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Delaware General Corporation Law provides that the directors of a corporation may declare and pay dividends either (1) out of its surplus, as defined in and computed in accordance with sections 154 and 244, or (2) in the case there shall be no surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. 8 Del. C. § 170 (a).

Surplus is defined as the amount by which the present fair value of the total assets of the corporation exceeds its stated liabilities and identified off-balance sheet and contingent liabilities, and the aggregate par value of its issued capital stock.

Delaware permits the directors of the corporation to “revalue” the assets and liabilities of the corporation to reflect their present fair values for the purpose of determining the amount of surplus available for stock repurchases and dividend payments when they have reason to believe that the books and records of the corporation, which although prepared in accordance with GAAP, do not necessarily reflect current values.

The Delaware Test opinion is a formal, written opinion stating that immediately after and on a pro forma basis giving effect to the dividend or stock repurchase, the fair value and present fair saleable value of the company’s assets would exceed its total stated liabilities and identified off-balance sheet and contingent liabilities by at least the aggregate par value of its issued capital stock.