With many financial years ending on 31 December, directors’ and shareholders’ minds turn to dividends, declaring dividends to shareholders follows a defined process, with compliance required at each stage if they are to be lawful. MSP Company Secretarial has created this practical guide to the steps companies need to follow to declare dividends lawfully.
This article is intended to summarise the considerations for a company when proposing cash dividends, so non-cash distributions and distributions in kind are not directly addressed, however, if your interest relates to such distributions, please contact us and we will be happy to assist you in any way we can.
Dividend Proposals
Dividends are a means of returning cash to shareholders. They are a common type of distribution made to shareholders in the form of cash payments that come from accumulated profits in accordance with Part 23 of the Companies Act 2006 (the ‘Act’), and any additional requirement of a company’s articles. There is a clear dividend process, as defined in the Act.
What is a Proposed Final Dividend?
The first step in declaring a company’s final dividend is proposed by the directors based on the company’s final annual accounts from which the directors determine whether there are enough “accumulated, realised profits” not otherwise encumbered in accordance with section 830 of the Act and which are available for distribution to shareholders. In addition to satisfying the qualifications set out in section 830, the final dividend proposal must comply with the requirements of the company’s articles.
Additionally, a dividend proposal for a PLC must satisfy the ‘net asset restriction’ (section 831 of the Act describes the requirement); and for investment companies trading on a UK-regulated market, the company must satisfy the “accumulated revenue profits” requirements of section 832.
Note that unless the company’s final annual accounts are exempt from audit (and directors have taken advantage of this exemption), the accounts need to be audited. Be aware that if the auditor’s report is qualified then the auditor’s statement needs to be circulated to shareholders for a private limited company, or, in the case of public companies, laid before shareholders in a general meeting.
Declaring Dividends for Shareholder Approval
Once confident of the profits available for distribution by final dividend, the Board of Directors must then resolve to recommend the dividend for approval via a shareholder resolution. Boards of companies with complex shares structures (e.g. multiple share classes which might include preference and redeemable shares) need to be careful when preparing the resolution to ensure that the proposal is properly characterised.
Declaration of Dividend by a Private Company
For private limited companies, the requirements of shareholder approval can be found in two places: the company’s articles and in section 288 of the Act. For private limited companies adopting model articles, the details for dividend declaration and payment are addressed by model articles 30 and 31.
Declaration of Dividend by a PLC
Likewise, for PLCs, final dividends proposed require approval by shareholder resolution passed at a general meeting, typically the company’s AGM. For PLCs adopting model articles, the details for dividend declaration and payment are addressed by model articles 70 to 73.
In any case, dividend proposals must comply with the company’s articles.
Declaring Interim Dividends vs Final Dividends
The beginning of the new year corresponds to the mid-financial year for many companies and so interim dividends are also on the mind of directors and shareholders.
What are Interim Dividends?
Interim dividends differ from final dividends in that they are often paid quarterly or half-yearly.
The qualifications for payment of interim dividends fall along the same lines as those mentioned above. Any distribution must be made from “accumulated, realised profits”, where the same additional requirements for PLCs and listed investment companies mentioned above, apply.
What are the Differences Between Interim Dividends and Final Dividends?
For interim dividends, however, there are two notable differences:
- Unless a company’s articles require otherwise, directors declare an interim dividend, shareholder approval need not be sought, and
- If the last set of annual accounts do not justify the proposed interim dividend, but new interim accounts do, then these interim accounts can be used to justify dividend payment.
Almost all companies will be familiar with the requirements and scope of interim accounts – these are outlined in section 836 of the Act; however, PLCs need to be especially mindful that their interim accounts are “properly prepared”. Section 838(4) defines the requirements of properly prepared accounts; they are similar to annual accounts and require a signed balance sheet. Note that for a PLC to rely on interim accounts, the accounts must have been filed with Companies House before an interim dividend is declared.
What is Unlawful?
Put simply, an unlawful distribution is one that contravenes Part 23 of the Act (section 847).
Keeping the focus on cash dividends, where a shareholder “knows or has reasonable grounds for believing that” a dividend contravenes the requirements of Part 23, then the shareholder is liable to repay the distribution. Clearly, a situation to avoid for a company and its shareholders.
