In this article, we explore some of the questions we are frequently asked in relation to dividends.
This FAQ applies in relation to private companies limited by shares, having model articles of association.
Other rules and provisions apply in respect of public companies, investment companies, life or long-term insurance companies, and community interest companies, which are beyond the scope of this article.
What are dividends?
Dividends are a type of distribution of assets made by a company to its shareholders. Dividends are typically paid in cash but can also be made in kind with non-cash assets (such as shares in another company, or property or other physical assets) through what is commonly referred to as a dividend-in-specie.
A company must only make distributions out of profits available for that purpose. In that regard, the available profits are a company’s accumulated, realised profits (which have not been utilised in a previous distribution or capitalisation), less its accumulated, realised losses (which have not been written off in a reduction or reorganisation of capital), as stated in the relevant annual, interim or initial accounts of the company.
When should dividends be paid?
Dividends can be paid following the end of a company’s financial year, once its year-end financial statements have been approved (a “final dividend”), or at any time during the financial year, before the company’s annual profits have been determined (an “interim dividend”).
How to declare dividends
The procedure for declaring or recommending dividends is typically set out in a company’s articles of association and (for company’s having them) in shareholders’ agreements.
Under the current model articles of association for private limited companies, the directors of a company can decide to pay interim dividends at any time. A final dividend can be declared by an ordinary resolution of the company’s shareholders, provided that the directors have made a recommendation as to the amount of the dividend (and the amount of the dividend declared by the shareholders does not exceed the recommended amount).
Amount and payment of dividends
In recommending or deciding to pay a dividend, the directors should have regard to their statutory duties. In particular, care should be taken to ensure that dividends are only declared out of profits available for distribution, and (if applicable) that appropriate capital is retained by the company for the purpose of carrying on its business and complying with any sector-specific regulation.
For companies having a single class of shares, dividends should be declared and paid equally on each share. If companies wish to deviate from this position at all, then consideration should be given to creating different classes of shares and defining how their respective rights differ in relation to dividends and in any other respect.
Dividends are most commonly paid by bank transfer or cheque to each recipient.
This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Paramjit Sehmi or write to us using the contact form below.
