A dividend is a distribution to the shareholders of the company based on the number and type of shares that they hold. There is no legal obligation for dividends to be paid and the right to recommend a dividend lies with the board of directors.
When declaring a dividend it is important for the directors to ensure the company has profits available for distribution. Where the directors authorise payment of a dividend without sufficient profits being available for that purpose, it is deemed to be an unlawful distribution and they may be held personally liable. When preparing the necessary board minutes of the discussion to declare the dividend, it is important that the company secretary make an explicit reference to the directors having reviewed relevant financial statements prior to approving or proposing the dividend payment.
There are two types of dividends:-
1. A final dividend is calculated from the last statutory financial statements for the company that must be approved by the shareholders of the company in a general meeting. Shareholders cannot declare an amount above the recommendation of the directors of said company.
2. Interim dividends can be determined by the directors of a company at any time during the year. Unlike final dividends they do not have to be declared by the shareholders of a company, and directors can decide not to declare interim dividends at any time up to the point of payment. Interim dividends are calculated from the interim financial statements of a company.
The declaration of a dividend is an important event in the diary of the company secretary and the directors will reply upon him/her to ensure that the procedure for the administration and payment of the dividend is correctly adhered to and in line with Companies Act 2014. Therefore it is useful for the company secretary to keep a checklist of matters to be attended to:-
Declaring a dividend
- Check the Constitution of the company for any special provisions regarding the declaration of the dividend,
- If an interim dividend is proposed, hold a board meeting to propose a resolution to declare a dividend,
- Final dividends must be recommended to the shareholders for their approval in a general meeting.
- Secure the money to pay the dividend, by making sure there is a corresponding sum of cash at the bank to be distributed.
Paying a dividend
- Ensure that all transfers, transmission documents, probates, changes of address and other documentation received up to the close of business on the record date are processed so that the dividends may be correctly dispatched.
- Prepare dividend warrants and dividend tax vouchers for printing.
- Compile a dividend sheet which records the amount of the dividend and tax credit for each shareholder.
- Check that the overall total number of shares on which the dividend is paid agrees with the company’s issued capital.
Given the onerous rules surrounding dividends, it is important that the relevant tax, accounting and company secretarial advice is sought from the company’s professional advisors prior to declaration.