The term “dividend” is inseparably linked to shareholders in a joint-stock company. Capital companies, including joint-stock companies, engage in operations usually meant to generate profit. A company may share its profit with its shareholders. Explained below are the questions of what a dividend is, who may receive it and in what amount.
What is a dividend?
A dividend is simply a portion of the company’s profit meant to be distributed among the shareholders. For the profit to become a dividend, a resolution of the general meeting on the distribution of profits to the shareholders is necessary.
How to acquire a dividend resolution?
In a joint-stock company, dividends may only be paid under the principles specified in the company’s articles of association or a resolution of the general meeting. As a rule, a dividend resolution should be adopted at the general meeting approving the financial statements for the previous financial year. The resolution is adopted by the shareholders by majority vote.
Detailed rules for the dividend resolution may be set out in the company’s articles of association. This is crucial to prevent actions detrimental to the company or its shareholders. Such undesirable actions may result, for example, in profits being retained in the company to the detriment of its minority shareholders due to dividends not being paid.
Moreover, in the case of an equality of votes, a decision-making deadlock may occur, when a resolution cannot be adopted as a majority of the votes is not obtained. As a result, funds intended for the shareholders will be blocked.
We encourage shareholders setting up joint-stock companies or amending the articles of association of existing companies to consider legal solutions intended to prevent possible future disagreements over dividend payments.
Who is entitled to dividends?
As a rule, the parties entitled to dividends are the shareholders of the company. A shareholder’s claim to receive a dividend only arises upon the adoption of a resolution by the general meeting on the payment of dividends for a given year. Legal scholars also believe that the company’s articles of association may provide for a complete exclusion of the right to dividends (e.g. for companies operating not for profit).
In addition to shareholders, other entities entitled to dividends are the holders of utility certificates.
How are dividends distributed to shareholders?
As a rule, dividends are distributed proportionally to the number of shares held. If the shares are not fully paid up, the amount of the dividend is proportional to the payments made for the shares. The articles of association may provide for a different profit distribution framework.
What is the amount of the dividend?
The sums to be divided among the shareholders may not exceed the profits for the previous financial year, increased by the undivided profits from previous years and by the sums drawn from the supplementary and reserve capitals which were ring-fenced for dividends. However, that amount to be divided is reduced by the uncovered losses (also from previous years), own shares, and the sums allocated to the supplementary or reserve capitals.
Some shares in a joint-stock company may be preference shares as regards the distribution of profit. Such shares give their holders the right to a higher dividend than they would be entitled to under the general rules described above. However, the dividend payable on such preference shares may not be more than 50% higher than the dividend on non-preference shares.
What is the dividend day?
The dividend day is the day with reference to which the persons entitled to receive the dividends are determined. For a joint-stock company, which is not a public company, such persons are the shareholders who held shares on the date of the general meeting’s resolution on the distribution of profits. However, the articles of association may allow for the general meeting to set another date as the dividend day.
In a public company, as well as in a company whose shares are registered in a securities deposit, the dividend day is determined differently, i.e. by an ordinary general meeting. In such a case, the dividend day may be set within a period between 5 days and 3 months from the date of adoption of the resolution on the distribution of profits.
How are the dividends paid out?
As a rule, dividends are paid out within three months of the dividend day, on a date determined by a resolution of the general meeting or the supervisory board. If no such date is set by either of these bodies, the dividend must be paid out immediately after the dividend day.
Is it possible to receive an interim dividend under an interim dividend resolution?
The articles of association may grant the management board the right to make advance payments towards the expected dividend by adopting an interim dividend resolution, provided, however, that the company has the funds to make such interim payments and that it obtained a profit in the preceding financial year. For an interim dividend to be paid out, consent of the company’s supervisory board is required. An interim dividend may not exceed half of the profits earned in the financial year in which it is paid out, increased by the reserve capitals and reduced by the uncovered losses and own shares.
A question may arise: Is an interim dividend paid on preference shares? The answer is: Yes, it is. This means that the preferential treatment of shares in respect of the dividend also extends to the right to interim dividends.
The management board must announce the payment of interim dividends at least 4 weeks before the payment date.
If a company earns a profit, it can share it with its shareholders by paying out dividends. In general, dividends are distributed to the shareholders in proportion to their holdings of shares. As a rule, it is the shareholders themselves who set the dividend amount and payment date by way of a resolution of the general meeting. At Radkiewicz Lawyers Poland, we specialise in providing ongoing legal support to commercial companies. We assist clients in drafting corporate documents, especially resolutions of the shareholders’ general meetings concerning the payment of dividends.
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