The distribution of dividends
When an individual participates in a company, whether in a personal capacity or as a legal entity, they do so with the expectation and confidence that the company will generate profits. Shareholders or members are afforded the opportunity to reap the returns on their investment in the company. Under our legal system, this is characterised as a mere expectation and is realised through dividends. Such dividends are approved at a General Meeting by the legally required majority, namely, an ordinary majority in private limited companies (S.L.) and a simple majority in public limited companies (S.A.), unless otherwise provided for in the articles of association. These dividends derive from the company’s profits and are distributed among the shareholders in the agreed proportions.
Requirements for the distribution of dividends
However, dividends may only be distributed once the following requirements have been met, the purpose of which is to ensure, as far as possible, the company’s continued viability.
Requirements to be met prior to distribution
- Legal or mandatory reserves, whether statutory or voluntary, must be complied with. This facilitates self-financing to cover potential risks. Freely distributable reserves must be at least equal to the book value of the assets corresponding to research and development as recorded in the balance sheet.
- There must be profits arising from the company’s overall activities.
- Net assets must be positive; that is, there must be no accumulated losses from previous financial years. If such losses exist, profits must first be applied to offset them. Furthermore, dividends may only be distributed out of distributable profits if the value of net assets is not, and as a result of the distribution does not become, lower than the company’s share capital, and provided that all other applicable financial and accounting criteria are satisfied.
Methods and timeframes for the distribution of dividends
The distribution of dividends, which may be made in cash or in kind, shall be agreed at the General Meeting. Contrary to common belief, it is not necessary to wait until the end of the financial year; the same General Meeting will determine the method of payment and the time at which it will be made, with a maximum period of 12 months from the date of the resolution. If no specific timeframe is stipulated, payment shall be deemed to be made at the company’s registered office on the day following the resolution. It should also be noted that the right to claim dividends is subject to a limitation period of five years, calculated from the first date on which payment could have been made.
As a general rule, in private limited companies (S.L.) dividends are distributed in proportion to each member’s holding in the share capital, whereas in public limited companies (S.A.) distribution is based on the paid-up share capital. However, this rule may be modified by the company’s articles of association, provided that the prohibition of the so-called “leonine agreement”, which would exclude any shareholder or member from participation in profits or losses, is not infringed.
Where the articles of association provide for a minimum dividend in respect of certain shares or holdings, the holders thereof shall have priority in distribution, even over the remuneration of directors, who may only be paid once the legal and statutory reserves have been satisfied.
What happens if no distribution is made or if it is made incorrectly?
If a distribution is made incorrectly, the dividends must be repaid with statutory interest, provided that the company can demonstrate that the recipients were aware of the irregularity or, in the circumstances, could not reasonably have been unaware of it.
It is important to emphasise that, once the distribution of dividends has been approved, the shareholder becomes a creditor of the company and is entitled to payment. The General Meeting may not subsequently amend or revoke the resolution without the consent of the affected party.
If no dividends are distributed and the company has generated profits over the previous three financial years, a minority shareholder may exercise a right of withdrawal, unless otherwise provided in the articles of association. Furthermore, after five financial years have elapsed since the company’s registration with the Mercantile Registry, any shareholder who has formally recorded their objection to the insufficiency of the dividends declared shall have a right of withdrawal if the General Meeting does not resolve to distribute at least 25% of the distributable profits from the preceding financial year.
However, even where this condition is met, the right of withdrawal shall not arise if the total dividends distributed over the previous five years amount to at least 25% of the distributable profits recorded during that period.
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