In this blog, we will discuss the process involved in paying a dividend to a shareholder and discuss the two most common types of dividend; final and interim dividends.
Final and Interim Dividends
Final dividends are paid annually, after the end of the financial year. Interim dividends, which are generally smaller than final dividends, can be paid at any time throughout the financial year. There are also differences in how each dividend is declared but both should be calculated and initially approved by the Directors before the Company’s accounts have been prepared.
As with all Directors’ decisions, the Company’s articles of association should be reviewed to ensure compliance, as amended articles are likely to contain provisions regarding the declaration and payment of dividends. In addition to the articles, it is also important to investigate the shareholders rights. A dividend can only be passed to a shareholder if the Company is sufficiently profitable and if their share class has the right to receive dividends. It is also important to remember that if a company has numerous share classes, the rights for each class must be reviewed as they may vary.
The Directors must also remember that their duty is to the Company and that any decision to provide dividends to shareholders must be in the best interest of the Company as a whole. Dividends can be passed to the shareholders as often or as infrequently as the Company wishes. However they can only come from the Company’s profit after all tax, costs and expenses have been paid.
How to declare
In cases where a private company subscribes to the model articles, or their articles do not contain additional dividend clauses, the Directors of a company, must decide if a dividend should be paid after reviewing the Company’s finances (but before the preparation of draft accounts). This decision is taken at a meeting of the Directors and minutes must be prepared showing the decision.
Once a final dividend has been approved the shareholders are required to declare same by way of an ordinary resolution signed by a majority of the Shareholders. It is not necessary to call a meeting of the Shareholders.
Interim dividends can be approved and declared by the Directors only. Please note that even if you are the sole Director and sole Shareholder of a Company, it is a legal requirement to hold a Directors meeting to approve the dividend and to prepare the necessary paperwork.
How to pay
The model articles allows for dividends to be paid by cheque, bank transfer or any other means which has been agreed with the “distribution recipient”. The agreement between the Directors and the recipient can be made in writing or as the Director may otherwise decide.
The articles also define the distribution recipient as the:
- Holder of the shares, or
- If shares are held jointly, whichever person is named first in the register of members, or
- If the holder is no longer entitled to their shares (through death, bankruptcy or otherwise), the rights pass to the transmittee (person whom the shares have been passed to). The transmittee can either keep the shares and become a shareholder or they can arrange for the shares to be transferred to another person – a transmittee cannot vote at general meetings.
The above breaks down how and when a company can pay a dividend, the article does not discuss the tax implications or how dividends should be represented on the company’s accounts. For further advice or assistance with dividends please contact a professional services provider.