If you are a shareholder with the type of shares that entitle you to dividends, you may be concerned if the directors decide not to make a payout. We explain dividends and shareholder rights, and look at what to do if dividends are withheld when you feel they should have been paid.
Summary
This article covers:
- Understanding dividends and dividend rights UK
- Shareholder rights relating to dividends, including dividends ordinary vs preference shares
- Common reasons dividends are withheld, and no dividends are declared and shareholder rights
- Withholding dividends under UK law
- Shareholder remedies, dividends and company law dividends
- Preventing dividend disputes in the future
Understanding Dividends and Dividend Rights in the UK
Dividends are a share of a company’s profits that are paid to eligible shareholders. Not all shares entitle the holder to dividends, and even if you have shares which allow dividends, company directors can choose not to pay these.
Directors are responsible for looking at a company’s profits and its business position and deciding whether dividends should be paid. Dividends can only be paid out of distributable profits, and need to be approved by the board of directors and, in the case of final dividends, approved by shareholders at a general meeting.
If dividends are to be paid, directors must ensure that a company has sufficient distributable profits, that the payment does not breach the terms of the company’s articles of association, and that the correct process is followed when declaring dividends, including the making of a resolution. Minutes of the relevant board meeting must be kept, even where there is only one director, and if a dividend is approved, then a dividend voucher should be issued. This must include the following:
- The company’s name
- The date of the dividend issue
- The shareholder’s name and address
- Their shareholding
- The dividend they are entitled to receive
- The signature of the director of the company secretary
Each eligible shareholder is then supplied with a copy of the voucher.
Dividends can be paid during the financial year, known as interim dividends, or once a year after the financial year end, known as final dividends.
If directors authorise dividend payments when a company does not have sufficient distributable profits, or they should have foreseen financial problems, they will be personally liable for any shortfalls.
In addition, a shareholder who accepts a dividend knowing or having reasonable grounds to know that it is unlawful will be liable to repay the sums received.
Dividend Rights for Shareholders: Ordinary vs Preference Shares
Eligible shareholders have a right to dividends if the company decides to declare them. They can vote on whether to accept or reduce final dividends, but cannot vote to increase the sum, and they have the right to attend the general meeting when the vote is held.
Shareholders have the right to equal treatment with other shareholders of the same class of shares.
Dividends are paid in accordance with any restrictions or obligations set out in the articles of association and depending on the rights attaching to each class of share. Preference shares are generally paid first, taking priority over ordinary shares.
Common Reasons Dividends Are Withheld
There are several reasons why directors may decide not to pay dividends, including:
- Insufficient distributable profits
- Directors want to reinvest profits
- Directors are concerned about a company’s financial health and want to retain profits as a cushion
- Dividends cannot be paid if they leave a company with insufficient funds to cover its liabilities
What Shareholders Can Do If Dividends Are Withheld
Review Company Documents
The first step is to establish the legal position, including checking shareholder entitlement under the company’s articles of association and your shareholders’ agreement. Minority shareholder dividend rights can be different to majority shareholder rights, and you need to be clear on what your holding entitles you to.
Discuss and Negotiate
You can raise any concerns with the company directors. Depending on the size of the company, this could be done informally or at a shareholders’ meeting. They may be open to negotiating, to include considering whether to issue dividends after all, or whether another compromise can be made, such as a share buyback.
Request Financial Transparency
You can ask the directors to explain their stance by making relevant financial records available to the shareholders.
Consider Alternative Payments
If a company decides not to pay dividends, then shares could become more valuable as the money will remain in the company.
An alternative to dividend payments is share capital reduction, where a company reduces its share capital, with assets being returned to shareholders. This generally involves either cancelling some shares or reducing their nominal value. A special resolution or court approval is required for this option.
Shares can also be purchased by the company, known as share buyback, reducing the number of shares on the open market, and meaning that shareholders can then hold a larger share of the company if the purchased shares are cancelled.
Legal Remedies for Shareholders When Dividends Are Withheld
Unfair Prejudice Petition Under Section 994 of the Companies Act 2006
Under Section 994 of the Companies Act 2006, shareholders can issue an unfair prejudice petition if a company’s directors use funds for excessively high salaries and fail to pay dividends, unfairly prejudicing shareholders’ investments and devaluing shares.
If a court finds that a reasonable individual would consider the directors’ conduct to be unfairly prejudicial, it can order a remedy, such as requiring a majority shareholder to buy out a minority shareholder for a fair price.
Derivative Action
A derivative action is brought by shareholders on behalf of the company, and any remedy will benefit the company and not shareholders, so this option will not directly allow shareholders to obtain dividends, although it can protect the company.
Winding-up Petition on Just and Equitable Grounds
If directors persistently fail to pay dividends when they should, shareholders can ask the courts to wind the company up. This option is usually a last resort when a business is no longer able to operate effectively because of internal conflict or poor management. Not paying dividends alone is not sufficient for a company to be wound up, and will be part of more wide-ranging problems, such as a breakdown in trust and confidence and unfair conduct, if this option is to be successful.
The following issues could establish this wider pattern of behaviour:
- Breach of duty on the part of the directors, or mismanagement, including paying themselves excessive sums or using company profits for personal gain
- Attempting to exclude minority shareholders from involvement in the company when they have a reasonable expectation of this
- A severe breakdown of trust and confidence between directors and shareholders, which means the company is no longer functional
Court Orders or Injunctions
Courts do not generally interfere in the running of companies to force the payment of dividends. However, if a company’s actions breach the articles of association or shareholders’ agreement, or are unfairly prejudicial, courts may make the following orders:
- An order to pay, requiring a company to pay outstanding dividends
- An injunction to freeze assets temporarily or stop excessive payments to directors
- A buy-out order requiring the company or majority shareholders to purchase a minority shareholder’s shares
Preventing Future Dividend Disputes and Legal Action
The key to tackling dividend disputes effectively is to deal with matters early on before a situation deteriorates, and to ensure that firm action is taken. A solicitor will be able to advise you on the strength of your position and discuss the outcome you might be able to obtain.
A formal legal letter can help directors focus on finding an acceptable solution and ensure that they understand their actions are subject to scrutiny. This is often sufficient to ensure that proper consideration is given to the payment of dividends.
Where the relationship between directors and shareholders has become strained, negotiation via a third party, such as a corporate solicitor or a mediator, can help to repair it and find a way forward. This could be by assisting those involved to work together in the future, or by negotiating a buy-out.
If necessary, a solicitor can advise and represent you in legal action to enforce your rights.
Contact Our Company Solicitors
If you need advice on shareholders’ rights and dividends, contact us today, and we will be happy to help. We have many years of experience in dividend dispute resolution and will work to find a prompt solution.
For more information on our services, see our shareholder disputes solicitors page.
To speak to one of our expert corporate solicitors, ring us on 0330 912 7841, email us at info@witansolicitors.co.uk or fill in our contact form, and we will talk through your situation with you and discuss how we can assist. We have offices in Birmingham, Northampton, London and Wellingborough.
