Dividends

Introduction

Dividends are payments made by a company to its shareholders. They are paid out of distributable profits and they are usually paid as a fixed amount per share. In this way shareholders receive an amount that is in proportion to their shareholding in comparison to other ordinary shareholders.

Distributable profits

Distributable profits are the accumulated realised profits (i.e. realised profits less realised losses of the business since incorporation) of the business not yet distributed. 

Additional rules for public companies

A public limited company can only declare a dividend if both before and after distribution its net assets are not less than the aggregate of its called up share capital and undistributable reserves.

Undistributable reserves are:

• share premium account
• capital redemption reserve
• unrealised profits (i.e. revaluation reserve)
• reserves that the company is forbidden to distribute.

The latest audited accounts are used to make the calculations.

Model articles

Under the model articles, the directors recommend the payment of a dividend and the company declares it by passing an ordinary resolution. The amount paid cannot exceed the amount recommended by the directors.

However, a shareholder is not entitled to a dividend as of right.

Unlawful dividends

If a dividend is not paid in accordance with the rules on distributions then the company can recover the distribution from:

• shareholders who knew or had reasonable grounds to know the dividend was unlawful
• any director unless he can show he exercised reasonable care in relying on properly prepared accounts
• the auditors if the dividend was paid in reliance on erroneous accounts.

However, if a director has to make good to the company an unlawful dividend he may claim indemnity from the shareholders who, when they received the dividend, knew it was an unlawful dividend.

Further topics - The dividend decision

A discussion of what level of dividend the directors should agree to can be found here.

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