Profit sharing: are all shareholders entitled to dividends?
Many companies call an ordinary general meeting before the end of April after the end of the financial year to approve the annual accounts and distribute profits. Shareholders of companies often look forward to this date in the hope of receiving an appropriate share of the profits in the form of dividends. But are they all entitled to receive dividends? Can they be paid every year? Are companies free to decide in what form and how much dividends to pay to their shareholders?
According to Sandra Mickienė, Associate at AVOCAD, the Law on Joint Stock Companies (the "ABI") provides for certain important restrictions that must be taken into account when deciding on the payment of dividends.
Are all shareholders of a company entitled to receive dividends, and what proportion of the net profit is used to pay dividends?
The answer to this question, according to the lawyer, depends on when the individual became a shareholder of the company, whether he or she has paid up his or her shares in full and by the due date, and the way in which the company's articles of association regulate the distribution and payment of dividends (for example, the articles of association may provide that the dividend on paid-up shares is reduced if payment for the shares has been completed in the financial year in respect of which the dividend is paid; they may stipulate the percentage of the company's net profits to be used for the payment of the dividend; and so on.) or in the shareholders' agreement, if any (shareholders' agreements often provide that no dividends will be paid to shareholders for a certain period of time in order to, for example, invest a certain proportion of the profits in the development of the company's business, and usually regulate the percentage of net profit to be allocated to the payment of the dividends, and so on).
If the company's articles of association do not deal with this issue or do not provide for any exceptions, if there is no shareholders' agreement, then the following general rules apply:
(1) Dividends shall be payable to those persons who, at the close of business on the day of the general meeting of shareholders declaring the dividend, were shareholders of the company and who have paid up their shares;
2) if the share is not fully paid up and its maturity date has not expired, the shareholder's dividend is reduced in proportion to the unpaid portion of the share price;
3) if the share is not fully paid up and the payment period has expired, no dividend is payable to that shareholder;
4) the decision on the payment of dividends and the specific amount of dividends is taken by the general meeting of shareholders of the companies. The decision shall determine the proportion of profits to be allocated to the payment of dividends and the proportionate dividend per share.
In what form are dividends paid?
In practice, dividends are paid to shareholders in the form of shares or assets, or in some other form. However, the ABL provides that dividends must be paid in cash.
Courts have held that it is contrary to the provisions of the ABI to pay dividends in a form other than cash. For example, in one case, the court ruled on the conclusion of assignment of claims agreements to pay dividends. In this case, the court held that the ABI regulates the payment of dividends only in cash, and that it is therefore contrary to the law to enter into assignment of claims agreements for the payment of dividends.
Restrictions on the payment of dividends
The Companies Act provides that the General Meeting of Shareholders may not decide to declare and pay dividends if at least one of the following conditions is met:
(1) the company has outstanding debts which have fallen due before the decision is taken;
2) the amount of distributable profit for the financial year is negative(loss);
3) the company's equity is less than , or would become less if dividends were paid, than the sum of the company's authorised capital, statutory reserve, revaluation reserve and reserve for the acquisition of own shares.
According to AVOCAD, it is important to consider not only what debts the company has to its creditors and what the company's situation is before the dividend is paid. "Make sure and assess where the company will be after the dividend has been paid, i.e. whether the company will be able to pay its creditors after the dividend has been paid, and whether the company's equity will not be less than the sum of the company's share capital, the mandatory reserve, the revaluation reserve and the reserve for the acquisition of treasury shares," Sandra Mickienė advises.
However, in business, there are cases where these imperative limits are not respected. There is still a perception that the distribution of a company's profits is a matter for the company itself and its shareholders. Shareholders pay themselves dividends in spite of the legal restrictions, taking the view that non-compliance with the law is a mere formality and hoping that no one will claim against them, either now (since all shareholders have approved the payment of dividends) or in the future.
But the courts say otherwise - if dividends are paid illegally, in breach of the law, shareholders may have to repay dividends paid to the company even years later.
In 2023, the Supreme Court of Lithuania heard a case in which the insolvency administrator applied to the court for an award of dividends paid by the shareholders of the bankrupt company to the shareholders of the bankrupt company (in excess of EUR 75,000), which essentially constituted damage suffered by the bankrupt company as a result of the unlawful acts of the company shareholders. The administrator took the position that both at the time of the decision to pay the dividend (7 March 2017) and at the time of the payment of the dividend (16 August 2017), the company was in arrears to its creditors, and that therefore the decision to pay the dividend and the payment of the dividend were illegal. The Court of First Instance upheld the action and the Court of Appeal and the Court of Cassation have not substantially modified it.