When can or can't a board of directors declare a distribution?

Corporations are, ideally, money making machines. People invest into the machine, put the machine to work, and, if everything goes well, the machine generates a profit. It's common for those profits to get put back into the machine (hiring new employees, buying new offices and equipment, etc.). But sometimes the board of directors may feel that their machine has made so much money that there is enough to give some of it back to shareholders, allowing them to enjoy some of the benefits from the machine they helped build. These moments are called distributions (because the corporation will be distributing value back to the shareholders). There are 3 common types of distributions that we will cover in a separate card.

Generally, the board of directors are free to choose when and if a distribution is made, if ever (for example, Apple didn't pay its first dividend until 2012, even when the company sat on top of $100 billion in assets). The main exception to this is if the company (a) is insolvent (which means broke), or (b) would become insolvent as a result of the distribution (which means the corporation can't afford to distribute as much value as the board of directors wants, because if they did they would go broke).

Note that directors who unlawfully make distributions can be held personally liable unless they reasonably relied on a financial officer's advice. In other words, if a CFO tells the board, "Don't worry, guys! HypoCorp has plenty of money in the bank to afford paying a $1 dividend!" But then the $1 dividend causes HypoCorp to go bankrupt, if the directors are sued they can say, "We trusted the CFO. He said this was okay."