The last few days have seen a wave of dividend suspensions, as well as cancellations of share buybacks, as companies urgently reassess their financial position in the light of the pandemic. The Financial Times (23 March 2020) notes that "the pandemic appears set to end the decade-long run of bumper payouts for income-hungry investors". This move is fully supported by institutional investors such as Legal & General Investment Management, and reinforced in a joint statement issued by the the FCA, the FRC and the PRA on 26 March 2020. The regulators said directors must: "pay attention to capital maintenance, ensuring that sufficient reserves are available when the dividend is made, not just proposed".
So when may, or indeed should, the directors of a company reconsider their dividend position?
Any dividend payment by a company to its shareholders must meet various requirements set out in legislation and in the company's articles of association. The key requirement is that, in order for a company to be able to lawfully pay a dividend, it must have sufficient distributable profits that are justified by reference to relevant accounts.
However, it is vital for directors to be aware that having relevant accounts which show adequate distributable profits is not the end of the story. The directors must also carefully consider their statutory and common law duties.
Directors' duties
The directors are subject to a range of statutory duties under the Companies Act 2006, in particular sections 171 (Duty to act within powers), 172 (Duty to promote the success of the company) and 174 (Duty to exercise reasonable care, skill and diligence). Company directors are also under a common law duty to safeguard the company's assets and must also consider the company's future financial requirements before making a distribution.
This means that the directors must take all relevant circumstances into account, including any darkening of the economic picture since the date of the relevant accounts which could indicate that the company's cash flow position could deteriorate. If the directors come to the view that the company's interests are best served by retaining distributable profits, then they must consider cancelling or at least deferring the dividend payments. This applies equally to private companies as to big household names. Importantly, directors of a group company need to bear in mind that they owe their duties as directors to that company, not to the group as a whole or to the holding company. Therefore they must not approve the payment of dividends up to the holding company if that might or could negatively impact the company of which they are directors.
How can an interim or final dividend be cancelled after it has been declared but before it has been paid?
An interim dividend is defined in case law as a dividend paid in respect of part of an accounting period, at a date between general meetings of the company at which a final dividend is declared, and in anticipation of profits to be made for the entire accounting period. Most standard form articles of association will give the directors authority to pay interim dividends.
A final dividend is a dividend that is declared in respect of a specific accounting period of a company. Most standard forms of articles will provide that a final dividend is declared by the members resolving, by ordinary resolution, to approve a dividend of a particular amount. Articles will also almost always state that the amount of any dividend approved by the members shall not exceed the amount recommended by the directors.
As noted above, an interim dividend does not become enforceable as a debt prior to actual payment. This means it can be cancelled by the directors at any time before it is paid.
The position with a final dividend is that if the directors consider that, for whatever reason, the distribution cannot lawfully be made, it should not be made. The directors can achieve this by withdrawing their recommendation, because, as noted above, articles will almost invariably state that the amount of any dividend is dependent on the directors' recommendation.
Contact us
This is a general reminder of the position on payment of dividends. For tailored legal advice on your company's situation, please contact Gillian White (gillian.white@howardkennedy.com) or your usual Howard Kennedy LLP contact.