Directors authorising payment of a dividend that exceeds a company’s distributable profits are at risk of breaching their common law and statutory duties and could find themselves liable to repayment of the unlawful dividend payment.
The circumstances that can result in contravention of Part 23 of the Act are beyond the scope of this article, however, where directors can be confident of the distributable earnings available and that they have the proper justification for declaring a dividend before any declaration then they will minimise their liability and promote the lawfulness of the dividend. The following points illustrate the need to have proper justification for a dividend and to follow the proper process:
- Interim dividend payments are typically paid on the authorisation of the directors and it is important for relevant accounts to be properly prepared and reviewed with directors taking all reasonable steps to ensure, for example, that distributable profits have not deteriorated since the last annual accounts were prepared and that the dividend paid fully satisfies sections 830 and 831 of the Act and is justified and lawful.
- If a company cannot justify a dividend based on its last annual accounts but during the following year the company’s financial position improves – if the directors do not prepare interim accounts, then the distribution will be unlawful even if it could later be shown that there were sufficient reserves to cover the dividend payment.
- For PLCs, where interim accounts are relied upon, then these accounts must be filed with the registrar before a dividend is declared.
How MSP Company Secretarial Can Help You
It is important that dividends (and any other distribution) are declared properly to ensure they are lawful.
Declaring dividends to paying dividends is a complex activity and MSP Company Secretarial can help public, private, and listed companies at every step of the process by:
- Preparing Board resolutions that properly characterise and declare final and interim dividends.
- Preparing public announcements such as RNS releases for listed PLCs announcing dividends.
- Preparing shareholder resolutions, whether for PLC AGMs or written shareholder consents for private limited companies and officiating at AGMs if required.
- For a company’s AGM, ensuring that it is properly called (preparing the Notice of AGM, and proxy forms).
- Assist with all relevant statutory filings and liaising with a company’s share registrar, as required.
If your company wishes to make a non-cash distribution, we can provide complete support, with guidance at all stages of the process.
For more information about our services, contact us to schedule a chat with a member of the team.
Declaring Dividends: Frequently Asked Questions
What justification is required before a distribution can be declared?
Section 836 of the Act addresses the justification of distribution by reference to relevant accounts. The “relevant accounts” are usually the company’s last annual accounts (after its first accounting reference period). If these accounts do not support a distribution then interim accounts are required to justify a distribution, and where successive distributions are made during a year by reference to the same accounts, then the justification for each of these successive distributions needs to address the accumulated amount of the successive distributions justified against the accounts (section 840 of the Act).
In any case, section 830 – distributions to be made only out of profits available for the purpose – must be satisfied, and for PLCs, section 831 (net asset restriction on distributions by public companies), must also be satisfied.
Don’t forget: for PLCs relying on interim accounts, these interim accounts must be “properly prepared” (see section 838(4) of the Act) and filed with Companies House before the dividend is proposed (section 838(6)).
When are dividends declared?
Dividends are declared whenever an organisation decides to pay a portion of its distributable profits to its shareholders. Typically, this is either at the end of the company’s financial year after accounts have been audited or as an “interim” dividend. Interim dividends can often be half or quarterly payments depending on the policy of the organisation, or whether it is a PLC or Limited company.
Note the following actions are not distributions under the Act (section 829(2)): issuing of bonus shares; the reduction of share capital (either by extinguishing shares not paid up or repaying paid-up share capital); redemption or purchase of any of the company’s shares out of capital or unrealised profits; or distribution of assets to members on winding up.
Who declares dividends to company shareholders?
It is standard practice that the board of directors declares dividends. It is a formal announcement to shareholders, recorded in the minutes of a board meeting, with attendees, date and time of the meeting. For final dividends, as mentioned earlier, the shareholders must approve the proposed value of the dividend. For interim dividends, shareholder approval is typically not required, however, a formal announcement must still be made and recorded in the appropriate board minutes.
Declaring Dividends: Related Topics
AGM’s – Adopting Financial Statements as the First Resolution