Right to a Dividend
A dividend is a distribution of the company’s assets to its shareholders. Dividends can only be proposed by the directors and when the directors propose a dividend, it must then be approved by the members.
There is no legal obligation on a company to declare a dividend even where there are sufficient distributable profits available, unless its memorandum and articles of association or constitution require it to. However, once a final dividend (i.e. as opposed to an interim dividend) is declared on a shareholder’s share, that shareholder is entitled to payment and in the event of non-payment can sue the company for arrears in the same way as any ordinary creditor may sue for a debt.
A dividend can only be paid out of a company’s profits which are available for distribution. The profits available for distribution are the company’s net accumulated realised profits. In simple terms this means that only the company’s aggregate profits less losses can be used to pay dividends. Other company profits and reserves, for example:
- Unrealised profits i.e. profits which have not as yet crystallised
- Share premium i.e. any premium charged over and above the nominal value of a share on issue cannot be used for the purposes of paying a dividend
A public limited company can only make a distribution where its net assets, following the distribution, are not less than the aggregate of its called-up share capital and its undistributable reserves.