses. This flexibility can make the company more attractive to different types of investors and can help with managing cash flow for the company. Additionally, offering share-based distributions may help the company conserve cash, which can be reinvested in its operations or used for other strategic purposes.
Understanding elective distributions in cash or shares through an example
For example, a company declares a dividend payment of $1 per share. Shareholders are given the option to either receive the payment in cash or, alternatively, to receive additional shares in the company based on the current market price. If a shareholder owns 1,000 shares, they can choose to receive $1,000 in cash, or they can choose to receive new shares equivalent to that value (for instance, 100 shares if the stock price is $10 per share).
In another example, a startup may offer its early investors the choice to receive profits from the company’s growth as either a cash dividend or as equity in the form of additional shares, depending on their preference. Shareholders who opt for shares might be doing so because they believe in the company’s future growth and want to increase their ownership stake.
An example of an elective distributions in cash or shares clause
Here’s how an elective distributions in cash or shares clause might appear in a shareholder agreement:
“The Company shall declare dividends on an annual basis, and each shareholder shall have the option to elect the form of distribution. Shareholders may choose to receive their dividend in cash or in additional shares of the Company, calculated based on the current market price at the time of distribution. If no election is made, the distribution will be made in cash.”
Conclusion
Elective distributions in cash or shares provide shareholders with the flexibility to choose between receiving immediate cash or reinvesting in the company by receiving more shares. This option benefits both the shareholders, who can choose according to their financial needs or investment strategy, and the company, which can conserve cash while still providing value to its investors. Clear communication of the election process and terms is essential to ensure shareholders understand their options and make informed decisions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.