Dividends and Other Distributions of a Company

Generally, dividends are the most typical form of cash payment made by Companies, typically large businesses whose shares trade on the Capital Market. Purchasing a share of a Company makes one a partial owner of such Company, and in such circumstance, a holder of a unit of share of a Company can earn payment(s) from the Company’s profits, known as a dividend.

Put differently, dividend is the payment received by a shareholder from a company after distribution of profits. Thus, under Section 9(3) of the Companies Income Tax Act (as amended) (CITA) “dividend” means in relation to a company not in the process of being wound up or liquidated, any profits distributed, whether such profits are of a capital nature or not including any amount equal to the nominal value of bonus shares, debentures or securities awarded to the shareholders.” On the other hand, the Companies and Allied Matters Act (CAMA) defines “dividend” as a proportion of the distributed profits of the company which may be a fixed annual percentage, as in the case of preference shares, or it may be variable according to the prosperity or other circumstances of the company, as in the case of equity shares.

While there are also different forms of dividends including stock dividends, property dividends, scrip dividends and liquidating dividends, it is important to note that “other distributions of a company” though not clearly defined under CAMA are distributions made in the course of the company’s winding up. Such other distributions may include the whole or part of a company’s undertaking or assets to another body corporate in consideration or part consideration of any shares, debentures, policies or other like interest in that body corporate whether in liquidation or by way of dividend. This newsletter in discussing other distributions of a Company shall focus on non-cash dividends. 

RIGHT TO RECOMMEND THE DIVIDEND

One of the primary goals that the Board or other managers of the business of the company strives to deliver is to increase the wealth of shareholders by paying or owing dividend and/or ensuring that the stock price goes up. The right to recommend a dividend lies with the Board of directors. Only when the Board recommends a dividend, the shareholders can declare a dividend in the general meeting. However, the shareholders cannot insist the directors to recommend. Even if there are sufficient profits, but the directors feel that a distribution of dividend is undesirable in the interests of the financial stability of the company, they can refuse to recommend a dividend.

RIGHT TO DECLARE A DIVIDEND

Only the shareholders in the Annual General Meeting can declare the dividend. The Board of Directors determines the rate of dividend to be declared and recommends it to the shareholders. The shareholders, by passing a resolution in the general meeting, can declare the dividend. The shareholders can either accept the same rate of dividend or they can even reduce the rate. However, they cannot enhance the rate of dividend recommended by the directors. 

PROCEDURE FOR DECLARING DIVIDENDS

1. The company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends.
2. A dividend must not be declared unless the directors have made a recommendation as to its amount. Such a dividend must not exceed the amount recommended by the directors.
3. No dividend may be declared or paid unless it is in accordance with shareholders’ respective rights.
4. Unless the shareholders’ resolution to declare or directors’ decision to pay a dividend, or the terms on which shares are issued, specify otherwise, it must be paid by reference to each shareholder’s holding of shares on the date of the resolution or decision to declare or pay it.
5. If the company’s share capital is divided into different classes, no interim dividend may be paid on shares carrying deferred or non-preferred rights if, at the time of payment, any preferential dividend is in arrear.
6. The directors may pay at intervals any dividend payable at a fixed rate if it appears to them that the profits available for distribution justify the payment.
7. If the directors act in good faith, they do not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on shares with deferred or non-preferred rights.

PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS

Where a dividend or other sum which is a distribution is payable in respect of a share, it must be paid by one or more of the following means—

a. transfer to a bank specified by the distribution recipient either in writing or as the directors may otherwise decide;

b. sending a cheque made payable to the distribution recipient by post to the distribution recipient at the distribution recipient’s registered address (if the distribution recipient is a holder of the share), or (in any other case) to an address specified by the distribution recipient either in writing or as the directors may otherwise decide;

c. sending a cheque made payable to such person by post to such person at such address as the distribution recipient has specified either in writing or as the directors may otherwise decide; or

d. any other means of payment as the directors agree with the distribution recipient either in writing or by such other means as the directors decide.

UNCLAIMED DISTRIBUTIONS

All dividends or other sums which are payable in respect of shares, and unclaimed after having been declared or become payable, may be invested or otherwise made use of by the directors for the benefit of the company in accordance with the provisions of section 429 of CAMA. 

The payment of any such dividend or other sum into a separate account does not make the company a trustee in respect of it if twelve years have passed from the date on which a dividend or other sum became due for payment, and the distribution recipient has not claimed it, the distribution recipient is no longer entitled to that dividend or other sum and it ceases to remain owing by the company and should be included in the report that should be submitted to the other shareholders of the company.

The company shall publish the list of unclaimed dividend in two national newspapers and attach the list as published to the notice of the next annual general meeting to the members. Dividends that are unclaimed after 12 years could be included in the profits that should be distributed to the other shareholders of the company.
 

NON-CASH DISTRIBUTIONS

Subject to the terms of issue of the share in question, the company may, by ordinary resolution on the recommendation of the directors, decide to pay all or part of a dividend or other distribution payable in respect of a share by transferring non-cash assets of equivalent value (including, without limitation, shares or other securities in any company).

WAIVER OF DISTRIBUTIONS

Distribution recipients may waive their entitlement to a dividend or other distribution payable in respect of a share by giving the company notice in writing to that effect, but if the share has more than one holder, or more than one person is entitled to the share, whether by reason of the death or bankruptcy of one or more joint holders, or otherwise, the notice is not effective unless it is expressed to be given, and signed, by all the holders or persons otherwise entitled to the share.

CONCLUSION

It is important that dividend being the primary return that Shareholders expect on their investment in a Company’s business is paid by a Company in accordance with its Articles of Association and in utmost good faith, allowing the Company to share its profits with Shareholders, which helps to thank Shareholders for their support via higher returns and to incentivize Shareholders to continue holding the stocks. Safe to state that consistent dividends are often viewed by investors as a sign of a Company’s strength and that the Company’s management has positive expectations around future earnings growth, making the Company more attractive to investors, which helps to drive the stock price higher.

REFERENCES

1. Section 426 of Companies and Allied Matters Act, 2020
2. Section 429 of Companies and Allied Matters Act, 2020
3. Section 9(3) of the Companies Income Tax Act (as amended)