Dividends – Part One of Two
Frequently, as a corporate lawyer, I am asked to record particulars of dividends in the corporate minute book. Usually, it is my client’s accountant who is asking me to do so.
What is a Dividend?
A dividend is a distribution of retained income. In the corporate context, it usually means a payment to shareholders of a corporation out of the profits and other amounts available for distribution. It must be a payment to a person in his, her, their or its capacity as a shareholder and not, for example, solely as an employee.
Who Declares Them?
Typically, dividends are declared by directors. Dividends are declared to the holders of a particular class of shares. Corporations may have multiple classes of shares, including common shares, preferred shares and special shares. Share attributes can be quite complex and the permutations are endless.
How Are They Paid?
Dividends are typically payable on a certain date to the holders of shares as of a certain record date. In the absence of qualifying wording, dividends are typically payable in cash. Cash means “payable in currency.” Dividends can also be payable by the issuance of additional “stock” or shares of the particular class, typically as part of a corporate reorganization.
Who Receives Them?
In the absence of attributes in the share provisions or requirements in a Shareholders’ Agreement requiring directors to declare dividends (or declare them in a certain way), dividends can be discretionary. Discretionary means the directors have a choice as to whether, when and in what amount to declare dividends. If there are multiple classes of shares, except as set out above, directors may declare dividends to the holders of one class of shares to the exclusion of others. Directors may not, however, discriminate between or among shareholders of a particular class.
Is “Preferred” Necessarily “Better”?
Dividends can also be preferential, meaning the holders of that class are entitled to a “preference” or priority to dividends over another class of shares. “Preference” does not necessarily mean better. The preference may be for a nominal amount, with discretion vested in the directors to declare dividends to the holders of another class in a higher amount.
Are There Restrictions on Dividends?
Dividends are subject to a statutory solvency test, meaning they cannot be declared if there are reasonable grounds for believing that the corporation is, or after the payment, will be, unable to pay its liabilities or the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and its stated capital of all classes.
What Happens if Dividends are Declared but not Paid?
Dividends can be cumulative or non-cumulative. In the former case, dividends, if not paid out in a particular year, are added to the payment to be made in the next year.
Are Dividends Prepared With Other Documents?
Dividends are often prepared in conjunction with a corporation’s annual resolutions. The documents, once signed, are filed in the corporate minute book. In our case, it is a virtual minute book, and the signatures are obtained electronically.
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The above is not to be construed as legal or tax advice.
