We are all looking for ways to make our money, make more money. For most people, when they buy shares in a public listed company or put capital into a private company, they are hoping for a return on their investment. That return generally takes the form of a dividend. If you have been savvy enough to invest in a company that regularly declares a dividend, then you may have happily become accustomed to receiving this “extra cash”. However, shareholders do not have a right to dividends.
A dividend can be defined as the distribution of profits by a company to its shareholders. The payment of dividends by a company is subject to several considerations. Firstly, section 158(3) of the Companies Act of Jamaica (the “Act”) states that, “no dividend shall be payable to the shareholders of a company except out of profits.” Therefore, there is a statutory requirement that a company can only pay dividends out of profits. This statutory requirement cannot be contracted out of or overruled by agreement.
The Act imposes further limitations on a company’s ability to declare or pay dividends. In section 158(4) it provides that a company shall not declare or pay a dividend, “if there are reasonable grounds for believing that a) the company is, or would be after the payment, unable to pay its liabilities as they become due; or b) the realizable value of the company’s assets would thereby be less than the aggregate of its liabilities and stated capital.” In other words, a company is prohibited from declaring or paying any dividends if that payment would result in the company being declared insolvent based on an assessment of either the cash flow or balance sheet test.
Thus, the primary financial requirements that the Companies Act imposes on the declaration of a dividend are that a dividend can only be paid of out the company’s profits and that the payment of dividends should not result in the company being deemed insolvent. That said, satisfaction of these financial requirements is not solely determinative of whether dividends will be declared. Per section 145 of the Act, the directors of the company must in every calendar year, lay before the shareholders in general meeting, a balance sheet as at the date to which the profit or loss account, or the income and expenditure account is made up, a report as to the state of the company’s affairs and the amount, if any, they recommend should be paid by way of dividend or put in the reserve fund. It is in fact within the director’s discretion as to whether to recommend the declaration of a dividend to shareholders. In other words, a company that has made a profit is not obligated to declare a dividend and the directors have the power to reallocate any amount of those profits to fund the reserves of the company as they see fit.
Where the directors do recommend the declaration of a dividend, the final “say” lies with the shareholders in general meeting. The directors make their recommendation to the shareholders, but the shareholders in general meeting may accept or reject the recommendation. Provisions relating to dividends are generally outlined in a company’s Articles of Incorporation and customarily provide that the shareholders cannot approve a dividend greater than that recommended by the directors. The directors may also declare an interim dividend from time to time but this must also be approved as final by the shareholders in general meeting.
A company may have a dividend policy that outlines in general terms how the company proposes to distribute dividends. Even where a company has a dividend policy, this policy cannot mandate the payment of dividends. A company may for example have a dividend policy which states that it intends to make available up to 25% of its net profit for distribution or that it intends to pursue a dividend policy that projects an annual final dividend of up to 15% of net profits available for distribution. The actual ability to declare a dividend is subject to the considerations discussed above.
Disgruntled shareholders may have a remedy if they are dissatisfied with the non-declaration of dividends. Whereas the mere failure of a board to recommend or pay a dividend is not in and of itself “actionable” there may be potential for a claim if it is established that (a) there is no commercial or financial justification for the directors not recommending the payment of dividends; and (b) this is unfairly prejudicial and unfairly disregards the interests of the shareholders.
Shareholders ought to keep in mind that some companies may be subject to regulatory capital requirements or directions that impact declarations of dividends. A board may be considering a material acquisition that it is not yet able to disclose. The board must juggle several considerations while ensuring that a company can pass the cash flow and balance sheet tests.
When investing, it is important to remember that the payment of dividends is not guaranteed. No dividends today, may well lead to a greater dividend tomorrow.
Simone Bowie Jones is a Partner in the Commercial Department of Myers, Fletcher & Gordons. She may be contacted via firstname.lastname@example.org or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice. Research assistance provided by Akil Williams, student pursuing a Bachelor of Laws at the University of the West Indies.