Failure to pay dividends to shareholders might be due to legitimate business reasons. However, there are occasions where dividend payments are wrongfully withheld. Whatever your situation, our team of experts are here to help
What is a dividend?
A dividend is a payment made by a company to shareholders by way of a return on their investment. A dividend must be declared at a general meeting and can only be declared to shareholders if the company has made sufficient profit after payment of corporation tax.
Dividends are paid to shareholders as a return on their investment. The amounts paid to a shareholder will depend on the shareholding value that the shareholder holds in the company.
- dividends do not have to be paid at any particular time of the year, although they can only be paid once the company has made a profit and therefore these would usually be declared once the company’s annual accounts have been completed;
- larger companies tend to pay dividends to shareholders once or twice a year, but in a smaller company, this can be at any point when the company is sure that it is making sufficient profit.
Dividends are declared at a meeting called by the directors. Shareholders are then entitled to attend a general meeting and vote on the declaration. The declaration of dividends will then be recorded in the board minutes for the meeting and kept in the financial records.
Non declaration of dividends
There is no legal obligation on a company to declare dividends. Even if there are available profits for distribution, the directors may decide not to declare a dividend if this is not in the best interests of the company.
This might be the case if the company needs to use the profits to fund more investment into the company, to ensure its success. As long as this does not breach their director’s duties, then this is a decision the directors are entitled to reach on behalf of the company.
Breach of duty and unfair prejudice claims
However, if the decision is taken in breach of duty, for an improper reason, then a shareholder might have recourse by bringing a claim that the failure to declare dividends is unfairly prejudicial to the shareholders.
Shareholders would have to be very clear that the decision-making behind the failure to declare a dividend is unfairly prejudicial and out of in line with the duties that the director has to the company.
- if the directors are taking excessive remuneration and making decisions about company funding that is not in the best interests of the company, while refusing to declare a dividend on profits year after year.
- a policy of not paying dividends is more likely to lead to a successful claim for example, than a one-off decision when the company requires the capital in other areas.
If an unfair prejudice claim is unlikely to be successful, then an alternative for the shareholder is to exit the company by selling their shareholding. This may be easier said than done depending on the size of the company and any pre-emption rights that may be in existence however.
Other remedies are available to a shareholder.
At Francis Wilks & Jones we advise both companies and shareholders on the rights to dividends, and remedies available for breach of duty. If you are a shareholder and believe that a company is exercising a policy of deliberately failing to declare a dividend, then contact one of our expert teams to today to discuss further. This is a complex issue. Speak to one of our team today if you have concerns.