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A closely held corporation sought to repurchase 25 percent of its outstanding shares from one of its shareholders. The corporation 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 statute provides: “A corporation may purchase its own shares only out of earned surplus but the corporation may make no purchase 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.

1. What are the arguments that the repurchase of shares satisfied the incorporation statute?
2. What are the arguments that the repurchase of the shares did not satisfy the incorporation statute?