A closely held corporation sought to repurchase 25 percent of
its outstanding shares from one of its shareholders. The corpo-
ration and the shareholder agreed that the corporation would
purchase all of the shareholder’s stock at a price of $500,000,
payable $100,000 immediately in cash and the balance in four
consecutive annual installments. The State’s incorporation stat-
ute provides: “A corporation may purchase its own shares only
out of earned surplus but the corporation may make no pur-
chase of shares when it is insolvent or when such purchase
would make it insolvent.” At the time of the repurchase of the
shares, the corporation had an earned surplus of $250,000.
a. What are the arguments that the repurchase of shares
satisfied the incorporation statute?
b. What are the arguments that the repurchase of the shares
did not satisfy the incorporation statute?
c. Which argument should prevail?
