Coronavirus and company dividends

Answer

Dividends have been hit hard by the covid-19 pandemic. Several traditional dividend-paying FTSE 100 companies have announced a full or partial dividend cut. For example, BT announced a suspension of its dividend for two years and Royal Dutch Shell was forced to cut its dividend for the first time in nearly 75 years.

As companies around the world are forced to make tough decisions, we consider the key obligations, options and considerations relating to the payment of dividends in the context of covid-19.

Are companies required to pay a final dividend?

There is no obligation for a company to pay a final dividend unless it is required by the company’s articles of association or the company has otherwise committed to do so (eg, under a shareholders’ agreement). Usually a company’s articles will provide that the shareholders may declare a dividend by ordinary resolution if recommended by the directors. Public companies will typically include a resolution to declare a final dividend of an amount recommended by the directors in their notice of annual general meeting (AGM).

Under the Companies Act 2006, a dividend may only be paid out of a company’s distributable profits as determined by reference to a set of accounts drawn to a specific date, typically the company’s year-end accounts. In addition, common law distribution rules, which focus on the financial position of the company at the time the distribution is made, must also be taken into account. Since some time may have elapsed between the company’s financial year end (being the date of the year-end accounts) and the decision to pay a dividend, companies may decide that they need to prepare interim accounts to support the distributable profits assessment.

When deciding whether to recommend that a dividend be paid and the amount of such dividend, directors must look beyond distributable reserves. Directors should have regard to their common law and equitable duties, and their statutory duties under sections 171-177 of the Companies Act 2006. If the directors fail to consider events occurring after the date of the relevant accounts, they are at risk of a claim for breach of duty.

On 20 May 2020, the Financial Reporting Council updated its guidance for companies preparing financial statements in context of the covid-19 pandemic. The guidance encourages boards to pay attention to capital maintenance, ensuring that sufficient reserves are available when a dividend is paid, not just when it is proposed and that enough resources remain to continue to meet the company’s needs.

If, prior to publishing the notice of AGM, the board considers that it is not appropriate to recommend the payment of a final dividend, no resolution for the declaration of a final dividend should be included.

It’s also worth noting that companies that borrow more than £50,000,000 through the Coronavirus Large Business Interruption Loan Scheme will be subject to restrictions on their ability to make dividend payments during the period of the loan.

How might the social distancing requirements and other restrictions on holding an AGM impact on final dividends?

The restrictions introduced by the UK government in response to covid-19 have caused issues for companies convening their AGMs. The adjournment of a company’s AGM may mean that the company is unable to declare and pay a final dividend at the proposed time. In such circumstances, the directors may consider the payment of an interim dividend (if permitted by the company’s articles), which typically do not require a shareholder vote.

Can a resolution to declare a final dividend be amended or withdrawn before the AGM?

The notice of AGM will set out the text of all proposed resolutions, including, in the context of a dividend resolution, the board’s recommendation of the proposed amount and payment date. Following publication of the notice, the board may determine that the position of the company has changed such that it is no longer appropriate or permitted to pay a dividend.

If, following its recommendation but prior to the date of the AGM, the board decides that it can no longer recommend the distribution, it may rescind its recommendation and withdraw the resolution from being put to the meeting. Alternatively, if appropriate, the board may reduce the amount recommended to be paid. In this case, it should consider the ability of a proxy to vote on an amendment resolution (and any consequently amended dividend resolution).

On 29 April 2020, the Chartered Governance Institute published guidance on the withdrawal or amendment of resolutions to pay final dividends. The guidance notes that where a company has already published its AGM notice and the board decides to withdraw or amend the dividend resolution, the company should notify shareholders accordingly and explain the reasons for the amendment or withdrawal. Companies subject to the Market Abuse Regulation will also need to update the market as soon as possible.

Can a company cancel a final dividend that has been declared?

The declaration of a final dividend by shareholders creates a debt owed by the company to each shareholder at the dividend record date. The debt is enforceable from the payment date, or where a payment date is not stipulated, the date of the declaration. Once declared, a company may not unilaterally amend, cancel or postpone the dividend unless permitted by its articles, the terms of issue of the relevant shares, or the terms of the declaration of the dividend itself.

Failure to pay, when due, a declared final dividend would allow a shareholder to start proceedings to recover the payment. This may be by way of a debt claim or initiation of compulsory winding-up proceedings. Failure to pay the dividend may also trigger cross-default provisions and constitute an event of default under the company’s facility agreements.

A shareholder resolution will not be sufficient to revoke or cancel a declared dividend. Each shareholder at the record date will have become a creditor of the company and, as such, unanimous consent of those creditors must be obtained to revoke the dividend. A creditors’ scheme or composite members’/creditors’ scheme of arrangement under Part 26 of the Companies Act 2006 could also be undertaken to effect the cancellation of a declared dividend.

Alternatively, a company may request that certain significant shareholders agree to a delay in their payment or to waive the dividend completely. Another option may be to resolve to pay the declared dividend in scrip rather than cash (subject to having the required authority to allot such shares).

It should be noted that the interests of creditors take precedence where the company is or is likely to become insolvent after a dividend is recommended or paid. In this situation, the directors should withhold payment of the dividend on the basis that it would be capable of being set aside as a preference and/or transaction at an undervalue under sections 238 and 239 of the Insolvency Act 1986. Payment of a dividend in these circumstances would also constitute a breach of fiduciary duty by the directors.

Has any other guidance been published relating to dividends during the covid-19 crisis?

On 25 March 2020, the London Stock Exchange (LSE) published a notice that makes temporary changes to the Dividend Procedure Timetable 2020. The market notice provides that, until further notice, the LSE will permit a deferral period of up to 30 business days for payment of a dividend, but no more than 60 business days after the record date. Any deferral of a dividend payment must be notified to the LSE stock situations team without delay. After the deferral period has expired, the dividend must be paid or cancelled and the company should notify the LSE stock situations team and the market of any cancellation without delay.

What can we learn from the impact of covid-19 on the payment of final dividends?

Companies should consider the measures that could be put in place now, which would mitigate similar issues in future. Amendments to a company’s articles that provide greater flexibility for the company are likely to be particularly useful. For example, a company’s articles could provide that any dividend (final or interim) will not constitute a debt and may be reduced, revoked or deferred by the directors at any time prior to payment.

The Investment Association said: “Once these challenging times have passed, shareholders will expect companies to restart their payments to their shareholders as soon as it is prudent to do so. In the meantime, we will stand together with British businesses to weather the storm.”

Edwina Daws is a corporate associate at White & Case.