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How to: Shareholder dividends

Introduction

A dividend is where a company's money or property (other its own shares) are transferred, directly or indirectly, to a shareholder of the company or for the shareholder's benefit. (This does not include, however, where a company buys its own shares from a shareholder, nor where the company gives financial assistance to a shareholder for the purpose of buying the company's shares).

The payment of dividends is governed by the COMPANIES ACT 1993 and by the company's constitution, if it has one. See How to draft a company constitution and How to: The rights, powers and liabilities of shareholders ).

The directors' power to pay dividends

Unless the constitution says otherwise, the company's board of directors may authorise the payment of a dividend without needing a decision of the shareholders. However, the company must satisfy the "solvency test" (see below).

The directors may not authorise dividends to be paid to some but not all of the shareholders in a particular class, nor may they pay some shareholders in a class a greater value of dividend than is paid to other shareholders in the same class (unless payment is made in proportion to the amounts paid on shares).

Solvency test must be satisfied

Before the board of a company may authorise the distribution of company funds as dividends, the directors must be satisfied that, immediately after the dividend is paid, the company will satisfy the solvency test. This test has two limbs:

  • First, the company must be able to pay its debts as they become due in the normal course of business.
  • Second, the value of the company's assets must be greater than the value of its liabilities.

If after a dividend has been paid the company fails to satisfy the solvency test, the company may recover the dividend from each shareholder, unless:

  • the shareholder received the dividend in good faith without knowing that the test wasn't satisfied, and
  • the shareholder altered his or her position in reliance on the dividend, and
  • it would be unfair to require the shareholder to repay the dividend in full or at all

Waiver of dividends

As a shareholder you are entitled to waive your allocated dividend, provided you give written notice to the company.

Issuing shares instead of dividends, and shareholder discounts

A company may choose to issue shareholders other shares as a whole or partial replacement for a proposed dividend, provided certain conditions are satisfied.

In addition, a company may choose to offer discounts to shareholders on some or all of the goods or services the company provides. The board of directors must resolve that the offer is fair and reasonable to the company and to all shareholders, and that the offer is available to all shareholders of the same class on the same terms.

Cautionary notes
  • A company director who fails to take reasonable steps to ensure that the necessary conditions (such as the solvency test) were satisfied before a dividend was paid will be personally liable to the company to repay the dividends or that part of them that cannot be recovered from shareholders.
  • If the company has a constitution then any action taken or not taken regarding dividends must be in accordance with that provisions of the constitution.


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