Liquidating dividend definition insurance
The result is that the acquirer takes over the target and the former stockholders of the target company now become stockholders in the acquirer. For a regular dividend the declaration date or announcement date is when a company's board of directors announces a distribution. As company operations end, remaining assets go to existing creditors and shareholders. As a result, the tax code allows for tax free mergers, or reorganizations.
Liquidating Dividend and Liquidation Preference In addition to a liquidating dividend, companies have a set order in which they must re-pay their owners in the event of a liquidation. For example, a firm may be liquidated because the officers believe its stock price does not adequately reflect the value of its assets. Their basis would be increased by the amount of gain they were taxed on. Voluntary liquidation begins when the company passes the resolution, and the company will generally cease to carry on business at that time if it has not done so already.
All of the firm's debts must be paid before it can pay liquidating dividends. Payment by a firm to its owners from capital rather than from earnings.
Tax-Free Merger When one company merges with another, both sides generally want to avoid recognizing any gain on the transaction. The ex-dividend date is typically set for two business days prior to the record date. The former target stockholders get their acquirer stock from a liquidating dividend. Merger Tax Implications The purpose of these types of mergers is to minimize tax repercussion, so if only stock is exchanged, no gain or loss will be recognized by either party.
The former target company stockholders transfer their basis to their new stock, and when they sell their acquiring company stock they will use that figure to calculate their taxable gain or loss. If you purchased the stock at different times, divide the dividends into short-term and long-term proportionally, based on when each block of stock was acquired. The capital gain is treated as long-term or short-term depending on whether you owned the shares for longer than a year. All debts and other obligations usually must be satisfied before issuance of a final liquidating dividend. The decision to liquidate is made by a board resolution, but instigated by the director s.
In that case, the general meeting will appoint the liquidator s. This usually happens when shareholders believe that the company is no longer sustainable or profitable. Each of these parties has a priority in the order of claims to company assets. Paid after satisfying all corporate debts, the liquidating dividend is meant to provide a return on investment.
The purpose of this exercise is to gain the money necessary to pay off its debts and then to distribute the remainder to its shareholders through a liquidating dividend. Preferred and common shareholders receive any remaining assets, respectively.